ACCT2140 Review Term Test #1

Chapters 13 and 14

Question 1.

Dark Ale Brewery includes 1 coupon in each case of beer that it packs. A CD is offered as a premium for every 20 coupons that customers send in along with $2.00. In Year 3, Dark Ale Brewery purchased 6,000 CDs at $5.00 each, in addition in costs $.50 to mail each CD. In Year 3 Dark Ale sold 180,000 cases of beer at $40.00 per case. Dark Ale Brewery estimates that $2.00 of the sale price relates to the CD being awarded. Based on past experience it is estimated that 60% of the coupons will be redeemed. During Year 3, 48,000 coupons were presented for redemption.

During Year 4, 9,000 more CDs were purchased at $5.00, the company sold 400,000 cases of beer at $40.00 and 170,000 coupons were presented for redemption.

Instructions

1. Prepare all the entries that would be made relative to sales of beer and to the premium plan in both Year 3 and Year 4, assuming that the company follows ASPE and has a policy of charging the cost of coupons to expense as they are redeemed. Ck # Exp Yr 3 $18,900, Exp Yr 4 $42,000
2. Prepare the journal entries that should be recorded in Year 3 relative to the premium plan, assuming that the company follows IFRS and accounts for its promotional programs in accordance with the revenue approach and IFRIC 13. Ck # Unearned Revenue balance December Yr 3 $200,000

Question 2

Mintz Equipment Company sells computers for $2,000 each and also gives each customer a 3-year warranty that requires the company to perform periodic services and to replace defective parts. During Year 3 the company sold 500 computers. Based on past experience, the company has estimated the total 3-year warranty costs as $40 for parts and $80 for labour. (Assume sales all occur at December 31, Year 3)

In Year 4, Mintz incurred actual warranty costs relative to Year 3 computer sales of $5,000 for parts and $12,000 for labour.

Instructions:

1. Prepare the entries to reflect the transactions for Year 3 and Year 4 using the assurance-type (expense-based) approach.
2. What is the balance in current liabilities on the Year 3 balance sheet using the assurance-type (expense-based) approach?
3. Under the cash basis method, what are the warranty expense balances for Year 3 and Year 4.

Question 3.

Henry Corporation sells DVDs. The corporation offers to sell its customers a two-year warranty contract as a separate service. During Year 1, Henry sold 20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing warranties during Year 1, and it estimates that an additional $900,000 will be spent in the future to service the warranties. Henry recognizes warranty revenue based on the proportion of costs incurred out of total estimated costs. Prepare Henrys journal entries for (a) the sale of warranty contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue under the revenue approach used for service-type warranties. Ck # $330,000

Question 4.

On June 30, Year 5 Sarah Jane issued 14% bonds with a par value of $800,000 due in 20 years. They were issued at 99 and were callable at 103 at any date after June 30, Year 15. Because of lower interest rates and a significant change in the companys credit rating, it was decided to call the entire issue on September 30, Year 16, and to issue new bonds. New 12% bonds were dated June 30, Year 16 but not sold until September 30, Year 16 in the amount of $900,000 at 101 plus accrued interest; they mature on June 30, Year 26. Sarah Jane follows ASPE and uses straight-line amortization. Interest payment dates are December 31 and June 30 on both the old issue and new issue.

Required:

1. Prepare the entry to record the interest expense from July 1, Year 16 to September 30^th Year 16 when the bonds were recalled. Ck # Exp $28,100.
2. Prepare the entry to record the retirement of the old issue on September 30, Year 16. Ck # Loss on Retirement $27,500.
3. Prepare the journal entry to record the sale of the new issue on September 30, Year 16. Ck # Cash $936,000.
4. Prepare the entry required on December 31, Year 16. Ck # Int Exp $26,769.
5. BONUS assume that the new issue was sold on June 30, Year 16 (i.e. has a full 10 year term). What is the yield rate of the new issue? Show your answer to 4 decimal points. Ck # 11.8%

Question 5.

On May 1, Year 3 Heather Corporation issued a $200,000 five-year 8% bond, with interest payable semi-annually on November 1 and May 1. Heather has a December 31 year end. The bonds were issued to yield a market interest rate of 6%. Heather follows IFRS and uses the effective interest method.

1. Calculate the present value of the bonds on May 1, Year 3. Ck # $17,060.41
2. Prepare the effective interest amortization chart up to November 1, Year 4.
3. Record the issue of the bonds on May 1, Year 3.
4. Prepare the November 1, Year 3 journal entry. Ck # Int Exp $6,512
5. Prepare the December 31, Year 3 journal entry. Ck # Int Exp $2,156
6. Prepare the May 1, Year 4 journal entry. Ck # Int Exp $4,311

Question 6.

Kane Ltd., who owes Patrick Corp. $300,000 in notes payable, is in financial difficulty. To eliminate the debt, Patrick agrees to accept from Kane land having a fair value of $227,500 and a recorded cost of $170,000. Both Kane Ltd. And Patrick Corp. follow IFRS.

Instructions

(a) Calculate the amount of gain or loss to Kane on the transfer (disposition) of the land. Ck # Gain $57,500

(b) Calculate the amount of gain or loss to Kane on the settlement of the debt.

(c) Prepare the journal entry on Kane's books to record the settlement of the debt.

(d) Calculate the gain or loss to Patrick from settlement of the receivable from Kane. Ck # Loss $72,500

(e) Prepare the journal entry on Patrick's books to record the settlement of the receivable.

Question 7.

Blackbird Ltd. Prepares financial statements in accordance with IFRS. Below are selected transactions of Blackbird Ltd. for Year 4:

1. On June 1, the company purchased equipment for $180,000 from Seagull Ltd., paying $60,000 in cash and giving a one-year, 8% note for the balance.

2. On September 30, the company borrowed $150,000 from the Second National Bank by signing a one year, zero-interest-bearing note for $162,000. The banks discount rate was 8%.

Instructions

a. Prepare the journal entries necessary to record the transactions above using appropriate dates.

b. Prepare the adjusting entries necessary at December 31, Year 4 in order to properly report interest expense related to the above transactions.

c. Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Blackbird's December 31, Year 4 statement of financial position. Ck # Current Liabilities $278,600

d. Prepare the journal entries for the payment of the notes at maturity.

Question 8.

Below are three independent situations:

1. In August, Year 1, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued his employer, Prince Corp., for $500,000. Princes legal counsel believes it is possible that the outcome of the suit will be unfavourable and that the settlement would cost the company from $150,000 to $400,000.

2. On October 4, Year 1, a lawsuit for breach of contract seeking damages of $2,400,000 was filed by an author against Queen Corp. Queen's legal counsel believes that an unfavourable outcome is more likely than not. A reliable measurement of the award to the plaintiff is between $600,000 and $900,000.

3. King Ltd. is involved in a pending court case. King's lawyers believe it is likely that King will be awarded damages of $700,000.

Instructions

1. Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. Assume all companies involved use IFRS.
2. Repeat part 2 assuming that Queen Corp. follows ASPE

Question 9.

The total payroll of Lyndon Inc. was $230,000. Income taxes withheld were $55,000. The EI rate is 1.66% for the employee and 1.4 times the employee premium for the employer. The CPP/QPP contributions are 4.95% for both the employee and employer. Union dues in the amount of $8,000 were withheld.

Instructions (Round all values to the nearest dollar, if necessary)

a. Prepare the journal entry for the wages and salaries paid. Ck# Cash 151,797

b. Prepare the entry to record the employer payroll taxes. Ck # Exp 16,730