Ramirez Inc a publishing company is preparing its December

Ramirez Inc., a publishing company, is preparing its December 31, 2011 financial statements and must determine the proper accounting treatment for the following situations. The company has retained your group to assist it in this task.

1. Ramirez sells subscriptions to several magazines for a one-year, two-year, or three-year period. Cash receipts from subscribers are credited to Magazine Subscriptions Collected in Advance, and this account had a balance of $2.3 million at December 31, 2011. Outstanding subscriptions at December 31, 2011, expire as follows:

During 2012 …………………….    $600,000

During 2013 …………………….         500,000

During 2014 …………………….         800,000

2. On January 2, 2011, Ramirez discontinued collision, fire, and theft coverage on its delivery vehicles and became self insured for these risks. Actual losses of $50,000 during 2011 were charged to delivery expense. The 2010 premium for the discontinued coverage amounted to $80,000 and the controller wants to set up a reserve for self-insurance by a debit to delivery expense of $30,000 and a credit to the reserve for self-insurance of $30,000.

3. A suit for breach of contract seeking damages of $1 million was filed by an author against Ramirez on July 1, 2011.

The company's legal counsel believes that an unfavourable outcome is likely. A reasonable estimate of the court's award to the plaintiff is in the range between $300,000 and $700,000. No amount within this range is a better esti mate of potential damages than any other amount.

4. Ramirez's main supplier, Bartlett Ltd., has been experiencing liquidity problems over the last three quarters. In order for Bartlett's bank to continue to extend credit, Bartlett has asked Ramirez to guarantee its indebtedness. The bank loan stands at $500,000 at December 31, 2011, but the guarantee extends to the full credit facility of $900,000.

5. Ramirez's landlord has informed the company that its warehouse lease will not be renewed when it expires in six months' time. Ramirez entered into a $2-million contract on December 15, 2011, with Complete Construction Company Ltd., committing the company to building an office and warehouse facility.

6. During December 2011, a competitor company filed suit against Ramirez for industrial espionage, claiming $1.5 million in damages. In the opinion of management and company counsel, it is reasonably possible that damages will be awarded to the plaintiff. However, the amount of potential damages awarded to the plaintiff cannot be reasonably estimated.

Instructions

(a) For each of the above situations, provide the journal entry that should be recorded as at December 31, 2011, under private enterprise GAAP, or explain why an entry should not be recorded. For each situation, identify what disclosures are required, if any.

(b) Would your answer to any of the above situations change if Ramirez followed IFRS (particularly current IFRS standards including IAS 37)?

(a)       Private enterprise GAAP.

1.	Magazine Subscriptions Collected in         Advance.................................................................................	400,000
	Magazine Subscriptions Revenue...........................				400,000
	(To record subscriptions earned
	during 2011)
	Carrying amount balance of liability             account at 12/31/11			$2,300,000
	Adjusted balance ($600,000 + $500,000
	+ $800,000)			1,900,000
	Credit to revenue account			$   400,000

2.         No entry should be made to accrue for an expense, because the absence of insurance coverage does not mean that an asset has been impaired or a liability has been incurred as of the balance sheet date. The company may, however, appropriate retained earnings for self-insurance as long as actual costs or losses are not charged to the appropriation of retained earnings and no part of appropriation is transferred to income. Appropriation of retained earnings and/or disclosure in the notes to the financial statements are not required, but are recommended.

3.         Estimated Loss from Pending Lawsuit    300,000

                  Estimated Liability from Pending Lawsuit                                    300,000

                           (To record estimated minimum damages

                            on breach-of-contract litigation)

Note disclosure would also be required indicating the nature of the loss contingency and that there is an exposure to loss in excess of the amount recorded.

.           No entry should be made for this loss contingency, because it is not likely that an asset has been impaired or a liability has been incurred and the loss cannot be reasonably estimated as of the balance sheet date. The company must however disclose the guarantee in the notes to its financial statements, even if the likelihood of loss is remote. The note disclosure should include the nature of the guarantee, the maximum potential amount of future payments, the nature and extent of any recourse provisions and the carrying amount of any liability.

5.         No entry should be made since it does not represent a liability at the balance sheet date. The company should have a note disclosure for this contractual obligation since it represents a major capital expenditure commitment.

6.         No entry should be made for this loss contingency, because it is not likely that an asset has been impaired or a liability has been incurred and the loss cannot be reasonably estimated as of the balance sheet date. The loss contingency should be disclosed in the notes to financial statements.

(b)       IFRS.

3.         IAS 37 would be similar to the PE GAAP standard except IAS 37 uses the recognition criterion used to determine the chance of occurrence of a confirming future event is “probable,” which is interpreted to mean “more likely than not.” This is a somewhat lower hurdle than the “likely” required under private enterprise standards. If the amount cannot be measured reliably, no liability is recognized under IFRS either; however, the standard indicates that it is only in very rare circumstances that this would be the case. If recognized, IAS 37 requires the best estimate and an “expected value” method to be used to measure the liability. This approach assigned weights to the possible outcomes according to their associated probabilities when measuring the amount of the provision to make if a range of possible amounts is available.