Before adjustments and closing on December 31, 2017, the current accounts of Seymour and Associates indicated the following balances:The terms of an outstanding long-term note payable state that Seymour must maintain a current ratio of 2:1 or the note will become due immediately. The following items are not reflected in the balances above:
1. Bad debt losses in the amount of 6 percent of the outstanding accounts receivable balance are expected.
2. The warranty liability on outstanding warranties is estimated to be $12,000.
3. 40 percent of the unearned revenue had been earned as of December 31.
4. $5,000, listed above under €œnotes payable,€ is part of a line of credit and is expected to be immediately refinanced on a long-term basis when due.
5. The total income tax payable for 2017 was estimated at year-end to be $23,000. Estimated tax payments during the year totaled $20,000.
6. Trademans Inc. brought suit against Seymour early in 2017. As of December 31, Seymour€™s legal counsel estimates that there is a 60 percent probability that the suit will be lost in the amount of $10,000. If the suit is lost, payment will most likely be due in the next year.

REQUIRED:
a. Prepare the journal entries that would be recorded (if necessary) for each of the six items listed.
b. After preparing the journal entries, compute the company€™s current ratio, assuming that the contingent liability described in (6) is not accrued.
c. After preparing the journal entries, compute the company€™s current ratio, assuming that the contingent liability described in (6) is accrued.
d. If you were Seymour€™s auditor, would you require that the contingent liability be accrued? Discuss.

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Debit Credit $40,000 Cash Accounts receivable 50,000 Allowance for doubtful accounts 2,000 Inventory 52,000 Accounts payable 30,000 Unearned revenues 25,000 Warranty liability 5,000 Notes payable 10,000