In-class work Chapter 13

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In-Class Work Chapter 13 E13.4 (LO 3, 9) (Liability for Returnable Containers) Diagnostics Corp. follows IFRS and sells its products in expensive, reusable containers that can be tracked. The customer is charged a deposit for each container that is delivered and receives a refund for each container that is returned within two years after the year of delivery. When a container is not returned within the time limit, Diagnostics accounts for the container as being sold at the deposit amount and credits the account Container Sales Revenue. Information for 2023 is as follows: Containers held by customers at December 31, 2022, from deliveries in: 2021 $170,000 2022 480,000 $650,000 Containers delivered in 2023 894,000 Containers returned in 2023 from deliveries in: 2021 $115,000 2022 280,000 2023 310,400 705,400 Instructions a) Prepare all journal entries required for Diagnostics for the returnable deposits during 2023. Use the account Deposits. b) Calculate the total amount that Diagnostics should report as a liability for returnable deposits at December 31, 2023. c) Should the liability calculated in part (b) be reported as current or long term? Explain. d) Had Diagnostics followed ASPE, would any of your answers in parts (a) to (c) be different? (AICPA adapted) E13.5 (LO 3) (Entries for Sales Taxes) Sararas Ltd., a private company following ASPE, is a merchant and operates in the province of Ontario, where the HST rate is 13%. Sararas uses a

perpetual inventory system. Transactions for the business for the months of March and April are as follows: Mar. 1 Paid March rent to the landlord for the rental of a warehouse. The lease calls for monthly payments of $5,500 plus 13% HST. 3 Sold merchandise on account and shipped merchandise to Marcus Ltd. for $20,000, terms n/30, f.o.b. shipping point. This merchandise cost Sararas $11,000. 5 Granted Marcus a sales allowance of $500 (exclusive of taxes) for defective merchandise purchased on March 3. No merchandise was returned. 7 Purchased merchandise for resale on account from Tinney Ltd. at a list price of $4,000, plus applicable tax. 12 Purchased a desk for the shipping clerk, and paid in cash. The price of the desk was $600 before applicable tax. Apr.15 Paid the monthly remittance of HST to the Receiver General for Canada. 30 Paid the monthly PST remittance to the Treasurer of the province (where applicable). Instructions a) Prepare the journal entries to record these transactions on the books of Sararas. b) Assume instead that Sararas operates in the province of Alberta, where PST is not applicable. GST is charged at the rate of 5%. Prepare the journal entries to record these transactions on the books of Sararas. E13-8 (Refinancing of Short-Term Debt) On December 31, 2023, Hornsby Corporation had $1.2 million of short-term debt in the form of notes payable due on February 2, 2024. On January 21, 2024, in order to ensure that it had sufficient funds to pay for the short-term debt when it matured, Hornsby issued 25,000 common shares for $38 per share, receiving $950,000 in proceeds after brokerage fees and other costs of issuance. On February 2, 2024, the proceeds from the sale of the shares,

along with an additional $250,000 cash, were used to liquidate the $1.2- million debt. The December 31, 2023 balance sheet is issued on February 23, 2024. Instructions (a) Assuming that Hornsby follows ASPE, show how the $1.2 million of short-term debt should be presented on the December 31, 2023 balance sheet, including the note disclosure. (b) Assuming that Hornsby follows IFRS, explain how the $1.2 million of short-term debt should be presented on the December 31, 2023 statement of financial position. (c) Considering only the effect of the $1.2-million short-term notes payable, would Hornsby's current ratio appear higher if Hornsby followed ASPE, or if Hornsby followed IFRS? Discuss your answer from the perspective of a creditor. E13-11 (Compensated Absences—Vacation and Sick Pay) Mustafa Limited began operations on January 2, 2022. Mustafa employs nine individuals who work eight-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows: Actual Hourly Wage Rate Vacation Days Used by Each Employee Sick Days Used by Each Employee 2022 2023 2022 2023 2022 2023 $20 $21 0 9 4 5 Mustafa Limited has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when they are earned and to accrue sick pay when it is earned. For the purpose of this question, ignore any tax, CPP, and EI deductions when making payments to the employees. Instructions

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(a) Prepare the journal entry(ies) to record the transactions related to vacation entitlement during 2022 and 2023. (b) Prepare the journal entry(ies) to record the transactions related to sick days during 2022 and 2023. (c) Calculate the amounts of any liability for vacation pay and sick days that should be reported on the statement of financial position at December 31, 2022 and 2023. (d) How would your answers to parts ( b ) and ( c ) change if the entitlement to sick days did not accumulate? E13-15 (Asset Retirement Obligation) On January 1, 2023, Offshore Corporation erected a drilling platform at a cost of $5,460,000. Offshore is legally required to dismantle and remove the platform at the end of its six-year useful life, at an estimated cost of $950,000. Offshore estimates that 70% of the cost of dismantling and removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the cost is caused by using the platform in production. The present value of the increase in asset retirement obligation related to the production of oil in 2023 and 2024 was $32,328 and $34,914, respectively. The estimated residual value of the drilling platform is zero, and Offshore uses straight-line depreciation. Offshore prepares financial statements in accordance with IFRS. Instructions (a) Prepare the journal entries to record the acquisition of the drilling platform, and the asset retirement obligation for the platform, on January 1, 2023. An appropriate interest or discount rate is 8%. ( Hint: For a review of present value concepts, see Appendix 3B of Volume 1.) (b) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2023.

