Unit 5 Study Exercises

Question 5.1(Total: 20 marks; 2 marks per line)

Healthy Farms Company is testing a number of new agricultural seeds which it they have recently harvested. To generate interest, the company has decided to grant five of its largest customers the unconditional right to return these products if not fully satisfied. The right of return extends for 4 months. Healthy Farms sells these seeds on account for $1.5 million on April 2, 2020. The cost of these seeds were $800,000.Customers are required to pay the full amount due by June 15, 2020. In addition, Healthy Farms is a public company and as a result follows IFRS.

Required

1.Prepare the journal entry for Healthy Farms at April 2, 2020, assuming Healthy Farms estimates returns of 20% based on prior experience.

2.Assume that one customer returns the seeds on July 1, 2020. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Healthy Farms.

Question 5.2(Total: 12 marks; -2 marks per line)

Red Fish Corporation shipped $20,000 of merchandise on consignment to Blue Fish Corporation. Red Fish paid freight costs of $2,000. Blue Fish paid $500 for local advertising, which is reimbursable from Red Fish. By year end, 60% of the merchandise had been sold for $21,500. Blue Fish notified Red Fish, retained a 10% commission, and remitted the cash due to Red Fish.

Required

1.Prepare Red Fish's journal entry when cash is received.

Question 5.3(Total: 20 marks)

Gigabit Inc., a software company sells new accounting software and user support bundled together. The fair value of the software is $1,500 and the fair value of the user support is $500. The user support is valid for a period of 12 months from the date of software purchase. To be able to compete with a competitor's offering, Gigabit decided to sell the bundle at a discount for $1,800.

During its first month of sales, 100 units of this software bundle were sold at the discounted price, and expenses were $50,000.

Required

1.Calculate the sale price that should be allocated to each component of the bundle using the adjusted market assessment approach.

2.Calculate the sale price that should be allocated to each component of the bundle using the residual approach.

3.Assuming that the relative fair value method is used and income tax rate is 30%, calculate the net income applicable to Gigabit's first month of sales.

Question 5.4(Total: 14 marks; 2 marks per line)

Frigid Temperatures Inc.has sold 1,000 refrigerators during 2020 at a total price of $ 1,620,000, with a warranty guarantee that the product was free from any defects. The cost of the refrigeratetorssold was $1,080,000. The warranty covers one year, with an estimated cost of $ 10,000. In addition,Frigid Temperatures Inc.sold extended warranties on 600 refrigerators for four years beyond the one-year period for $ 210,000.

Required

1.Prepare the journal entries to record the sale and related warranties for 2020.

Question 5.5(Total: 34 marks)

The board of directors for Apache Construction Corp. is meeting to choose between the completed-contract method and the percentage-of-completion method of accounting for long-term contracts in the company's financial statements. You have been engaged to assist Apache's controller in the preparation of a presentation to be given at the board meeting. The controller provides you with the following information:

Apache commenced doing business on January 1, 2020.

Construction activities for the year ended December 31, 2020, were as follows:

Project

Total contract

Price

Billings through

12/31/20

Cash collections through

12/31/20

A

$ 615,000

$ 340,000

$ 310,000

B

450,000

135,000

135,000

C

475,000

475,000

390,000

D

600,000

240,000

160,000

E

480,000

400,000

400,000

$ 2,620,000

$ 1,590,000

$ 1,395,000

Project

Contract costs incurred through 12/31/20

Estimated additional costs to complete contracts

A

$ 510,000

$ 120,000

B

130,000

260,000

C

350,000

-0-

D

370,000

290,000

E

320,000

80,000

$ 1,680,000

$ 750,000

Each contract is with a different customer.

Any work remaining to be done on the contracts is expected to be completed in 2021.

Required

1.Prepare schedule by project, calculating the amount of gross profit (or loss) for the 2020 calendar year, which would be reported under:

a.The completed-contract method.

b.The percentage-of-completion method (based on estimated costs).

2.Prepare the general journal entry to record revenue and gross profit on project B for 2020, assuming that the percentage-of-completion method is used.

3.Indicate the balances that would appear in the statement of financial position at December 31, 2020 for the following accounts for Project D, assuming that the percentage-of-completion method is used.

a.Accounts Receivable

b.Billings on Construction in Process

c.Construction in Process

How would the balances in the accounts discussed in part 3 above change (if at all) for Project D, if the completed-contract method is used?