Q1- (Contingencies and Commitments) Four independent situations follow.
Situation 1: During 2014, Sugarpost Inc. became involved in a tax dispute with the CRA. Sugarpost's lawyers have informed management that Sugarpost will likely lose this dispute. They also believe that Sugarpost will have to pay the CRA between $900,000 and $1.4 million. After the 2014 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, 2014, assuming that Sugarpost follows ASPE?
Situation 2: Toward the end of Su Li Corp.'s 2014 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. Su Li had spent $1.2 million in wages on this group of workers in 2014.
Instructions
Prepare the entry, if any, that Su Li Corp. should make at December 31, 2014. Briefly explain your answer.
Situation 3: On October 1, 2014, 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 con- cluded that it is likely that Jackhammer will be found responsible for damages, and a reasonable estimate of these dam- ages is $5 million. Jackhammer's insurance policy of $9 million has a clause requiring a deductible of $500,000.
Instructions
(a) Assuming ASPE is followed, how should Jackhammer Chemical report this information in its financial statements at December 31, 2014?
(b) Briefly identify any differences if Jackhammer were to follow IFRS.
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 govern- ment 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?
Q2- Bian Inc. financed the purchase of equipment costing $85,000 on January 1, 2014, using a note payable. The note requires Bian to make annual $32,389 payments of blended interest and principal on January 1 of the following three years, beginning January 1, 2015. The note bears interest at the rate of 7%.
Instructions
(a) Prepare the debt amortization schedule for the note over its term. (b) Prepare the journal entry(ies) that are required for the year ended December 31, 2014, and the first instalment payment on January 1, 2015.
(c) Prepare the statement of financial position presentation of the note at December 31, 2014. (Include both the cur- rent and long-term portions.)
(d) Prepare the statement of financial position presentation of the note at December 31, 2015. (e) Redo part (c) assuming that the equipment was purchased on July 1, 2014, and the payments are due beginning July 1, 2015."
Q3- Renew Energy Ltd. (REL) manufactures and sells directly to customers a special long-lasting rechargeable battery for use in digital electronic equipment. Each battery sold comes with a guarantee that will replace free of charge any battery that is found to be defective within six months from the end of the month in which the battery was sold. On June 30, 2014, the Estimated Liability Under Battery Warranty account had a balance of $45,000, but by December 31, 2014, this amount had been reduced to $5,000 by charges for batteries returned.
REL has been in business for many years and has consistently experienced an 8% return rate. However, effective October 1, 2014, because of a change in the manufacturing process, the rate increased to 10%. Each battery is stamped with a date at the time of sale so that Bartlett has developed information on the likely pattern of returns during the six- month period, starting with the month following the sale. (Assume no batteries are returned in the month of sale.)
Month Following Sale
1st 2nd 3rd 4th 5th 6th % of Total Returns Expected in the Month 20% 30% 20% 10% 10% 10% = 100%
For example, for January sales, 20% of the returns are expected in February, 30% in March, and so on. Sales of these batteries for the second half of 2014 were:
Month
July August September October November December
Sales Amount
$1,800,000 1,650,000 2,050,000 1,425,000 1,000,000 900,000
REL's warranty also covers the payment of the freight cost on defective batteries returned and on new batteries sent as replacements. This freight cost is 10% of the sales price of the batteries returned. The manufacturing cost of a bat- tery is roughly 60% of its sales price, and the salvage value of the returned batteries averages 14% of the sales price. Assume that REL follows IFRS and that it uses the expense approach to account for warranties.
Instructions
(a) Calculate the warranty expense that will be reported for the July 1 to December 31, 2014 period.
(b) Calculate the amount of the provision that you would expect in the Estimated Liability Under Battery Warranty account as at December 31, 2014, based on the above likely pattern of returns."