Analysis
Describe how the transactions above affect ratios that might be used to assess Yellow Card's liquidity. How important is the commitment letter that Yellow Card has from First Trust Corp. to these ratios?
Principles
Yellow Card is contemplating offering an extended warranty. If customers pay an additional $50 at the time of product purchase, Yellow Card would extend the warranty an additional two years. Would the extended warranty meet the definition of a liability under current Generally Accepted Accounting Principles? Briefly explain?
For any part of this problem requiring an interest or discount rate, use 10 percent.
Yellow Card Company manufactures accessories for iPods. It had the following selected transactions during 2010.
1. Yellow Card provides a 2-year warranty on its docking stations, which it began selling in 2010. During 2010 Yellow Card spent $6,000 servicing warranty claims. At year-end, Yellow Card estimates that an additional $45,000 will be spent in the future to service warranties related to 2010 sales.
2. Yellow Card has a $200,000 loan outstanding from First Trust Corp. The loan is set to mature on February 28, 2011. For several years, First Trust has agreed to extend the loan, as long as Yellow Card makes all its quarterly interest (interest is due on the last days of each February, May, August, and November) payments and maintains an acid-test ratio (also called 'quick ratio') of at least 1.25. First Trust has provided Yellow Card a 'commitment letter' indicating that First Trust will extend the loan another 12 months, providing Yellow Card makes the interest payment due on March 31.
3. During 2009, Yellow Card constructed a small manufacturing facility specifically to manufacture one particular accessory. Yellow Card paid the construction contractor
$5,000,000 cash (which was the total contract price) and placed the facility into service on January 1, 2010. Because of technological change, Yellow card anticipates that the manufacturing facility will be useful for no more than ten years. The local government where the facility is located required that, at the end of the ten year period, Yellow Card remediate the facility so that it can be used as a community center. Yellow Card estimates that the cost of remediation to be $500,000.
Accounting
Prepare all 2008 journal entries relating to (a) Yellow Card's warranties, (b) Yellow Card's loan from First Trust Corp., and (c) the new manufacturing facility Yelllow Card opened on January 1, 2010.
Analysis
Describe how the transactions above affect ratios that might be used to assess Yellow Card's liquidity. How important is the commitment letter that Yellow Card has from First Trust Corp. to these ratios?
Principles
Yellow Card is contemplating offering an extended warranty. If customers pay an additional $50 at the time of product purchase, Yellow Card would extend the warranty an additional two years. Would the extended warranty meet the definition of a liability under current Generally Accepted Accounting Principles? Briefly explain?