[cpa1988]

Why do you add the $50,000 if it is paid on 1/1/Y2

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2.

In its Year 1 income statement, what should House report as contest prize expense?

In its Year 1 income statement, what should House report as contest prize expense?

a. $468,250

b. $0

c. $1,000,000

d. $418,250

Explanation

Choice “a” is correct. $468,250 contest prize expense.

First payment on 1/2/ Year 2 $ 50,000

Present value of 19 subsequent payments 418,250

Contest prize expense in Year 1 income statement $ 468,250

[Anonymous]

It is payable at 12/31 and would therefore be expensed and recorded in AP.

[Anonymous]

Why is it payable 12/31 if it isn't paid until Jan. 2 year 2…..

The problem doesn't say it is payable in Year 1. Do we just assume that?

[Missy]

It says they announced the winner and signed the note payable on Dec 31 year 1. So yes, the problem does state it is payable in year 1 but paid in year 2.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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