Question

4.54 Analysis of Accounting Estimates. "Oak Industries, a manufacturer of radio and cable TV equipment and an operator of subscription TV systems, had a multitude of problems. Sub scription services in a market area, for which $12 million of cost had been deferred, were being terminated and the customers were not paying on time ($4 million receivables in doubt). The chances are 50-50 that the business will survive another two years. An electronic part turned out to have defects that needed correction. Warranty expenses are estimated to range from $2 million to $6 million. The inventory of this part ($10 million) is obso- lete, but $1 million can be recovered in salvage, or the parts in inventory can be rebuilt at a cost of $2 million (selling price of the inventory on hand would then be $8 million with 20 percent of the selling price required to market and ship the products, and the normal profit expected is 5 percent of the selling price). If the inventory were scrapped, the company would manufacture a replace ment inventory at a cost of $6 million, excluding marketing and shipping costs and normal profit. The company has defaulted on completion of a military contract, and the government is claiming a $2 million refund. Company attorneys think the dispute might be settled for as little as $1 million. The auditors had previously determined that an overstatement of income before taxes of $7 million would be material to the financial statements. These items were the only ones left for audit decisions about possible adjustment Management has presented the following analysis for the determination of loss recognition: Write off deferred subscription costs Provide allowance for bad debts Provide for expected warranty expense Lower-of-cost-or-market inventory write-down Loss on government contract refund $3,000,000 4,000,000 2,000,000 2,000,000 ???????? Required: Prepare your own analysis of the amount of adjustment to the financial statements. Assume that none of these estimates have been recorded yet and give the adjusting entry you would recommend. Give any supplementary explanations you believe necessary to support your recommendation 4.55 Horizontal and Vertical Analysis. Horizontal analysis refers to changes of financial

Answer 1

Solutions Given *) In the analysis of all ounting Si Mares It is Oak Industries is this Hanuract wren of an oradio and operator and cable TV equipmen ble TV squipment Ob Subexiprion TV Systems, -) It had a multitude of problers. =) In this industries had the chances are another 50 - 50 that the will survive business two 400015 - In this we need to det ermination of loss Je cognition Let, » we need to assuming will sur this business -vive for the another a years. tool the deferies Coisa To the loss gecognition 06 19 million.

* Subscription cost Goal Account 08-6m subscrip lion cost to TO The deferred Alcom the cost 607 1 ye.com detened subscription * Pal Account 08.2m To the subscripl-lon cost is account 1. The allowance Gou a bad debts * this allowance for the Doubtrol debts of Account D802m . * To this Accounts Jeceivables 06 Account is.am --> this 45 being of accounts peceivables is adjusted for the doubtful debts * pal Account is D82- * To this. Allowance is for the Doubtful debts is am to doubt tot de ble => It berg the below ance Provided

the provision boa e Expected Woulantly expense * The P& Į Account is Dr.2m af In the warriantly expense account is am - It is being Expense of changed of warrantly 1 in to P&L account. = 1 Loss down on recognition on Drventory write the below table-l : 'In Milions WOW of inventory 10 1 Salvage Voyue 06 Inventory '. NRV 06 Inventory wolte down of inventory . tableal =. It is P&L account is Dr.qm. woote down =) This allowance for the inventory of tour Account am

-> Now being the allowance of invent-0074 17e down provided * the allowance to inventory write down 6007 Account Do-qm "To this Inventory Account 15 9m =) the being Inventory as wooten down . . on contrach T loss Government The recognition ReRund is The on is contract for * Lawsuit Government Account is 18.1m TE is accrued ability on Government content ob Refund Account is im - This being locability for recognized of Lawsuit =) Why because of Os liability is both the probable and Estimated