Items 11 and 12 are based on the following:

House Publishers offered a contest in which the winner would receive $1,000,000, payable over twenty years. On December 31, 2006, 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, 2006, 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, 2007.

In its December 31, 2006 balance sheet, what amount should House report as note payable—contest winner, net of current portion?

  1. $368,250
  2. $418,250
  3. $900,000
  4. $950,000

In its 2006 income statement, what should House report as contest prize expense?

  1. $0
  2. $ 418,250
  3. $ 468,250
  4. $1,000,000