12.11 Exercises
Chapter 12
Exercise 12.1
For each of the following items, identify whether it should be reported as a current liability (CL), a non-current liability (NCL), both a current and non-current liability, or not recorded at all.
- A bank overdraft
- Refundable sales tax collected on sales
- Accounts payable
- Accrued vacation pay
- A bank loan with a five-year term that requires monthly payments
- A commitment under a purchase contract that is not onerous
- Unearned revenue
- Decommissioning costs
- A claim against the company filed under a lawsuit
- Income taxes payable
- Unremitted payroll deductions
- A five-year warranty on the sale of an automobile
- Notes payable
- A deposit received from a customer
- Loyalty points awarded by a hotel chain
Exercise 12.2
On October 5, Bendel Ltd. renegotiated the terms of an $8,000 outstanding account payable with a supplier. The supplier agreed to replace the outstanding amount with a 120-day, 9% note. Bendel Ltd. has a December 31 year-end.
Required:
- Prepare the journal entry made by Bendel Ltd. on October 5.
- Prepare any journal entries required by Bendel Ltd. on December 31.
- Prepare the journal entry required by Bendel Ltd. on the note’s maturity date.
Exercise 12.3
Baldwin Inc. operates in a jurisdiction that levies two types of sales taxes: a federal, 6%, refundable goods and services tax and a provincial, 4% non-refundable sales tax. Both taxes are calculated on the base cost of the item, that is, there is no tax on the tax, and apply to all transactions. During the current year, the following transactions occurred:
- Inventory was purchased on account at a cost of $10,000, plus applicable taxes.
- Equipment was purchased for cash at a cost of $3,000, plus applicable taxes.
- Sales on account were made for proceeds of $16,000 plus applicable taxes.
- Cash sales were made for proceeds of $5,000 plus applicable taxes.
- At the end of the year, the net amounts of all sales taxes owing were remitted to the federal and provincial government authorities.
Required:
Prepare journal entries to record the transactions detailed above.
Exercise 12.4
Mandler Inc.’s payroll clerk unexpectedly quit on December 24, one week before the end of the fiscal year. At that time, employees had not been paid for the most recent pay period. Management issued total cash advances of $50,000 to the employees until payroll could be properly prepared. These advances were recorded in the Employee receivable account. In early January, the company hired a new payroll clerk who determined the following:
| Gross employee pay, December 10 – 24 | $73,000 |
| Income tax withheld from employees | $19,000 |
| Government pension withheld from employees | $1,000 |
| Additional government pension to be paid by employer | $1,200 |
The new payroll clerk also determined that no year-end accrual had been made for the payroll from December 25 to 31. The clerk has determined that the pay for this period should be accrued at the same rate as the previous pay period.
Required:
- Record the journal entry to correct the December 24 payroll amounts.
- Record the journal entry to accrue the payroll amount from December 25 to 31.
Exercise 12.5
Wightman WaxWorks Ltd. offers repair and maintenance services for premium turntables and other audio equipment. Service contracts may be purchased for one, two, or three years. Prices are $120 for a one-year contract, $200 for a two-year contract, and $280 for a three-year contract. All contract fees must be paid at the start of the term. In 2021, three sales promotion events occurred that generated sales in the following months:
| January 2021 | July 2021 | December 2021 | |
|---|---|---|---|
| One-year subscription | 17 | 18 | 12 |
| Two-year subscription | 24 | 20 | 30 |
| Three-year subscription | 30 | 22 | 36 |
Required:
- Determine the amount of revenue recognized in the year ended December 31, 2021.
- Determine the amount of deferred revenue reported as a current liability at December 31, 2021.
- Determine the amount of deferred revenue reported as a non-current liability at December 31, 2021.
