QUESTION 5 (8 Marks)

Part A (4 Marks)

Smith Company had sales of $3,000,000 for the year ending December 31, 2021. All products sold are subject to warranty with an estimated warranty cost of 3%. The estimated warranty payable at the beginning of 2021 was $30,000 and warranty payments during 2021 totalled $42,000. All warranty payments are in cash.

Required:

Calculate the amount of the warranty liability to appear on the December 31, 2021 balance sheet.

Part B (4 Marks)

The Davis Company reported the following as of December 31, 2021:

Preferred Shares, Cumulative, $1.50, 50,000 shares issued $ 800,000

Common Shares, 400,000 shares issued $2,200,000

Davis had experienced a downturn in business in both 2019 and 2020 and was not able to pay any dividends. Business returned to normal in 2021 and Davis declared dividends totalling $425,000.

Required:

1. Calculate the amount of dividends paid to Preferred Shareholders in 2021
2. Calculate the amount of dividends paid to Common Shareholders in 2021