Assignment Instructions: Complete the Individual Assignment Questions and Answers
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For each independent situation:
- A former employee of Melvin Minimarket Inc. sued the company for $900,000, alleging that the company owner harassed her. Melvin’s lawyers suggest that the lawsuit has a 30-40% probability of success and that, if successful, the plaintiff will be awarded between $400,000 and $500,000.
- Leduc Pyrotechnics Ltd. received a $15,000 fee to guarantee the $800,000 bank indebtedness of Kenora Fireworks Inc. The fair value of the guarantee is initially estimated to be $15,000.
- Montomery Syringes Co. sued a competitor for $800,000, alleging corporate Montomery’s legal counsel believes that the company will be successful and will be awarded somewhere in the range of $650,000 to $800,000.
Describe how the event should be dealt with in the financial statements and explain why. Prepare all required journal entries. (3 marks)
GOT Jetski Corp. has sold motorized watercraft for a number of years. GOT includes a three-year warranty on each watercraft they sell. Management estimates that the cost of providing the warranty coverage is 2% of sales in the first year and 3% of sales in each of years two and three. Other facts follow:
- GGT reported a $270,000 provision for warranty payable on its December 31, 2017 balance
- GGT’s sales for 2018 totaled $6,000,000 spread evenly through the
- The cost to GGT of meeting their warranty claims in 2018 was $480,000;
$300,000 for parts and $180,000 for labour.
- GGT’s sales for 2019 totaled $6,200,000 spread evenly through the
- The cost to GGT of meeting their warranty claims in 2019 was $468,000;
$280,800 for parts and $187,200 for labour. Based on recent claims history, GGT revises their 2019 warranty provision to 9% of sales.
- Prepare summary journal entries to record warranty expense and warranty claims in 2018 and (2 marks)
- Determine the provision for warranty payable that GGT will report as a liability on December 31, (1 mark)
It is early in February 2017 and you are conducting the audit of Blast Off Airline’s 2016 financial statements. Through discussion with Blast Off’s Chief Financial Officer you learn of matters that have not yet been incorporated into the 2016 financial statements:
During 2016, Blast Off began a customer loyalty program. For each aeronautical mile that a passenger travels on a paid flight, the passenger accrues one flight mile. Passengers can redeem accrued flight miles for free air travel. Earned miles do not expire. Blast Off’s analysis of its competitors’ programs suggests an average redemption rate of 55%. In 2016, Blast Off awarded 50,000,000 flight miles, 1,375,000 of which were redeemed. Management estimates the fair value of the flight miles is $540,000.
Prepare the journal entries to record the required adjustments for the above event. (2 marks)
Cynthia Dixie Accounting Inc. takes advantage of a well-known office furnishings store’s low-interest-rate financing. Cynthia buys furniture on the first day of its fiscal year, signing a $19,000, five-year note. The note is payable in full at maturity. Interest is payable annually at 2%. The market rate of interest for similar transactions is 5%.
Prepare journal entries to record:
- The purchase of the office
- The payment of interest and related amortization of the discount at the end of year
Canadian Sea Rides Ltd. issues $8,000,000 of four-year, 4% bonds dated January 1,2015. Interest is payable on January 1 and July 1 each year. The proceeds realized from the issue were the $8,529,082 sales price less the $50,000 fee charged by Sea’s lawyers. Sea’s year-end is December 31.
Prepare entries for
- The issuance of the
- Payment of interest and related amortization on July 1,
- Accrual of interest and related amortization on December 31, 2015. (3 marks)
Cartwright Corporation had a $1,350,000, 5% bond available for issue on September 1, 2017. Interest is to be paid quarterly beginning November 30th. All of the bonds were issued at par on October 1st.
Prepare the journal entries for October 1st and November 30th. (2 marks)
Legally Yours, a law firm, sells $8,000,000 of four-year, 8% bonds priced to yield 6.6%. The bonds are dated January 1, 2018, but due to some regulatory hurdles are not issued until March 1, 2018. Interest is payable on January 1 and July 1 each year. The bonds sell for $8,388,175 plus accrued interest.
In mid-June, Legally Yours earns an unusually large fee of $11,000,000 for one of its cases. They use part of the proceeds to buy back the bonds in the open market on July 1, 2018 after the interest payment has been made. Legally Yours pays a total of $8,456,234 to reacquire the bonds and retires them.
Prepare journal entries to record: (3 marks)
- The issuance of the bonds—assume that Legally Yours has adopted a policy of crediting interest expense for the accrued interest on the date of
- Payment of interest and related amortization on July 1,
- Reacquisition and retirement of the
Bailey’s Gold Mines Inc. (BGMI) purchases a piece of land for the purpose of developing a gold mine. BGMI is legally required to remove all structures and convert the mine site to a wildlife sanctuary at the end of its estimated 10-year useful life. BGMI estimates that it will have to spend $11,000,000 to decommission the site and reclaim the land when operations cease. The present value of this $11,000,000 site restoration cost, assuming a discount rate of 5%, is $6,753,046. BGMI uses straight-line depreciation.
Required: Prepare the journal entries to recognize this site restoration cost the company would record upon initial acquisition and subsequently. (3 marks)
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