1. Greflow Communications Ltd manufactures component parts for cellular telephones. The business was restructured in 2021 which included refinancing debt and obtaining additional loan obligations. You are the accountant and the following entries relate to the year ended December 31, 2021.

A. On February 1^st, the company borrowed $500,000, by signing a one-year 5% interest-bearing note at BRN Financial Bank.

B. On March 1^st, the company purchased equipment for $350,000 from LaserFuse Equipment Limited. This was financed by paying 50,000 in cash and borrowing the balance of $300,000 by signing a one-year $350,000 zero coupon note from XN International.

C. On March 5th, the company purchased metal parts from Metalcell Company Limited for $1,000,000 with related terms 2.5/10, n/15. Greyflow paid for this purchase on March 18th. Purchases and accounts payable are recorded at net amounts.

D.Greflow had a loan obligation of $500,000 which was due on March 31, 2022, plus interest of $24,000 accrued from April 1, 2021. This was refinanced with a new maturity date of March 31, 2023, with the interest of 6% per annum payable at maturity. The agreement was reached on January 31, 2022, and the financial statements were authorized to be issued on March 31^st, 2022.

E. There was an explosion at the plant on December 23, 2021, with damages estimated at $1,385,000. The company has insurance to cover such incidents totaling $5,000,000 if the incident was an accident and $1,000,000 if it was due to company error. The incident was investigated and the explosion was found to be due to a faulty gas tank that was last serviced on July 15, 2021. The company policy was to service every 6 months however industry standards were generally 3 months. Management was advised by legal counsel that there was a high probability the company would be held responsible for the damages. Employees were not injured during the incident however the employees’ union has indicated that there are discussions underway relating to filing a $3,000,000 claim for unsafe working conditions.

F. The company sells cell phone component parts at an average price of $7,000. Each customer is offered a separate 4-year service type warranty contract of $500. With this contract, the company would carry out periodic services and replace defective parts. In 2021, the company sold 1,000 cell phone component parts and 800 warranty contracts for cash. It estimates the 4-year warranty costs like $300 for parts and $100 for labor and accounts for warranties separately. Assume sales occurred on December 31, 2021, and straight-line recognition of warranty revenues occurs.

Required

i.Prepare the journal entries necessary to record the transactions above using appropriate dates.

ii. Prepare the adjusting entries necessary on December 31, 2021, in order to properly report interest expenses related to the above transactions. Assume straight-line amortization.

iii. Complete the current and long-term liabilities section of the Statement of Financial Position as of December 31, 2021

(round to the nearest $1)

iv. Calculate the current ratio and acid test ratio if the current assets at December 31, 2021, are as follows (round to two decimal places):

Current Assets
Inventories	$500,000
Prepaid expenses	65,000
Accounts receivable	225,000
Short-term investments	1,200,000
Cash	5,250,000
Total current assets	$7,037,500

Answer rating: 100% (QA)

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