Chapter 12

Solutions

Exercise 12.1

  1. CL
  2. CL
  3. CL
  4. CL
  5. Both
  6. Not recorded
  7. CL and possibly NCL if goods/services provided more than one year in the future
  8. NCL, unless decommissioning will happen within one year, then CL
  9. Not recorded unless lawsuit is settled/resolved
  10. CL
  11. CL
  12. Both
  13. CL or NCL, depending on term of note
  14. CL
  15. Both, depending on expiry date of points

Exercise 12.2

a.

General journal example.b.

General Journal Examplec.

General Journal Example


Exercise 12.3

a.
General Journal Example
b.
General Journal Example
c.
General Journal Example
d.
General Journal Example
e.
General Journal Example


Exercise 12.4

a.

General Journal Example

Note: The cash represents the total of the individual payroll cheques that would be written to each employee, less the amount of the advances paid.

b.

General Journal Example

Note: Wage expense = 73,000\;\times\;5\;\div\;10\;=\;36,500 (based on 5 working days per week)Government pension expense = 1,200\;\times\;5\;\div\;10\;=\;600

In practice, the calculation of the government pension expense would be more complicated than this. However, the company would likely omit this part of the calculation, as it is not material to the accrual.


Exercise 12.5

  1. January 2021 Factor Revenue
    One-year subscription 17\;\times\;\$120 12/12 $2,040
    Two-year subscription 24\;\times\;\$200 12/24 $2,400
    Three-year subscription 30\;\times\;\$280 12/36 $2,800
    July 2021 Factor Revenue
    One-year subscription

    18\;\times\;\$120

    6/12 $1,080
    Two-year subscription 20\;\times\;\$200 6/24 $1,000
    Three-year subscription 22\;\times\;\$280 6/36 $1,027
    December 2021 Factor Revenue
    One-year subscription 12\;\times\;\$120 1/12 $120
    Two-year subscription 30\;\times\;\$200 1/24 $250
    Three-year subscription 36\;\times\;\$280 1/36 $280

    Total of all revenue amounts recognized = $10,997

    Note: This calculation assumes that services are provided in equal proportions throughout the contract term. If a different assumption is more accurate, then the calculations would be adjusted to reflect the expected pattern of service.

  2. Total contract payments received:
    [(17+18+12) × $120) + [(24+20+30) × $200] + [(30+22+36) × $280] = $45,080
    Less revenue recognized in 2021 $10,997
    Total deferred revenue at December 31, 2021 $34,083

    This will be reported as:

    Current liability $18,013
    Non-current liability $16,070

    Calculation:

    January 2021 Factor Current Liability
    One-year subscription 17\;\times\;\$120 0/12 $0
    Two-year subscription 24\;\times\;\$200 12/24 $2,400
    Three-year subscription 30\;\times\;\$280 12/36 $2,800
    July 2021 Factor Current Liability
    One-year subscription
    18\;\times\;\$120
    6/12 $1,080
    Two-year subscription 20\;\times\;\$200 12/24 $2,000
    Three-year subscription 22\;\times\;\$280 12/36 $2,053
    December 2021 Factor Current Liability
    One-year subscription 12\;\times\;\$120 11/12 $1,320
    Two-year subscription 30\;\times\;\$200 12/24 $3,000
    Three-year subscription 36\;\times\;\$280 12/36 $3,360

    Total current liability = $18,013

    Total non-current liability = (34,083\;-\;18,013)\;=\;\$16,070


Exercise 12.6

  1. General Journal Example
  2. Unearned revenue at December 31, 2022 = (70,000\;-\;23,333\;-\;23,333)\;=\;\$23,334

Exercise 12.7

a.

General Journal ExampleNote: This is simply a reclassification, as the employee would have been paid his or her regular pay on a sick day.

b. Vacation pay liability at December 31 = $24,720, per part (a)Sick pay liability at December 31 = $0 (these benefits do not accumulate)


Exercise 12.8

a.

General Journal ExampleTotal sales generated = 36,000\;cups\;\times\;\$2.70\;=\;\$97,200

Fair value per cup = \$97,200\;\div\;(36,000\;+\;2,000)\;=\;\$2.56\;per\;cup

(Denominator is total cups sold plus expected redemptions.)

Unearned revenue = 2,000\;expected\;redemptions\;\times\;\$2.56\;=\;\$5,120\;(rounded)
General Journal Example
This records the redemption of the first 1,000 free cups.

b. Liability at the end of 2020 will be the unearned revenue balance:

\$5,120\;-\;\$2,560 = $2,560

This will be reported as a current liability, as all loyalty cards expire within one year.


Exercise 12.9

  1. Present value of legal and constructive obligation = (FV\;3,500,000,\;n\;10,\;i\;11\%)
    = \$1,232,646
  2. General Journal Example

Exercise 12.10

a.

General Journal ExampleNote: This journal entry assumes that the three-year warranty period for all machines sold in 2021 has now expired. The balance of the provision must be reduced to zero once the warranty period ends. If there were still machines with remaining warranty rights, the balance of the provision would be carried forward to 2024 until the warranty period expired.

b. 2021 warranty liability = 1,800,000\;-\;975,000\;=\;\$825,000

2022 warranty liability = \$825,000\;-\;345,000\;=\;\$480,000

2023 warranty liability = 480,000\;-\;480,000\;=\;\$0

(assuming all warranty periods have expired by the end of 2023)

Note: In 2021, the liability would be separated into current and non-current portions, based on management’s best estimate of the pattern of future warranty repairs. In 2022, the liability would be reported only as current.


