The following events occurred during Sterling's December 31, 20X6, fiscal year:
i. On August 15, 20X6, Sterling issued a $250,000 note payable; the note bears interest at 7.5% and is payable in one year. Sterling classified the liability at fair value through profit or loss (FVPL) when it recorded the transaction in August because it intends to repurchase (or settle) the note in February 20X7. At December 31, 20X6, the fair value of the note was $252,000. The note is payable to Credit Financier Ltd. (CFL). It cost Sterling $2,500 to issue the note. This amount was expensed. Assume that interest expense for the note has been recorded correctly in the "interest expense other" account.
ii. Seven years ago, in January 20X0, Sterling issued $3,000,000 of 10-year, 9% bonds that pay interest semi-annually on June 30 and December 31. The bonds were issued when the market rate was 8%. Bond issuance costs were $200,000. The December 31, 20X6, payment of the semi-annual interest was recorded as a debit to interest expense of $135,000 and a credit to cash of $135,000.
iii. In November 20X6, Sterling ordered a bigger motor and heavier-duty pulley and lifting system for its warehouse storage system currently under construction. The larger motor and the enhanced lifting system will enable Sterling to continue using the existing storage system for another seven years. With the current equipment, the system would only last two more years. The total cost of the motor, pulley and lifting system is US$84,000. When Sterling ordered the equipment on October 18, the exchange rate was C$1.00 = US$0.84. When the equipment was received on December 15, the exchange rate was C$1.00 = US$0.79. The equipment will be put into operation on January 1, 20X7. The equipment was correctly recorded when received.
On December 31, 20X6, the exchange rate was C$1.00 = US$0.81. On January 13, 20X7, when Sterling paid the invoice, the exchange rate was C$1.00 = US$0.85.
Estimates of other charges related to the purchase are as follows:
Customs and duties $ 4,500
Transportation $ 3,600
Installation and assembly (to date) $ 12,300
The invoices for these other charges were not received prior to year end and have not been accrued for. The installation and assembly work is being done by an independent contractor.
iv. On December 20, 20X6, the existing motor, pulley and lifting system was sold for $2,500. The original cost of these components was $35,000. They had an expected life of 10 years and an estimated salvage value of $2,000. They had a net book value of $10,250. The cash received was recorded as a gain on sale of $2,500.
v. Sterling's insurance company sent a bill for additional insurance premiums of $350. This bill covers from the December 15 delivery date until the annual policy expires on March 31, 20X7. This bill was paid and the amount expensed. The cost of the policy used should be added to the cost of the asset under construction.
vi. Many of the manufacturers whose products Sterling carries provide a warranty. Sterling also provides an additional warranty on several lines/items. Based on experience over the years, the warranty costs average 0.25% of total sales. The provision is accrued quarterly but has not been recorded yet for the fourth quarter of 20X6; fourth-quarter sales were $3,280,000.
vii. The accounting staff determined that expenses for the fourth quarter included $6,905 of costs directly attributable to warranty work, bringing the total warranty costs paid by Sterling during 20X6 to $27,311. These costs for the fourth quarter have been charged to the wages, salaries, and benefits account. Warranty costs for the first three quarters are properly recorded.
viii. In January 20X6, Sterling purchased land for storage of industrial waste and surplus manufacturing plant supplies, paying $1,500,000. The terms of the permit require Sterling to restore the property for any decontamination from oils, solvents, or other contaminants. Sterling hired an appraiser to provide an estimate of the decommissioning costs; the appraisal report projects decommissioning costs to be $850,000. The discount rate for the obligation is 4%. Sterling expects to use the land for 25 years. Management believes that use of the land for waste and surplus storage will not affect the value of the land once the storage site has been decommissioned and restored as required. The appraisal report supports this view. Sterling began using the land for its intended purpose in January 20X6. In reviewing the trial balance, you notice that the land purchase was recorded, but that the related decommissioning obligation has not been recorded.
ix. A competitor, ABC Ltd., is suing Sterling for misuse/unauthorized use of ABC's customer list. Sterling hired a former ABC employee, who ABC alleges took its customer list to Sterling. Sterling's legal advisors have estimated that there is a 65% probability that ABC will be successful in its lawsuit. The legal firm believes that if it is successful, there is a 20% probability that ABC will be awarded $500,000, a 55% probability of a $300,000 award, and a 25% chance of a $250,000 award.
