Question 1

Tobi runs a film and design company. They are planning for a big project in Vancouver. The project will not occur until next fiscal year. They have contacted several hotels and made reservations for rooms as well as set up dining reservations. They are not sure exactly when they will be there, but all reservations can be canceled and this way they have the option to stay if needed. Tobi just summed all the reservations and realized it will cost her $12,500. How much, if any, liability should Tobi's company show on the financial statements at year end?

Question2

Caitlin owns a pet store, Caitlin's Critters (CC). Recently an employee failed to properly secure the cages for their rats, gerbils and hamsters properly. When Caitlin came in the next morning, there were animals all over her store. They had also spread into other stores in the mall. She and her employees spent the day capturing animals. They know they did not catch some of them.

The mall had an exterminator come in and set traps. The exterminator said they would have to monitor for 30 days to determine if the animals had begun to breed, which would require a more extensive program. The exterminator believes it is likely they will have to go to midlevel program, which would cost $15,000. However, it is possible that the animals are so spread out that they will not need further treatment. In that case, Caitlin will just be billed $2,000 for the first treatment and monitoring. There is also a small possibility that the rats will mix with domestic rats and form a large infestation problem. In that case, Caitlin would have to pay $50,000 or more.

The escape occurred in the last three days of the fiscal year. Choose the option that best describes the impact on Caitlin's financial statements in the current year.

$2,000 liability and expense.

$15,000 liability, no expense this year.

$50,000 liability and expense.

$50,000 liability, $2,000 expense.

$15,000 liability and expense.

Question3

Ignacio has been reviewing his company's financial situation. He has been monitoring a chemical spill that happened two years ago. The long-term impact is still not clear. While he does not think it is probable that they will have to do more clean up, it is possible. He is trying to decide if he should include this in his report to his shareholders in some way.

He should include the amount on his balance sheet, but he does not have to include it on his income statement until he is more sure that it will happen.

No, there is nothing that needs to be done.

Yes, he should include an explanation in the footnotes to his financial statements.

Yes, he should estimate the amount he would have to spend if a cleanup is required and reflect that on his income statement and balance sheet for this year.

Question4

During the current year, Warren's company sold 10,000 shares of no par value common stock for $20,000. They also had a net income of $40,000 and paid dividends of $8,000. By how much, if any, did their shareholder's contributed capital change?

Question5

During the year, Jessica's firm had net income of $700,000. It was a record year, but most of the sales were on credit and have not yet been paid. In fact, there are still $400,000 waiting for collection. Management believes they will be paid, but some of the terms allow almost a year before that occurs. The firms also paid a dividend of $4,000. How much, if at all, did retained earnings change this year?