Exercise 12.11

  1. If contract is completed:
    Sales revenue = 10,000\;grams\;\times\;\$45\;per\;gram = $450,000
    Cost of product = 10,000\;grams\;\times\;\$50\;per\;gram = 500,000
    Loss on contract $(50,000)

    If contract is cancelled and sales still made:

    Sales revenue (as above) $450,000
    Cost of product = 10,000 grams × $31 per gram = 310,000
    Cancellation penalty 75,000
    Profit on contract $65,000

    If contract is cancelled and no sales made, the $75,000 penalty still applies.

    Because the option of cancelling the contract and continuing to make sales results in a profit, this is not an onerous contract. No journal entry is required.

     

  2. If contract is completed, loss is as calculated in part (a) $(50,000)
    If contract is cancelled and sales made:
    Sales revenue (as above) $450,000
    Cost of product = 10,000 grams × $31 per gram = 310,000
    Cancellation penalty 150,000
    Loss on contract $(10,000)
    If contract is cancelled and no sales, penalty applies $(150,000)

    In this case, all options result in a loss, so this is an onerous contract. A journal entry is required to recognize the least costly option available:

General Journal Example


Exercise 12.12

  1. Ratio 2021 2020
    Current 1.14 1.13
    Quick 0.74 0.79
    Days’ sales uncollected 66 days 58 days
    Days’ payable outstanding

    140 days 120 days
    Current:
    2021
    323,000\;\div\;284,000\;=\;1.14
    2020 294,000\;\div\;261,000\;=\;1.13
    Quick: 2021 (323,000\;-\;113,000)\;\div\;284,000\;=\;0.74
    2020 (294,000\;-\;88,000)\;\div\;261,000\;=\;0.79
    Days’ sales uncollected:
    2021
    (175,000\;\div\;975,000)\;\times\;365\;=\;66\;days
    2020 (150,000\;\div\;950,000)\;\times\;365\;=\;58\;days
    Days’ payable outstanding: 2021 (229,000\;\div\;595,000)\;\times\;365\;=\;140\;days
    2020 (201,000\;\div\;610,000)\;\times\;365\;=\;120\;days
  2. The company’s cash decreased from the previous year, but this does not reveal much. The ratio analysis, however, does reveal some worrying trends in liquidity. The current ratio has been maintained at almost exactly the same level as the previous year, but it is only slightly above 1. This may indicate that the company will have difficulty meeting its short-term obligations when they come due. The quick ratio further emphasizes this point. The quick ratio declined from the previous year and is now less than 1. This means the company would not be able to fully pay its current obligations if they were to become immediately due. This could cause problems with trade creditors and the company’s bank, which could lead to further actions taken by those parties that could negatively affect the business. The collection period for receivables has also slowed by 8 days from the previous year, which indicates that it is taking longer to collect from customers. This trend will further exacerbate any cash flow problems the company has in meeting its current payment obligations. The actual collection period of 66 days may be reasonable, but the company’s credit terms and general industry conditions would need to be examined to see if this is in line with what is expected for this type of business. The payment period for the company’s suppliers shows the most alarming trend. The company is now taking 140 days to pay its payable, an increase of 20 days over the previous year. This could indicate serious cash flow problems, and may cause loss of credit with suppliers which could, ultimately, result in an inability to obtain a supply of inventory. The standard credit terms offered by suppliers will need to be examined to put this calculation into context. As well, the supplier list should be examined to see if there are any related parties involved that are granting more favourable credit terms than would be normally expected.Overall, the company appears to have some problems in managing its working capital, which could lead to more serious liquidity problems in the future. The company seems to be using trade creditors as its main source of short term financing, which may cause a degrading of the company’s credit and reputation with those suppliers. However, more information is required to fully understand these trends.

Exercise 12.13

1. Assurance-type (expense based)

Y6 Accounts Receivable 2,565,000
Sales Revenue 2,565,000
(450 units x $5,700 each)
to record sales on account
Y6 Warranty Expense 24,650
Cash 24,650
to record payment of warranty expenses
Y6 Warranty Expense 73,950
Warranty Liability 73,950
to record estimated future warranty liability
($98,600 - $24,650)

2. Service-type (revenue based)

Y6 Accounts Receivable 2,565,000
Sales Revenue 2,427,100
Unearned Warranty Revenue 137,900
(450 units × $5,700 each) = accounts receivable
to record sales on account
Y6 Warranty Expense 24,650
Cash 24,650
to record payment of warranty expenses
Y6 Unearned Warranty Revenue 34,475
Warranty Revenue 34,475
$137,900 × ($24,650 ÷ $98,600)
to remeasure unearned revenue - based on proportion of costs incurred (indicated in question)


Exercise 12.14

1. Assurance-type warranty

Y8 Cash 18,670,000
Sales Revenue 18,670,000
to record cash sales
Y8 Warranty Expense 54,100
Cash 54,100
to record warranty expense incurred
Y8 Warranty Expense 325,000
Warranty Liability 325,000
to accrue for estimated additional future warranty expenses

2. Service-type warranty

Y8 Cash 18,670,000
Sales Revenue 17,800,000
Unearned Warranty Revenue 870,000
to record cash sales
Y8 Warranty Expense 54,100
Cash 54,100
to record warranty expense incurred
Y8 Unearned Warranty Revenue 348,000
Warranty Revenue 348,000
$870,000 × 40% earned

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