Chapter 13, Problem 1CCTC

(1)(a)

To determine

Financial Statements: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements reports, and shows the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Liabilities: Liabilities are referred to as the obligations of the business towards the creditors for operating the business. Liabilities may be short-term or long-term depending upon the time duration in which it is paid back to the creditors. Liabilities are classified in to current liabilities and long-term liabilities. Current liabilities are those liabilities which need to be paid within a year. Long-term liabilities are those liabilities that have longer maturity period.

To provide: Four components of T’s current liabilities.

Explanation of Solution

Four components of current liabilities are as follows:

Current Liabilities	Amount ($ in millions)
	1/30/2016	1/31/2015
Accounts payable	7,418	7,759
Accrued and other current liabilities	4,236	3,783
Current portion of LT debt & other borrowings	815	91
Liabilities of discontinued operations	153	103
Total current liabilities	12,622	11,736

b.

To determine

Whether current assets are sufficient to cover current liabilities.

Explanation of Solution

Yes, in both the years ended 1/30/2016 and 1/31/2015, current assets are sufficient to cover the current liabilities.

Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is used to determine the ability of the company to fulfill the short-term liability. This reveals about conversion of cash or cash equivalents to cash in the short notice and explains the liquidity position. As on 1/30/2016 and 1/31/2015, current assets are $14,130 and $13,624 respectively. Further, as on 1/30/2016 and 1/31/2015, current liabilities are $12,622 and $11,736 respectively. Thus, current ratio for 2016 and 2015 is determined as below:

$\begin{array}{c}\text{Current ratio }\left(2016\right)\text{= }\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$14,130}{\$12,622}\\ =1.12\end{array}$

$\begin{array}{c}\text{Current ratio }\left(2015\right)\text{= }\frac{\text{Current assets}}{\text{Current liabilities}}\\ =\frac{\$13,624}{\$11,736}\\ =1.16\end{array}$

Conclusion

When both the year’s current ratio are compared, current ratio for 2016 is slightly lower than the previous year.

c.

To determine

To provide: Reason for company avoiding low current ratio.

Explanation of Solution

Thumb-rule standard for current ratio is 1:1. When the current ratio is too low, it reveals that company does not have sufficient current assets to fulfill the current obligations. When current ratio is too high, then it reveals that company does not use its current assets and liabilities effectively. The capital of the company is tied up in cash, and accounts receivables that are not collected. Inventory of the company are not sold and the prepaid expenses have been paid in the advance.

(2)(a)

To determine

To find out: Change in gift card liability between January 30, 2016 and January 31, 2015.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Change in }\\ \text{gift card liability}\end{array}\}\text{ = }\left[\begin{array}{l}\text{January }30,2016\\ –\text{January }31,2015\end{array}\right]\\ =\$644\text{ million – \$}612\text{million}\\ \text{=\$32 million}\end{array}$

Conclusion

Thus, change in gift card liability between January 30, 2016 and January 31, 2015 is $32 million.

b.

To determine

Effect on the gift card liability due to given circumstances.

Explanation of Solution

i. Sale of gift card

Date	Account Title and Explanation	Post .Ref	Debit ($)	Credit ($)
xxxx	Cash		XXX
	Deferred revenue, gift cards			XXX
	(To record the sale of gift cards.)

When sale of gift cards are considered,liability (deferred revenue) increases and cash increases. Thus, cash is debited and deferred revenue, gift cards are credited.

ii. Redemption of a gift card (the holder using it to acquire goods or services)

Date	Account Title and Explanation	Post .Ref	Debit ($)	Credit ($)
xxxx	Deferred revenue, gift cards		XXX
	Revenue			XXX
	(To record the redemption of gift cards.)

When redemption of gift cards are considered, deferred revenue, gift cards are decreased and revenue is increased. Thus, deferred revenue, gift cards is debited and revenue is credited.

iii. Increase in breakage estimated for gift cards already sold

Date	Account Title and Explanation	Post .Ref	Debit ($)	Credit ($)
xxxx	Deferred revenue, gift cards		XXX
	Revenue			XXX
	(To record the increase in breakage estimated for gift cards already sold.)

When redemption of gift cards are considered, deferred revenue, gift cards are decreased and revenue is increased. When there is increase in estimated breakage, the liability decreases. Only, few gift cards will be redeemed. Thus, deferred revenue, gift cards is debited and revenue is credited.

(3)(a)

To determine

The approach for accruing losses for litigation claims associated with the data breach.

Explanation of Solution

T is making reasonable estimated as per probable outcomes. T does not believe the probability. T is making reasonable estimates based on the probable outcomes. T does not believe the probable cases and thus it is litigated. T’s accrual amount is probable and reasonable estimable.

b.

To determine

To prepare: Journal entry to record T’s recognition of new expenses associated with the data breach litigation for the fiscal year ended January 30, 2016.

Explanation of Solution

As per note 19 Data breach balance sheet roll forward, T recognizes new expenses and increases the liability totaling $39 million for the fiscal year ended January 30, 2016:

Date	Account Title and Explanation	Post .Ref	Debit ($)	Credit ($)
xxxx	Expense – Data Breach		39
	Liability			39
	(To record recognition of new expenses associated with the data breach litigation.)

Expense – Data Breach is an expense and reduces the stockholder’s equity. Hence, debit with $39. Liabilities increase the amount of liabilities. Hence, credit liabilities with $39.

c.

To determine

To prepare: Journal entry to record T’s reduction of its liability associated with the data breach litigation for the fiscal year ended January 30, 2016.

Explanation of Solution

As per note 19 Data breach balance sheet roll forward, T recognizes new payment and increases the liability totaling $130 million and reduces data breach liability for the fiscal year ended January 30, 2016:

Date	Account Title and Explanation	Post .Ref	Debit ($)	Credit ($)
xxxx	Liability – Data Breach		130
	Cash			130
	(To record reduction of its liability associated with the data breach litigation.)

Liabilities – Data breach decreases the amount of liabilities. Hence, debit liabilities with $130. Cash is decreased due to reduction of liability. Hence, credit Cash with $130.