Complete the following individually and discuss your individual answers as a team:
• CA 4-2, p. 190
• Problem 18-3, p. 1043
• Problem 18-2, p. 1047
After discussing your answers, compile each into a team response.
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CA4-2 GROUPWORK (Earnings Management) Bobek Inc. has recently reported steadily increasing income. The company reported income of $20,000 in 2014, $25,000 in 2015, and $30,000 in 2016. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2017, and it again appears to be a good year. However, it has not yet recorded
(a) What is earnings management?
(b) Assume income before warranty expense is $43,000 for both 2017 and 2018 and that total warranty expense over the 2-year period is $10,000. What is the effect of the proposed accounting in 2017? In 2018?
(c) What is the appropriate accounting in this situation?
P18-2 (LO2,3,4) (Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1.
In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract.
(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.
(b) Prepare the journal entries on December 31, 2019, for the 40 extended contracts (the first year of the revised 3-year contract).
P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.
(a) Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer's gas line for a total price $800. On a standalone basis, the grill sells for $700 (cost $425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is $150
(b) The State of Kentucky is planning major renovations in its parks during 2017 and enters into a contract with Grill Master to purchase 400 durable, easy maintenance, standard charcoal grills during 2017. The grills are priced at $200 each (with a cost of $160 each), and Grill Master provides a 6% volume discount if Kentucky purchases at least 300 grills during 2017
(d) On October 1, 2017, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local builder. The builder plans to install it in one of its “Parade of Homes” houses. Grill Master accepted a 3-year, zero-interest-bearing note with face amount of $5,324