Dungannon Enterprises Ltd. sells a specialty part that is used in widescreen televisions and provides the ultimate in screen clarity. To promote sales of its product, Dungannon initiated a program with some of its smaller customers.
In exchange for making Dungannon their exclusive supplier, Dungannon guarantees these customers to their creditors so that Dungannon will assume the customers' long-term debt in the event of non-payment to the creditors. In addition to charging for parts, Dungannon also charges a fee to customers who take the guarantee program, and bases the fee on the time frame that the guarantee covers, which is typically three years. In the current fiscal year, these fees amounted to $30,000 for the three-year coverage period.
Six months before Dungannon's fiscal year end, one of its customers, Hutter Corp., began to experience financial dif ficulties and missed two months of mortgage payments. Hutter's lender then called on Dungannon to make the mortgage payments. At its fiscal year end on December 31, 2011, Dungannon had recorded a receivable of $15,000 related to the payments made by Dungannon on Hutter's behalf. Hutter owes the lender an additional $30,000 at this point. The lender is contemplating putting a lien on Hutter's assets that were pledged as collateral for the loans but the collateral involves rights on development of new state-of-the-art three-dimensional television technology that is still unproven. Dungannon follows private enterprise GAAP.
Instructions
(a) Prepare all required journal entries and adjusting entries on Dungannon's books to recognize the transactions and events described above.
(b) Identify any disclosures that must be made as a result of this information and prepare the note disclosure for Dungannon for the period ended December 31, 2011.