Provide the journal entries for each of the above issues. Provide a bonds payable amortization table, a stock appreciation rights worksheet, a convertible bonds payable amortization table, and any other working papers necessary to support the journal entries.
Sterling Industrial Equipment Inc. is a widely held Canadian corporation that went public 20 years ago. The company trades on the Toronto Stock Exchange (TSX). Sterling is an industrial supply company. Its products include industrial fasteners, heavy-duty power tools, hand tools, power supplies, adhesives and sealants, hydraulic and pneumatic equipment, hoses, safety supplies, welding equipment, and testing equipment. Customers can rent the more expensive hydraulic and pneumatic equipment. These rentals generally range from one day to five weeks. In 20x3 (three years ago), in response to customer demand, Sterling began to sell drilling equipment. This year (20X6), Sterling entered into a longer-term lease of one of its drilling units with one of its regular customers. As the senior accountant at Sterling, you work closely with the company's treasurer and its CFO. You have been asked to help prepare Sterling's December 31, 20X6, financial statements. The unadjusted trial balance as at December 31, 20X6, is as follows: Cash 1,642,301 Accounts receivable trade 1,250,000 Allowance for doubtful accounts 18,750 Prepaid insurance 33,500 Inventory 2,653,000 Income tax instalments 225,000 Deferred tax (statement of financial position) - loss carryforward 27,000 Deferred tax (statement of financial position) other 139,715 Land 12,485,300 Buildings 15,307,600 Accumulated depreciation - buildings 4,170,935 Tools and other equipment 952,624 Accumulated depreciation tools and other equipment 903,348 Tools and other equipment - under construction (in progress) 106,329 Vehicles delivery, service, sales 212,004 Accumulated depreciation - vehicles 131,336 Office equipment 85,220 Accumulated depreciation - Office equipment 47,006 Computer equipment 316,716 Accumulated depreciation - computer equipment 257,680 Right-of-use asset 10,132 Accumulated depreciation right-of-use asset 338 Net pension plan asset 108,000 Accounts payable 1,387,410 106,329 315,678 112,500 250,000 500,000 29,494 4,400,000 2,920,705 2,204,771 94,185 625,000 3,400,000 2,475,000 Accounts payable US$ at Canadian equivalent Accounts payable accrual Payroll taxes payable Note payable - Credit Financier Ltd. (at fair value through profit or loss) Current portion of long-term debt Provision for warranty payable Long-term debt Bonds payable Convertible bonds payable Liability under stock appreciation rights (SARS) Preference shares - A- cumulative (12,500 outstanding, $4) Preference shares B non-cumulative (34,000 outstanding, $3) Preference shares - C non-cumulative convertible (55,000 outstanding, $2) Contributed surplus - employee stock option plan (ESOP) - plan 20X1 Contributed surplus ESOP-plan 20X3 Common shares ESOP-plan 20X3 Common shares (1,200,000 outstanding) Retained earnings Revenue sales Cost of goods sold Advertising Audit and legal fees Bad debts expense Bond transaction expense Communications - phone, fax, computer, internet Dues and memberships golf Interest expense bonds Interest expense - long-term debt Interest expense other Insurance expense property, building, and casualty Insurance automobile Janitorial services Meals and entertainment Office expense Penalties and interest Property taxes Training and development Utilities Wages, salaries, and benefits Warranty expense 20,000 180,000 1,700,000 4,500,000 2,969,595 13,000,000 6,328,000 150,000 76,500 130,000 231,000 42,000 42,300 279,292 475,000 7,089 98,652 26,400 63,000 72,400 32,500 2,764 337,300 77,600 61,900 2,048,605 24,300 4,500 2,500 Dividend income Gain/loss of sale of property, plant, and equipment Depreciation expense owned assets Depreciation expense right-of-use assets 565,679 338 Total 46,727,060 46,727,060 The depreciation expense journal entry had already been done for the year and is included in the above totals. The journal entry was as follows: DR Depreciation expense 565,679 DR Depreciation expense right-of-use asset 338 CR Accumulated depreciation - buildings 362,690 CR Accumulated depreciation tools and other equipment 78,552 CR Accumulated depreciation - vehicles 16,417 CR Accumulated depreciation - Office equipment 4,948 CR Accumulated depreciation - computer equipment 103,072 CR Accumulated depreciation right-of-use asset 338 Note: Capital cost allowance (CCA) for 20x6 is $681,870.00. The closing balance as at December 31, 20X6 