Exercise 12.6
Wilder Watersports Inc. sells luxury yachts and related equipment. The sale price of each yacht includes a three-year comprehensive warranty that covers all repairs and maintenance for the period. Each yacht sells for $3,000,000. A review of competitor pricing indicates that a similar warranty, if sold separately, would be valued at $10,000. On January 1, 2021, Wilder Watersports Inc. sold seven yachts. Repair costs actually incurred for these yachts were as follows:
| Year ended December 31, 2021 | $12,000 | |
|---|---|---|
| Year ended December 31, 2022 | $30,000 | |
| Year ended December 31, 2023 | $35,000 |
Required:
- Prepare all the necessary journal entries for 2021, 2022, and 2023 to reflect the above transactions.
- Calculate the amount of unearned revenue to be reported at December 31, 2022.
Exercise 12.7
Lofft Furniture Mfg. currently employs 10 people on its assembly line, each of whom earn $160 per day. Each employee is entitled to 15 days of vacation per year and one sick day per month. Vacation days accumulate each month, but cannot be taken until after the end of the current year. Sick days do not accumulate, and if they are not taken in a given month they are forfeited. The company is planning to give a 3% raise to its employees in the next fiscal year. The 10 employees worked for the entire year and took a total of 96 sick days. No vacation was taken during the year.
Required:
- Prepare the journal entries for the current year with respect to the vacation and sick pay.
- Calculate the amount of liability to be reported at the end of the current year with respect to the vacation pay and sick pay.
Exercise 12.8
Sarkissian Specialties sells premium gelato from a portable trailer located in a busy public park. To promote sales, the business has created a loyalty program. If a customer buys nine cups of gelato, the tenth cup will be free. Each cup of gelato sells for $2.70. In 2020, the business sold 36,000 cups of gelato and redeemed 1,000 free cups. The business expects that another 1,000 free cups will be redeemed in the future. They also expect that any remaining free cups will be forfeited as the loyalty card expires one year after the first purchase, and past experience has indicated that only approximately 50% of the customers redeem their free cup.
Required:
- Prepare the journal entries for the current year with respect to the sales and loyalty program.
- Calculate the amount of liability to be reported at the end of the current year with respect to the loyalty program.
Exercise 12.9
Lupinetti Industries Ltd. has begun manufacturing a specialized cardiopulmonary bypass machine used to maintain the respiration and blood flow of patients during open-heart surgery. The company expects to continue manufacturing this machine for another 10 years, until such time that competitive products render the current technology obsolete. The company has agreed to vacate its current factory in 10 years’ time. The local government granted the land for the facility on the condition that it will be returned to its original state when vacated. The company has also agreed to build a public park on the site once the remediation is complete. The company has estimated that the total cost of the site remediation to be $3 million and the cost of constructing the park to be $500,000. The interest rate appropriate for this type liability is 11%.
Required:
- Prepare the journal entry to initially record the decommissioning cost.
- Prepare the journal entries required for the first two years after the initial recognition of the decommissioning cost.
Exercise 12.10
Braden Bonnet Technologies manufactures sewing and pressing machines that are used in the manufacture of felt hats. Each machine sold includes a three-year limited warranty that guarantees repairs if the machine should fail. The warranty is an integral part of the sale price and is not considered a separate performance obligation. In 2021, 3,000 machines were sold at a price of $11,000 each. Based on past experience, the company has estimated that the expected value of the warranty repairs will be $600 per machine. Actual repair costs on the machines sold in 2021 were incurred as follows:
| Year | Costs Incurred |
|---|---|
| 2021 | $975,000 |
| 2022 | $345,000 |
| 2023 | $425,000 |
Required:
- Prepare all the journal entries to record the sale and warranty transactions for 2021 to 2023.
- Determine the warranty liability balance that will be reported at each year-end from 2021 to 2023.
Exercise 12.11
Kercher Imports Inc. purchases large quantities of precious minerals in Asia that are then resold to various European end-use customers. The company has recently entered into a contract to purchase 10,000 grams of a particular mineral at a price of $50 per gram. The company intends to resell the mineral to its customers at $90 per gram. Soon after the contract was signed, the civil war in the mineral’s source country ended and a stable government was installed. This result calmed the markets, and the spot price for the mineral dropped to $31 per gram. Kercher Imports Inc. examined the contract and determined that to exit the arrangement early would result in a penalty of $75,000. As a result of the change in the market price, Kercher Imports Inc. can now only sell the product to its end-users at $45 per gram.
