ACCOUNTING FOR LIABILITIES AND EQUITY

b) Howard Company sells automatic can openers under a 90-day warranty for defective merchandise for Shs. 40 each. Based on past experience, Howard Company estimates that 2% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing a defective unit is Sh. 15. The units sold and units defective that occurred during the last two months of 2014 are as follows: Month Units Units Defective Sold Prior to December 31 September 35,000 500 October 33,000 350 Required: i) Give entries to record sales for the units sold in September and October. (2 marks) ii) Prepare the journal entry to record the estimated warranty expense. (2 marks) iii) Give the journal entry to record the honouring of 450 warranty contracts in January at an average cost of Shs 12. (2 marks) Page 1 of 2Question 2 [20 Marks] a) On July 1 Year 1, Terrier Company issued bonds with a face amount of Shs 2,000,000 maturing in 10 years. The nominal interest rate was 12% per annum, payable semi-annually on June 30 and December 31. The bonds were issued to yield 14% per annum compounded semi-annually. Required: Prepare journal entries for Terrier Company to record the following: i) Issuance of 12% bonds on July 1, Year 1. (3 marks) ii) Payment of interest and discount/premium amortization (under the interest method) on December 31, Year 1. (3 marks) iii) Payment of interest and discount/premium amortization (under the interest method) on June 30, Year 2. (3 marks) b) On January 1, 2014 Dual Systems Ltd. issued Shs 1,000,000 par value, 5 year life of 10% term bonds with interest payable on July 1 and January 1. The market rate of interest for the Company's bonds is 12%. Required: i) Calculate the price of the bond (3 marks) ii) Amortization schedule to using the straight line method (8 marks)