Instructor: Dr. Hall Accounting 460 Estimated time
CPA Problems 15-25 minutes
Handout Problem No. F-205
This question consists of 12 items. Select the best answer for each item.
Edge Co., a toy manufacturer, is in the process of preparing its financial statements for the year ended December 31, 1993.
Edge expects to issue its 1993 financial statements on March 1, 1994.
Required:
Items 1-12 represent various information that has not been reflected in the financial statements. For each item, the following
two responses are required:
a. Determine if an adjustment is required and select the appropriate amount, if any, from the list below.
b. Determine (Yes/No) if additional disclosure is required, either on the face of the financial statements or in the notes
to the financial statements.
Blacken the appropriate ovals on the Objective Answer Sheet.
Adjusted amounts
A. No adjustment is required
B. $100,000
C. $150,000
D. $250,000
E. $400,000
F. $500,000
Items to be answered:
1. Edge owns a small warehouse located on the banks of a river in which it stores inventory worth approximately $500,000.
Edge is not insured against flood losses. The river last overflowed its banks twenty years ago.
2. During 1993, Edge began offering certain health care benefits to its eligible retired employees. Edge’s actuaries have
determined that the discounted expected cost of these benefits for current employees is $150,000.
3. Edge offers an unconditional warranty on its toys. Based on past experience, Edge estimates its warranty expense to be
1% of sales. Sales during 1993 were $10,000,000.
4. On October 30, 1993, a safety hazard related to one of Edge’s toy products was discovered. It is considered probable
that Edge will be liable for an amount in the range of $100,000 to $500,000.
5. On November 22, 1993, Edge initiated a lawsuit seeking $250,000 in damages from patent infringement.
6. On December 17, 1993, a former employee filed a lawsuit seeking $100,000 for unlawful dismissal. Edge’s attorneys
believe the suit is without merit. No court date has been set.
7. On December 15, 1993, Edge guaranteed a bank loan of $100,000 for its president’s personal use.
8. On December 31, 1993, Edge’s board of directors voted to discontinue the operations of its computer games division and
sell all the assets of the division. The division was sold on February 15, 1994. On December 31, 1993, edge estimated
that losses from operations, net of tax, for the period January 1, 1994, through February 15, 1994, would be $400,000 and
that the gain from the sale of the division’s assets, net of tax, would be $250,000. These estimates were materially correct.
9. On January 5, 1994, a warehouse containing a substantial portion of Edge’s inventory was destroyed by fire. Edge expects
to recover the entire loss, except for a $250,000 deductible, from insurance.
10. On January 24, 1994, inventory purchased FOB shipping point from a foreign country was detained at that country’s border
because of political unrest. The shipment is valued at $150,000. Edge’s attorneys have stated that it is probable that Edge
will be able to obtain the shipment.
11. On January 30, 1994 Edge issued $10,000,000 bonds at a premium of $500,000.
12. On February 4, 1994, the IRS assessed Edge an additional $400,000 for the 1992 tax year. Edge’s tax attorneys and tax
accountants have stated that it is likely that the IRS will agree to a $100,000 settlement.