question archive QUESTION: What would be the effect of the following during 2018? Assume that Ferrari is good at estimating bad debts and warranties (unless noted otherwise)
QUESTION: What would be the effect of the following during 2018? Assume that Ferrari is good at estimating bad debts and warranties (unless noted otherwise)
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QUESTION: What would be the effect of the following during 2018? Assume that Ferrari is good at estimating bad debts and warranties (unless noted otherwise). Please provide a direction and amount (e.g., "+100") on each line and fill in "0" if nothing happens.
a. Ferrari writes off a receivable from a customer for €100.
ANSWER:
Pretax Income : 0
Total Assets: 0
Gross Accts. Rec. -100
b. Ferrari realizes at year-end that its allowance for doubtful accounts is too large and reduces it by €100.
ANSWER:
Pretax Income: +100
Total Assets: +100
Gross Accts. Rec. 0
c. Ferrari learns that €100 of accounts receivable that it had previously written off is recoverable.
ANSWER:
Pretax Income : 0
Total Assets: 0
Gross Accts. Rec: +100
d. Customer files a warrantee claim. Ferrari gives them a new car out of inventory (cost €100) to produce. New car was produced in a previous year.
ANSWER:
Pretax Income: 0
Total Assets: -100
Warrantee Liab. -100
e. Ferrari realizes that its warranty reserve is too small and increases it by €100.
ANSWER:
Pretax Income: -100
Total Assets: 0
Warrantee Liab.: +100
g. During 2018, Ferrari disposes of obsolete Monza SP1 wheel covers that cost €100 to produce. The obsolescence was created by the launch of a new model Monza in 2017, which rendered the old inventory obsolete.
ANSWER:
Total Assets:0
Pretax Income: 0
h. During 2018, Ferrari launches a new design of the Portofino line that creates €100 of obsolescence in the inventory of seat covers related to the previous model. Ferrari anticipates that the old seat covers will be disposed of in 2019.
ANSWER:
Total Assets -100
Pretax Income -100
i. During 2018, Ferrari spends €100 in cash to rent a stapling machine used in producing special seat covers. The payments cover rental for two years (2018 and 2019) and the seat covers are included in cars produced in 2018 and 2019 that will be sold in 2019.
ANSWER:
Total Assets: 0
Pretax Income: 0
j. During 2018, Ferrari pays €100 to an early-stage researcher designing self-driving technology. Ferrari is exploring the possibility of incorporating self-driving features into potential future electric car models.
ANSWER:
Total Assets -100
Pretax Income -100
k. During 2018, a production employee works on a batch of cars. As a result, her union contract dictates that she has rights to an additional €100 (present-valued) of healthcare when she retires in 2048. Half of the cars she worked on are still in finished goods inventory at year-end 2018.
ANSWER:
Total Assets +50
Pretax Income -50
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