Required:
- Determine if this is an onerous contract. Prepare the journal entry required to report this contract.
- Repeat part (a) assuming that the penalty for contract cancellation is $150,000 instead of $75,000.
Exericise 12.12
The financial statements for Stuewe Enterprises Ltd. are presented below:
|
Stuewe Enterprises Ltd. |
||
|---|---|---|
| 2021 | 2020 | |
| Current Assets | ||
| Cash | $35,000 | $56,000 |
| Accounts receivable | 175,000 | 150,000 |
| Inventory | 113,000 | 88,000 |
| 323,000 | 294,000 | |
| Property, plant and equipment | 475,000 | 510,000 |
| $798,000 | $804,000 | |
| Current Liabilities | ||
| Accounts payable | $229,000 | $201,000 |
| Current portion of long-term debt | 55,000 | 60,000 |
| 284,000 | 261,000 | |
| Long-term debt | 216,000 | 270,000 |
| 500,000 | 531,000 | |
| Equity | ||
| Share capital | 10,000 | 10,000 |
| Retained earnings | 288,000 | 263,000 |
| 298,000 | 273,000 | |
| $798,000 | $804,000 | |
|
Stuewe Enterprises Ltd. |
||
|---|---|---|
| 2021 | 2020 | |
| Sales | $975,000 | $950,000 |
| Cost of goods sold | 595,000 | 610,000 |
| Gross profit | 380,000 | 340,000 |
| Operating expenses | 275,000 | 195,000 |
| Income before tax | 105,000 | 145,000 |
| Income tax | 21,000 | 30,000 |
| Net income | $84,000 | $115,000 |
Required:
- Calculate the current ratio, quick ratio, days’ sales uncollected, and days’ payable outstanding ratios. Assume that all sales are made on credit and the only purchases made on credit are inventory purchases, that is, no operating expenses. Use period-end values rather than averages for your calculations.
- Using the ratios from part (a), evaluate the liquidity of Stuewe Enterprises Ltd.
Exercise 12.13
MVR Equipment Limited sold 450 Micomatics on account during Y6 for $5,700 each.
Cost of goods sold can be ignored. During Y6, MVR spent $24,650 servicing the two-year warranties that are include in each sale of the micomatics.
All transactions relating to servicing were paid in cash.
Required:
- Prepare all required Y6 entries if MVR uses the assurance-type (expense based) approach to warranties.
Assume MVR estimated the total cost of servicing the warranties will be $98,600 for two years
and all related payments are made in cash. - Prepare all required Y6 entries if MVR uses the service-type (revenue based) approach to warranties.
Assume that, of the total sales, $137,900 is identified as relating specifically to sales of warranty contracts.
MVR estimates that the total cost of servicing the warranties will be $98,600 for two years.
Repair costs are not expected to be incurred evenly, therefore warranty revenues should be recognized based on the proportion of costs incurred out of the total estimated costs, no evenly over two-years.
Exercise 12.14
Colborne Limited sells a product that includes a two-year warranty at no extra charge.
During Y8, Colborne sold products for $18,670,000 and spent $54,100 servicing warranty claims.
At the end of Y8, Colborne estimates that an additional $325,000 will be spent in the future to
service warranty claims related to the Y8 sales.
All sales and payment of expenses are in cash. Sales are made evenly throughtout the year. Cost of goods sold can be ignored.
Required:
- Prepare all required and necessary Y8 journal entries if Colborne uses the assurance-type warranty approach.
- Prepare all required and necessary Y8 journal entries if Colborne used the service-type warranty approach.
Colborne estimates that warranties of this nature have a stand-alone value of $870,000 and are expected to be earned over the warranty period as follows: Y8 = 40%; Y9 = 60%.
