Question #1

Nathalina Limited sells custom made jewellery which are sold with a 3 year warranty. The estimated warranty cost, based on experience, is 3% of sales the year after the sale, 2% of sales the second year after the sale and 1% of sales the third year after the sale. The companys total sales for 2020 was $1.3 million. Actual warranty work was performed in 2020 for a cost of $50,000. The opening balance in the Warranty Liability account as of January 1, 2020 was $61,000.

Required:

a. Prepare the journal entries for the warranty accrual and the actual warranty incurred for 2020 using the Expense Method. (6 marks)

b. What is the amount of the Warranty Liability to be reported on the Balance Sheet as at December 31, 2020 based on the Expense method?

Question #2

Wilma Corporation reported the following amounts in its shareholders equity section on the December 31, 2019 balance sheet:

Preferred shares, $5 dividend, 10,000 shares authorized, $180,000

2,800 shares outstanding

Common shares, 100,000 authorized, 25,000 outstanding 100,000

Contributed Surplus1 122,000

During 2020, the following transactions impacted shareholders equity:

a) Jan 15: Purchased 6,000 shares of its own common shares for $27 per share and retired them

b) Feb 1: Issued 1,500 preferred shares at $72 per share

c) Nov 1: Declared a 10% stock dividend on the outstanding common shares when they were trading at $32 per share.

d) Dec 31: Declared the annual 2020 preferred share dividend and a $3 per share dividend on the common shares. These dividends are payable in 2021.

Required:

Prepare journal entries for each of the transactions in 2020