Terry Part #10: Current Liabilities

To practice recording contingent liabilities and reporting them in the financial statements. (See Topic Guides LE 6, 7, 8).

Information:

At the beginning of 2019, Terry was informed that a new city ordinance would require them to restore the woods behind their main factory if they intend to keep using it. The estimated cost of the restoration will be approximately $430,000 and must be done within the next 5 years or the factory will be shut down. At the time, Terrys board decided to wait until the beginning of Year 6 to start the restoration.

Although the notice was received and the boards decision made at the beginning of the year, no journal entries have yet been made for this obligation. The factory was built 3 years ago when Terry was still a privately held company and is being depreciated using SL depreciation using the original estimate of a 15 year useful life. The depreciation for the building has already been recorded for 2019. The restoration will not change the factorys salvage value.

Terrys management would like to know the effect of the sale on the following ratios:

Current Ratio ROA

Assignment:

Calculations

Make the appropriate journal entries, if any, to account for the new liability (including any necessary changes to income tax expense). In making your entries, assume that Terrys Internal Rate of Return is 6%.

(please make the full entries for capitalization there should be three building to ARO, Interest to ARO, and a third one)