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Greenlaw, Inc., a publishing c

Greenlaw, Inc., a publishing company, is preparing its December 31, 2007 and must determine the proper accounting treatment for each of the following situations:

1. Greenlaw 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 $2,500,000 at December 31, 2007. Outstanding subscriptions at December 31, 2007 expire as follows:

During 2008 — $600,000

During 2009 — 900,000

During 2010 — 400,000

2. On January 3, 2007 Greenlaw discontinued collision, fire, and theft coverage on its delivery vehicles and became self insured for these risks. Actual losses of $45,000 during 2007 were charged to delivery expense. The 2006 premium for the discontinued coverage amounted to $100,000, and the controller wants to set up a reserve for self-insurance by a debit to delivery expense of $55,000 and a credit to the reserve for self-insurance of $55,000.

3. A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Greenlaw on July 3, 2007. The company’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is in the range between $100,000 and $500,000. No amount within this range is a better estimate of potential damages than any other amount.

4. During December 2007 a competitor company filed suit against Greenlaw for industrial espionage claiming $2,000,000 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.


For each of the preceding situations, prepare the journal entry that should be recorded as of December 31, 2007, or explain why an entry should not be recorded. Show supporting computations in good form.


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