Home Solutions Reviewing Cases:The case of Mead Motors
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) The case of Mead Motors pertains to the reporting of some noncash and cash transactions in the Cash Flow Statements. Mead Motors purchased the car with the intention of reselling it. FASB ASC 230-10-45-14 requires that cash purchases for manufacturing materials and goods that are meant for resale (including their principal and interest) be recorded as operating activities in the Cash Flow statements of the company. N………………………………………… does not have any impact on the cash flow during the purchase time. There is no direct effect on the statement of cash flow of the company, but the purchase of a new car using credit increases the liabilities of Mead Motors. Mead Motors will pay the amount they owe Generous Motors after they sell the car and disclosing this in the statement of the company will help explain the non-cash transaction. The repayment of interest and principal amount should be recorded as…………………………. order to have the other section of this paper
2) This case deals with the treatment of separate warranties. Lowland Company deals in extended priced warranties, and thus involves itself with extended warranty revenues and services. Lowland Appliances prices its warranties separately and is responsible for the claims and warranties throughout the warranty period. According to the guidelines on the treatment of revenues in extended warranties by the FASB ASC 605-20-25-3, all revenues related to any extended warranty should be principally recognized in the statement of financial positions; the company should recognize revenue throughout the extende the appliances recorded as unearned revenue. Accordingly, the Lowland Company should not use the reducing balance method as it runs the risk of overestimating the revenue or the warranty expenses in question. Furthermore, the expenses of extended warranties should be recognized as costs and recorded as expenses according to the accounting treatment; this is in tandem with the accounting principle of revenue recognition. The warranty expense therefore remains as a cost for Lowland because the company has to service the priced warrant products throughout the duration of the warranty.
3) In the fourth case, Lohse Company is not able to repay the note by 31st December and the bank requires the company to pay the amount due, in four installments. According to FASB ASC 470-10-45-9, a loan due in 12 months, or operating cycle if longer, should be recorded as a current liability. Lohse should thus record the amount of the loan that is due to the bank in 12 months, as a current liability in the statement of financial position. The FASB ASC 470-10-45-9 also defines the conditions of the clause “due on demand” and Lohse should…………………………
It is prudent for Lohse to record the loan as a current liability in the statement of financial position. The company should include the notes explaining the recorded loan as a short-term liability. The note should clearly state that the loan indicated as a current liability is indeed a long-term liability, but due to the clause ‘Due on Demand’, it has been recorded as a short-term liability. This will mitigate any confusion in interpreting the financial statements to the readers, i.e. shareholders and potential investors, and further facilitate the process of decision-making in their investment choices.