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Question 1. (10 Marks) Following is an article that was recently published: MMC tempts motorists with offer of free gas for a year Mitsubishi Motors Corp. is offering a year's worth of free gasoline to anyone who buys one of its new 2015 models. Under the campaign, just launched, MMC will give buyers prepaid debit cards they can use to buy a year's worth of gas at most gas stations. The cards are worth between $1,500 and $2,500, depending on the car. The campaign, which is good until the end of 2015, is part of MMC's efforts to clear out inventory before it rolls out its 2016 models this autumn, MMC officials said. One official quoted President Osamu Masuko as saying the campaign "costs less than the discounts" it has been offering amid the intensifying discounting battles being waged in the passenger vehicle market. Auto industry analysts are watching closely to see whether the campaign will help Mitsubishi Motors, which has been hit hard by vehicle defect coverup scandals, recover lost ground. Gas prices have fallen about 50 percent since early this year, but despite that, consumers still fear gas prices will soon rise again. Fuel-efficient Japanese cars are selling well in this environment, and the timing of this campaign is thus favorable, the officials said. REQUIRED: A) Identify and discuss the key underlying accounting principle(s) inherent in the above article. (4 marks) B) Assume that a vehicle which cost MMC $27,000 to manufacture is sold for $30,000 & a gas card with a $2,000 value is given to the customer. Prepare the journal entry(ies) that the company's accounting department would likely record for the above. Be sure to explain your reasoning for the journal entry(ies) you prepare. (3 marks) C) As a user of the company's financial statements, would you be concerned about MMC's quality of earnings given what has been reported in the above article? Defend your answer. (3 marks) QUESTION 2. (15 MARKS) You have just been handed Exhibits A and B by the sole shareholder of Continental Auto Sales Inc. for which the year-end is December 31, 2014. This year marks the company's 10th year of operations selling used cars and accessories. You have obtained the following additional information: 1) In 2014, management decided to carry Equipment it uses in its operations at lower of cost and market value. Management feels this better reflects the value of equipment 'in use'. The equipment originally cost $250,000 when it was purchased on January 3, 2010. Original estimates of a useful life of 10 years and no residual value are still valid. Prior to 2014, the company correctly recorded straight-line amortization on the Equipment. 2) Goodwill was recognized this year in celebration of the company's 10th anniversary. The CEO declared, '$100,000 of value for every year we've operated is a conservative estimate of the company's success!' The $1,000,000 amount was included in the company's revenues for the year. 3) Management estimates the bad debt losses and carries the Accounts receivable at their net realizable value. 4) The inventory is carried at its appropriate value on the Balance Sheet. 5) The company offers a 2 year warranty on the products it sells. Management accrues a warranty liability and estimates that $208,005 in claims are expected to be settled in 2015 while $300,000 will likely be settled in 2016. 6) Bank indebtedness represents the funds drawn on an approved operating line of credit (maximum $2,000,000). The indebtedness is secured by the inventory of used cars. Required: a) Identify (awarded as 1 mark each) any deficiencies and errors that you find if this were to be a set of financial statements prepared according to IFRS. (10 marks) DO NOT REDO THE FINANCIAL STATEMENTS. b) Prepare any necessary adjusting entries for items 1, 2 and 5 listed above. Give a brief explanation to management as to why these adjustments are necessary. (5 marks) EXHIBIT A CONTINENTAL AUTO SALES INC. (Incorporated under the laws of Canada) BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2014 ASSET Accounts receivable, net Inventory - at lower of cost and net realizable value Prepaid expenses Cash on hand Land - at cost Equipment - at net realizable value Goodwill $ 103,059 1,602,579 11,090 28,799 500,000 192,000 1,000,000 TOTAL ASSETS $3,438,526 LIABILITIES CURRENT Bank indebtedness Accounts payable and accrued liabilities Warranty liability $ 800,000 1,133,365 508,005 2,441,370 LONG-TERM DEBT 258,074 TOTAL LIABILITIES 2,699,444 SHAREHOLDERS' EQUITY CAPITAL STOCK 800,100 DEFICIT (61,018) 739,082 TOTAL LIABILITIES AND EQUITY $3,438,526 EXHIBIT B STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2024 REVENUES Sales Gain on revaluation of equipment OPERATING EXPENSES General Selling Administrative Interest $8,069,002 42,000 $7,273,948 193,629 594,342 168,056 8,229,975 NET LOSS RETAINED EARNINGS - BEGINNING OF YEAR DEFICIT - END OF YEAR (118,973) 57,955 $ (61,018) Question 3. (30 Marks) Part A - 14 marks Benmark Construction Limited uses the percentage-of-completion method to account for its construction projects. The percentage of completion is measured by the ratio of costs incurred to date divided by total estimated construction costs. Benmark has a December 31 year end. Benmark contracted to construct a building for $1,700,000. The contract provided for progress payments. The project was started in February 2013 and completed in November 2014. Construction activities for the two years are summarized below: 2013 Construction costs incurred during the year Estimated costs to complete Progress billings during the year Collections $629,000 $710,000 $550,000 $500,000 2014 Construction costs incurred during the year $690,000 The construction project was completed during 2014. The remaining balance of the contract was billed and subsequently collected during 2014. Required: a. Prepare the journal entries for the construction project for 2013 and 2014 (round percentages to 2 decimal places). b. Prepare the balance sheet and income statement presentation for the construction project as at and for the year ended December 31, 2013, assuming the use of: i) Percentage-of-completion method ii) Completed contract method Part B - 4 marks Computerstuff, a monthly magazine, began publication in late October 2014. It has a December 31 year end. Computerstuff is sold over the counter and by subscription. All subscriptions are paid in full at the time of enrolment. Subscription sales in the first month were as follows: Number of Subscriptions Subscription Start Date Term (Months) Subscription Price 4,700 1,900 November 1 November 1 12 24 $20 $30 Required: a. Compute the subscription revenue for the month of November 2014. Round all calculations to the nearest dollar. b. Compute the deferred revenue at November 30, 2014. Part C - 7 marks Excentrix Limited had credit sales of $80,000 in 2015 that required the use of the instalment method. Excentrix's cost of merchandise sold was $55,000. Excentrix collected cash related to the instalment sales of $30,000 in 2015 and $50,000 in 2016. A perpetual inventory system was used. Required: Prepare the journal entries related to the instalment sales of 2015 and 2016. *END OF ASSIGNMENT*