Q1. On January 1, 2020, Fro-Yo Inc. began offering customers a cash rebate of $5.00 if the customer mails in 10 proof-of-purchase labels from its frozen yogurt containers

Q1. On January 1, 2020, Fro-Yo Inc. began offering customers a cash rebate of $5.00 if the customer mails in 10 proof-of-purchase labels from its frozen yogurt containers. Based on historical experience, the company estimates that 20% of the labels will be redeemed. During 2020, the company sold 5,000,000 frozen yogurt containers at $1 per container. From these sales, 800,000 labels were redeemed in 2020, 150,000 labels were redeemed in 2021, and the remaining labels were never redeemed.
Required:
1. Prepare the journal entries related to the sale of frozen yogurt and the cash rebate offer for 2020 and 2021.
2. Next Level Assume that 300,000 labels were redeemed in 2021. Prepare the journal entries related to the cash rebate offer for 2021.
Chart of Accounts
CHART OF ACCOUNTS
Fro-Yo Inc.
General Ledger
ASSETS
111 Cash
121 Accounts Receivable
141 Inventory
152 Prepaid Insurance
181 Equipment
189 Accumulated Depreciation
LIABILITIES
211 Accounts Payable
231 Salaries Payable
242 Estimated Rebate Liability
250 Unearned Revenue
261 Income Taxes Payable
EQUITY
311 Common Stock
331 Retained Earnings
REVENUE
411 Sales Revenue
EXPENSES
500 Cost of Goods Sold
511 Insurance Expense
512 Utilities Expense
521 Salaries Expense
532 Bad Debt Expense
540 Interest Expense
541 Depreciation Expense
559 Miscellaneous Expenses
910 Income Tax Expense
General Journal
1. Prepare the necessary journal entries to record:
1. The sale of Fro-Yo containers for cash during 2020
2. The redemption of labels during 2020
3. The redemption of labels during 2021
4. The recognition of the unredeemed labels at the end of 2021
General Journal Instructions
PAGE 1
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2
3 ??
4 ?? ??
5 ??
6
7
8
9 ??
2. Assume that 300,000 labels were redeemed in 2021. Prepare the journal entries related to the cash rebate offer for 2021.
General Journal Instructions
PAGE 1
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2 ??
3

