Question 1: Warrant Provisions (10 marks)

Calla Corp. sells equipment that comes with a two-year unlimited warranty on parts and labour for repairs. All sales are cash sales. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $189,000 at the beginning of 20X5. The following events and decisions relate to the warranty:

20X5 Sales revenue of $4,650,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded.

20X5 Warranty work consumed parts inventory with a cost of $8,300, and labour of $33,000. Labour costs were paid in cash.

20X6 Sales revenue from products covered by the warranty were $6,650,000. Both the sale and the

warranty provision must be recorded.

20X6 Warranty work consumed parts inventory with a cost of $113,000, and labour of $289,000. Labour costs were paid in cash.

20X6 Year-end review indicated that based on new information the percentage used as an estimate for warranty work in 20X5 and 20X6 should have been a total of 9% of sales, rather than 6%.

20X6 Because of a specific prevalent defect to a seal discovered during repairs in 20X6, the company announced it would cover repairs for this specific defect for a third year for all sales of product made in 20X5 and 20X6. The cost of this work was estimated to be 1.5% of sales. This is in addition to the percentage increase described. above. Products were re-engineered to eliminate the defect starting in 20X7.

Required:

1. Prepare journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied.

2. Calculate the ending balance in the warranty provision account at the end of December 31, 20X6 (show calculations for credit). Merely showing an amount, whether right or wrong, will score a zero grade

Question 2 Journal Entries and Shareholders Equity (15 marks)

Talize Inc. has the following balances at December 31, 2014, its year end:

Preferred Shares, $4.25 cumulative (dividends in arrears for 2013 and 2014) $1,250,000

100,000 shares authorized, 25,000 issues and outstanding

Common Shares, unlimited authorized, 2,500,000 shares outstanding 4,500,000

Retained Earnings 5,000,000

During 2015:

Jan 2 Issued 20,000 common shares in exchange for machinery fair valued at $40,000.

The common shares had a market value of $1.80 per share

May 5 All required dividends were declared on preferred shares and a $.20 common share cash dividend was declared on common. Dividends will be distributed on Jan 2 2016. Separate both share classes.

July 15 Retired 5,000 preferred shares at $58 per share

Sept 25 Talize issued 2,000 preferred shares and 1,000 common shares to an investor for $100,000. At the issue date, the market value of the preferred shares was $45 per share and the market value of the common shares was $6 per share

Oct 31 Talize declared and issued a 5% share dividend on the common shares. The market value of the shares at declaration date was $3.00 per share

Required:

1. Journalize all the transactions for 2015

2. Prepare, in good form, the Shareholders Equity section of the balance sheet at its year end, December 31, 2015. Net income for 2015 was $520,000. Total comprehensive income for 2015 was $650,000 which includes net income plus a gain of $130,000 of foreign exchange gains caused by foreign subsidiary. Use a proper three-line title.

Question 3 Participating Preferred Shares (5 marks)

The shareholders equity section of a firms balance sheet reflects the following at the end of the current

year:

Preferred shares, $6, cumulative, fully participating, 3,000 shares outstanding $300,000

Common Shares, 100,000 shares outstanding $500,000

(Matching dividend, if applicable, $.30)

The preferred shares fully participate based on the relative annual total base dividend for the current year, once the common shareholders receive their match. There were two years of dividends in arrears on the preferred shares at the beginning of the current year. The firm declares $110,000 in dividends at the end of the current year.

Required: Prepare a schedule to show how dividends will be allocated this year. State the total amount of dividends to be allocated to each share class

Question 4 Bonds (23 marks)

Terra Company issued a $300,000, 7.50%, 10-year bond on June 1, 2015. Additional information on the bond follows:

Bond Date: January 1, 2015

Maturity Date: December 31, 2024

Yield (Market) Rate: 8%

Interest Payment Date: Interest is paid annually on December 31 of each year

Terras year end: September 30

Required: Round calculations to the nearest dollar

a) Calculate the present value of the bond assuming that it had been issued on January 1, 2015. Show calculations/keystrokes. (1 mark)

b) Prepare a bond amortization table from January 1, 2015 until December 31, 2018. Show each annual interest payment. (3 marks)

c) Calculate the total amount of cash received by Terra on June 1, 2015, reflecting the fact the bond was issued on June 1, 2015. Make the journal entry to record the bond issue on June 1, 2015. (4 marks)

d) Prepare the adjusting entry required at Terras year end, Sept 30, 2017. (2 marks)

e) Prepare the journal entry on Terras books to make the December 31, 2017 interest payment to its investors. (2 marks)

f) On July 1, 2018, Terra Company decides to retire 20% of the bonds at 98 plus accrued interest.

(i) Make the entry to record interest up to July 1 including interest payable (interest will be paid when the bond is retired in part (ii) below) (3 marks)

(ii) Make the entry to retire the bonds. (5 marks)

g) Make the entry on Terras books on December 31, 2018 to pay out interest to the remaining bondholders. (3 marks)