in undepreciated capital cost (UCC) is $11,765, 130. No additions were made to the property, plant, and equipment accounts in 20X6. Sterling Industrial Equipment Inc. is a widely held Canadian corporation that went public 20 years ago. The company trades on the Toronto Stock Exchange (TSX). Sterling is an industrial supply company. Its products include industrial fasteners, heavy-duty power tools, hand tools, power supplies, adhesives and sealants, hydraulic and pneumatic equipment, hoses, safety supplies, welding equipment, and testing equipment. Customers can rent the more expensive hydraulic and pneumatic equipment. These rentals generally range from one day to five weeks. In 20x3 (three years ago), in response to customer demand, Sterling began to sell drilling equipment. This year (20X6), Sterling entered into a longer-term lease of one of its drilling units with one of its regular customers. As the senior accountant at Sterling, you work closely with the company's treasurer and its CFO. You have been asked to help prepare Sterling's December 31, 20X6, financial statements. The unadjusted trial balance as at December 31, 20X6, is as follows: Cash 1,642,301 Accounts receivable trade 1,250,000 Allowance for doubtful accounts 18,750 Prepaid insurance 33,500 Inventory 2,653,000 Income tax instalments 225,000 Deferred tax (statement of financial position) - loss carryforward 27,000 Deferred tax (statement of financial position) other 139,715 Land 12,485,300 Buildings 15,307,600 Accumulated depreciation - buildings 4,170,935 Tools and other equipment 952,624 Accumulated depreciation tools and other equipment 903,348 Tools and other equipment - under construction (in progress) 106,329 Vehicles delivery, service, sales 212,004 Accumulated depreciation - vehicles 131,336 Office equipment 85,220 Accumulated depreciation - Office equipment 47,006 Computer equipment 316,716 Accumulated depreciation - computer equipment 257,680 Right-of-use asset 10,132 Accumulated depreciation right-of-use asset 338 Net pension plan asset 108,000 Accounts payable 1,387,410 106,329 315,678 112,500 250,000 500,000 29,494 4,400,000 2,920,705 2,204,771 94,185 625,000 3,400,000 2,475,000 Accounts payable US$ at Canadian equivalent Accounts payable accrual Payroll taxes payable Note payable - Credit Financier Ltd. (at fair value through profit or loss) Current portion of long-term debt Provision for warranty payable Long-term debt Bonds payable Convertible bonds payable Liability under stock appreciation rights (SARS) Preference shares - A- cumulative (12,500 outstanding, $4) Preference shares B non-cumulative (34,000 outstanding, $3) Preference shares - C non-cumulative convertible (55,000 outstanding, $2) Contributed surplus - employee stock option plan (ESOP) - plan 20X1 Contributed surplus ESOP-plan 20X3 Common shares ESOP-plan 20X3 Common shares (1,200,000 outstanding) Retained earnings Revenue sales Cost of goods sold Advertising Audit and legal fees Bad debts expense Bond transaction expense Communications - phone, fax, computer, internet Dues and memberships golf Interest expense bonds Interest expense - long-term debt Interest expense other Insurance expense property, building, and casualty Insurance automobile Janitorial services Meals and entertainment Office expense Penalties and interest Property taxes Training and development Utilities Wages, salaries, and benefits Warranty expense 20,000 180,000 1,700,000 4,500,000 2,969,595 13,000,000 6,328,000 150,000 76,500 130,000 231,000 42,000 42,300 279,292 475,000 7,089 98,652 26,400 63,000 72,400 32,500 2,764 337,300 77,600 61,900 2,048,605 24,300 4,500 2,500 Dividend income Gain/loss of sale of property, plant, and equipment Depreciation expense owned assets Depreciation expense right-of-use assets 565,679 338 Total 46,727,060 46,727,060 The depreciation expense journal entry had already been done for the year and is included in the above totals. The journal entry was as follows: DR Depreciation expense 565,679 DR Depreciation expense right-of-use asset 338 CR Accumulated depreciation - buildings 362,690 CR Accumulated depreciation tools and other equipment 78,552 CR Accumulated depreciation - vehicles 16,417 CR Accumulated depreciation - Office equipment 4,948 CR Accumulated depreciation - computer equipment 103,072 CR Accumulated depreciation right-of-use asset 338 Note: Capital cost allowance (CCA) for 20x6 is $681,870.00. The closing balance as at December 31, 20X6 in undepreciated capital cost (UCC) is $11,765, 130. No additions were made to the property, plant, and equipment accounts in 20X6
