Ford Motor Company is one of the world’s largest companies with annual sales of cars and trucks in excess of $170 billion. A recent annual report for Ford contained the following note:

Warranties

Estimated warranty costs are accrued for at the time the vehicle is sold to a dealer. Estimates for warranty cost are made based primarily on historical warranty claim experience.

1. This year, Ford reported claims amounting to $4.0 billion and accrued expenses for warranties in the amount of $3.9 billion. Describe the financial statement effects for this year.

Bally Total Fitness Holding Corporation is the largest publicly traded commercial operator of fitness centers in North America in terms of members, revenues, and square footage of its facilities.

The company operates 409 fitness centers primarily under the Bally Total Fitness name. The following note was contained in a recent annual report for Bally.

Revenue Recognition

As a general principle, revenue is recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and services have been rendered, (iii) the price to the buyer is fixed or determinable and, (iv) Collectability is reasonably assured. Membership revenue is earned on a straight-line basis over the longer of the contractual term or the estimated membership term.

The weighted average membership life is 39 months.

2. In your own words, explain how unearned revenue is reported in the balance sheet for Bally. Assume that the company collected $23 million in December 2011 for “New Year’s Resolution” memberships starting January 1, 2012. What is the amount of unearned revenue that should be reported on the 2011 and 2012 balance sheets?

3. A recent annual report for ExxonMobil reported a quick ratio of 0.20. For the previous year, the ratio was 0.45. Based on this information, do you think that Exxon is experiencing financial difficulty?

What other information would you want to consider in making this evaluation?

Brunswick Corporation is a multinational company that manufactures and sells marine and recreational products. A recent annual report for Brunswick contained the following information:

Legal and Environmental

The company is involved in numerous environmental remediation and clean-up projects with an aggregate estimated exposure of approximately $21 million to $42 million. The Company accrues for environmental remediation-related activities for which commitments or clean-up plans have been developed and for which costs can be reasonably estimated.

4. In your own words, explain Brunswick’s accounting policy for environmental expenditures. What is the justification for this policy?