(c) Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2024. (d) Assume that on December 31, 2028, Offshore dismantles and removes the platform for a cost of $922,000. Prepare the journal entry to record the settlement of the asset retirement obligation. Also assume its carrying amount at that time is $950,000. (e) Repeat parts a through d assuming that Offshore prepares financial statements in accordance with ASPE. E13-21 (Warranties—Assurance-Type and Service-Type) Selzer Equipment Limited sold 500 Rollomatics on account during 2023 for $6,000 each. During 2023, Selzer spent $30,000 servicing the two-year warranties that are included in each sale of the Rollomatic. All servicing transactions were paid in cash. Instructions (a) Prepare the 2023 entries for Selzer using the assurance-type (expense-based) approach for warranties. Assume that Selzer estimates that the total cost of servicing the warranties will be $120,000 for two years. (b) Prepare the 2023 entries for Selzer assuming that the warranties are not an integral part of the sale, but rather a separate service that is considered to be bundled with the selling price. Use the service-type (revenue-based) approach for warranties. Assume that of the sales total, $160,000 is identified as relating specifically to sales of warranty contracts. Selzer estimates the total cost of servicing the warranties will be $120,000 for two years. Because the repair costs are not incurred evenly, warranty revenues are recognized based on the proportion of costs incurred out of the total estimated costs. (c) What amounts would be shown on Selzer's income statement under parts ( a ) and ( b )? Explain the resulting difference in the Selzer's net income. (d) Are assurance-type and service-type warranties recorded differently in IFRS and ASPE? (e) Assume that the equipment sold by Selzer undergoes technological improvements and management now has no past experience on which to estimate the extent of the warranty costs. The chief engineer believes that product warranty costs are likely to be incurred, but they cannot be reasonably estimated. What advice would you give on how to account for and report the warranties?

E13.24 (Premium Entries) (LO 6 , 9 ) Moleski Limited, a private company following ASPE, includes one coupon in each box of soap powder that it produces, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2023, Moleski purchased 8,800 premiums at $0.90 each and sold 120,000 boxes of soap powder at $3.30 per box. In total, 44,000 coupons were presented for redemption in 2023. It is estimated that 60% of the coupons will eventually be presented for redemption. Moleski uses the expense approach to account for premiums. Instructions a. Prepare all the entries that would be made for sales of soap powder and for the premium plan in 2023. Ignore any cost of goods sold entry. Round amounts to the nearest dollar. b. What amounts relative to soap powder sales and premiums would be shown on Moleski's financial statements for 2023? c. What method did Moleski follow? Would the same method apply if Moleski had followed IFRS? E13-29 (Contingencies and Commitments) Four independent situations follow. (a) Situation 1: During 2023, Sugarpost Inc. became involved in a tax dispute with the CRA. Sugarpost's tax lawyers have informed management that Sugarpost will likely lose this dispute. They also believe that Sugarpost will

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have to pay the CRA between $900,000 and $1.4 million. After the 2023 financial statements were issued, the case was settled with the CRA for $1.2 million. Instructions What amount, if any, should be reported as a liability for this contingency as at December 31, 2023, assuming that Sugarpost follows ASPE? (b) Situation 2: Toward the end of Su Li Corp.'s 2023 fiscal year, employer- union talks broke off, with the wage rates for the upcoming two years still unresolved. Just before the new year, however, a contract was signed that gave employees a 5% increase in their hourly wage effective January 1, 2024. Su Li had spent $1.2 million in wages on this group of workers in 2023. Instructions Prepare the entry, if any, that Su Li Corp. should make at December 31, 2023. Briefly explain your answer. (c) Situation 3: On October 1, 2023, the provincial environment ministry identified Jackhammer Chemical Inc. as a potentially responsible party in a chemical spill. Jackhammer's management, along with its legal counsel, have concluded that it is likely that Jackhammer will be found responsible for damages, and a reasonable estimate of these damages is $5 million. Jackhammer's insurance policy of $9 million has a clause requiring a deductible of $500,000. Instructions (i) Assuming ASPE is followed, how should Jackhammer Chemical report this information in its financial statements at December 31, 2023? (ii) Briefly identify any differences if Jackhammer followed IFRS. (d) Situation 4: Etheridge Inc. had a manufacturing plant in a foreign country that was destroyed in a civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by that country's government officials that it will receive a definite amount for this plant. The compensation amount will be less than the plant's fair value, but more than its carrying amount. Instructions How should the contingency be reported in the financial statements of Etheridge Inc. under ASPE? E13.30 (LO 8) (Ratio Calculations and Discussion)

Kawani Corporation has been operating for several years. On December 31, 2023, it presented the following SFP. Cost of goods sold in 2023 was $420,000, operating expenses were $51,000, and net income was $27,000. Accounts payable suppliers provided operating goods and services. Assume that total assets are the same in 2022 and 2023. Instructions Calculate each of the following ratios: a) Current ratio b) Acid-test ratio c) Debt to total assets ratio d) Rate of return on assets e) Days payables outstanding (include cost of goods sold and operating expenses) For each ratio, also indicate how it is calculated and what its significance is as a tool for analyzing Kawani’s financial position, profitability, and liquidity.