Q2. Fallon Company, a toy manufacturer that also operates several retail outlets, is preparing its December 31, 2019, financial statements. It has identified the following legal situations that may qualify as contingencies:
1. A customer is suing the company for $800,000 in damages because her child was injured in November 2019 while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking “down” an escalator that was going “up.” Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between $50,000 and $100,000, with $80,000 being the most likely amount.
2. Fallon has discovered that a skateboard it began manufacturing and selling in 2019 has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a “recall” notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of $200,000 for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as $2 million.
3. Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August 2019 for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between $40,000 and $60,000 will be levied against the company, although they cannot predict the exact amount.
4. In early 2019, Fallon signed a contract with a computer vendor to install “state of the art” cash registers in all of its retail outlets. Because of the vendor’s inability to acquire sufficient cash registers, the vendor canceled the contract. Fallon has filed a breach of contract suit against the vendor, claiming $300,000 in damages. The company’s lawyers expect that it will settle the suit “out of court” for $150,000.
Required:
1. Next Level For each situation, prepare the journal entry (if any) on December 31, 2019, to record the information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the information would be disclosed in Fallon’s 2019 annual report.
2. How would your answers change if Fallon used IFRS?
Chart of Accounts
CHART OF ACCOUNTS
Fallon Company
General Ledger
ASSETS
111 Cash
121 Accounts Receivable
141 Inventory
152 Prepaid Insurance
181 Equipment
189 Accumulated Depreciation
LIABILITIES
211 Accounts Payable
231 Salaries Payable
236 Estimated Liability for Recall Repairs
244 Estimated Liability for Pollution Fine
245 Estimated Liability from Lawsuit
250 Unearned Revenue
261 Income Taxes Payable
EQUITY
311 Common Stock
331 Retained Earnings
REVENUE
411 Sales Revenue
EXPENSES
500 Cost of Goods Sold
511 Insurance Expense
512 Utilities Expense
521 Salaries Expense
532 Bad Debt Expense
535 Repair and Maintenance Expense
540 Interest Expense
541 Depreciation Expense
559 Miscellaneous Expenses
562 Loss from Litigation
564 Loss from Pollution Fine
910 Income Tax Expense
General Journal
1. For each situation, prepare the journal entry (if any) on December 31, 2019, to record the information for Fallon, and explain your reasoning. If no journal entry is recorded, explain how the information would be disclosed in Fallon’s 2019 annual report.
1. A customer is suing the company for $800,000 in damages because her child was injured in November 2019 while riding an escalator that stopped suddenly in one of its stores. The child was hurt when he tripped and fell while walking “down” an escalator that was going “up.” Legal counsel feels that the child is partially at fault, but that it is probable that the lawsuit will be settled for between $50,000 and $100,000, with $80,000 being the most likely amount.
An entry should be prepared to record Fallon’s loss contingency. Which of the following is true?
Entries are always recorded for future events.
Both the date of payment and the name of the family are known, so GAAP requires the loss contingency to be recorded.
An entry is recorded because it is an existing condition, a loss is probable, and the loss can be reasonably estimated.
General Journal Instructions
PAGE 1
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2
2. Fallon has discovered that a skateboard it began manufacturing and selling in 2019 has defective bearings, sometimes causing a wheel to fall off. Fallon has issued a “recall” notice in newspapers and magazines in which it offers to replace the bearings. It estimates a cost of $200,000 for these repairs. No lawsuits have been filed for injury claims, although the company feels that there is a reasonable possibility that claims may total as high as $2 million.
An entry should be prepared to record Fallon’s estimated repair costs. Which of the following is true?
An entry is recorded because a loss is probable and the loss can be reasonably estimated, even though there is no existing condition.
An entry is recorded because it is an existing condition, a loss is probable, and the loss can be reasonably estimated.
An entry is recorded because it is an existing condition and the loss can be reasonably estimated, even though the loss is only reasonably possible.
General Journal Instructions
PAGE 1
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2
An entry should not be prepared to record Fallon’s litigation liability. Which of the following is true?
Litigation liability is always reported in the notes to the financial statements
An entry is not recorded because a loss is probable and the loss can be reasonably estimated, even though there is no existing condition.
An entry is not recorded because no lawsuits have been filed and management has determined that it is only reasonably possible that any loss will be incurred.
Fallon’s litigation liability should be disclosed in the notes to the financial statements if:
a loss is probable and the loss can be reasonably estimated.
a loss is probable but the amount cannot be reasonably estimated.
it is reasonably possible that a loss will occur and the loss can be reasonably estimated.
3. Fallon has an incinerator behind one of its retail outlets which is used to burn cardboard boxes received in shipments of inventory from suppliers. The state environmental protection agency filed suit against the company in August 2019 for air pollution. Fallon expects to stop using the incinerator and begin recycling. However, its lawyers believe that it is probable that a fine of between $40,000 and $60,000 will be levied against the company, although they cannot predict the exact amount.
With regard to the environmental protection agency lawsuit, this loss contingency is not accrued at the end of 2019 because it cannot be reasonably estimated .
General Journal Instructions
PAGE 1
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2

Q3. Clean-All Inc. sells washing machines with a 3-year assurance-type warranty. In the past, Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also available:
Year Sales Warranty
Expenditures
2019 $520,000 $64,480
2020 640,000 80,640
2021 720,000 87,120
Required:
1. Prepare the journal entries for the preceding transactions for 2019-2021. Closing entries are not required.
2. What amount would Clean-All report as a liability on its December 31, 2021, balance sheet, assuming the liability had a balance of $87,200 on December 31, 2018?
3. Next Level How would the failure to recognize a contingent liability affect the financial statements?
Chart of Accounts
CHART OF ACCOUNTS
Clean-All Inc.
General Ledger
ASSETS
111 Cash
121 Accounts Receivable
141 Inventory
152 Prepaid Insurance
181 Equipment
189 Accumulated Depreciation
LIABILITIES
211 Accounts Payable
231 Salaries Payable
240 Estimated Warranty Liability
250 Unearned Revenue
261 Income Taxes Payable
EQUITY
311 Common Stock
331 Retained Earnings
REVENUE
411 Sales
438 Warranty Revenue
EXPENSES
500 Cost of Goods Sold
511 Insurance Expense
512 Utilities Expense
521 Salaries Expense
532 Bad Debt Expense
540 Interest Expense
541 Depreciation Expense
551 Warranty Expense
559 Miscellaneous Expenses
910 Income Tax Expense
General Journal
1. Prepare the journal entries for sales and warranty transactions on December 31, 2019-2021. Closing entries are not required.
General Journal Instructions
PAGE 2019PAGE 2020PAGE 2021
GENERAL JOURNAL
DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT
1
2
3
4
5
6
Balance Sheet
2. Complete Clean-All Inc.’s partial balance sheet at December 31, 2021.
Balance Sheet Instruction
CLEAN-ALL INC.
Partial Balance Sheet
December 31, 2021
1 Current Liabilities:
2

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