Week 1 - Textbook Questions

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Feb 20, 2024

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Week 1: Weekly Discussions Chapter 13 – Non-Financial and Current Liabilities Brandon Anh Pham BE 13.6: Takemoto Inc. Takemoto Inc. borrowed $60,000 on November 1, 2023, by signing a $61,350, three-month, zero- interest-bearing note. a. Using a financial calculator or Excel, calculate the effective interest charged on the note. RATE FORMULA =RATE(Nper,Pmt,PV,FV,TYP E) NPER 3 PMT 0 PV 60,000 FV -61,350 Rate Formula 0.74% Therefore, the effective monthly interest rate charged on the note is approximately 0.74%. In annual terms, the effective interest rate is 8.93% ( 0.74 % monthly interest × 12 months ). b. Prepare Takemoto’s November 1, 2023 entry; the December 31, 2023 annual adjusting entry; and the February 1, 2024 entries. Round amounts to the nearest dollar November.1.2023 Cash 60,000 Notes Payable 60,000 To record cash borrowed through a three-months, zero- interest-bearing note December.31.2023 Interest Expense 447 Notes Payable 447 To record interest expense on notes payable Interest Expense = Notes Payable×Effective Rate Interest Expense = $ 60,000 × 0.74% = $ 447 February.1.2023 Notes Payable 61,350

Cash 61,350 To record payment of notes payable BE 13.14: Burr Corporation At December 31, 2023, Burr Corporation owes $500,000 on a note payable due February 15, 2024. Assume that Burr follows IFRS and that the financial statements are completed and released on February 20, 2024. a. If Burr refinances the obligation by issuing a long-term note on February 14 and by using the proceeds to pay off the note due on February 15, how much of the $500,000 should be reported as a current liability at December 31, 2023? According to the IFRS accounting standards, despite the fact that the long-term financing would have been completed before the financial statements are released, since the debt is due within 12 months of the reporting date, the entirety of the $500,000 should be reported as a current liability. b. If Burr pays off the note on February 15, 2024, and then borrows $1 million on a long-term basis on March 1, how much of the $500,000 should be reported as a current liability at December 31, 2023? Under the IFRS accounting standards, because the debt on the note payable is due within 12 months of the reporting date and paid off before , the entirety of the $500,000 should be reported as current liability at December 31, 2023. c. How would the answers to parts (a) and (b) be different if Burr prepared financial statements in accordance with ASPE? Had Burr Corporation prepared financial statements in accordance with ASPE the answer in part a. would change as follows: Since a refinancing has occurred (February 14, 2024) before the financial statements were issued (February 20,2024), the amount to be recorded as current liability on the note payable would be offset by the amount of proceeds generated from the issuance of the long-term. As a result, only a portion of the $500,000 would be reported as current liability. The amount would equal the remainder on the note payable account after the proceeds of the long-term note has been used to pay the note.

With regards to part b., the answer would remain the same; The entirety of the $500,000 note payable should be reported as current liabilities. This is because the refinancing does not appear to be linked to the short-term debt of the note payable.

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BE 13.20: Lu Corporation Lu Corp. erected and placed into service an offshore oil platform on January 1, 2023, at a cost of $10 million. Lu is legally required to dismantle and remove the platform at the end of its nine-year useful life. Lu estimates that it will cost $1 million to dismantle and remove the platform at the end of its useful life and that the discount rate to use should be 8%. A. Using (a) factor Table A.2, (b) a financial calculator, or (c) Excel function PV, prepare the entry to record the asset retirement obligation. Assume that none of the $1 million cost relates to production. Round amounts to the nearest dollar. We can use Excel’s present value function to calculate the present value of the cost to dismantle the offshore oil platform as follows: Present Value =PV(Rate,Nper,Pmt,FV,Type) Rate (Discount Rate) 8% Nper (Useful Life of Platform in Years) 9 FV (Cost to Dismantle the Platform) -$1,000,000 PV $500,248.97 We can then prepare the journal entry to record the asset retirement obligation as follows: January.1.2023 Long-Term Asset - Offshore Oil Platform 500,249 Asset Retirement Obligation - Offshore Oil Platform 500,249 To record the asset retirement obligation of the offshore oil platform

BE 13.25: Jupiter Corporation Jupiter Corp. provides at no extra charge a two-year warranty with one of its products, which was first sold in 2023. In that year, Jupiter sold products for $2.5 million and spent $68,000 servicing warranty claims. At year end, Jupiter estimates that an additional $420,000 will be spent in the future to service warranty claims related to the 2023 sales. Prepare Jupiter’s journal entry(ies) to record the sale of the products, the $68,000 expenditure, and the December 31 adjusting entry under the assurance-type warranty approach. Ignore any cost of goods sold entry. Journal Entries Cash/Accounts Receivables 2,500,000 Sales Revenue 2,500,000 To record the sale of products Warranty Expense 68,000 Materials, Cash, Payables 68,000 To record expenditures related to servicing warranties Warranty Expense 420,000 Warranty Liability 420,000 To record warranty liability for future service warranty claims related to 2023 sales BE 13.26: Jupiter Corporation a. Prepare entries for the warranty that recognize the sale as a multiple deliverable with the warranty as a separate service that Jupiter bundled with the selling price of the product. Ignore any cost of goods sold entry. Sales in 2023 occurred evenly throughout the year. Warranty agreements similar to this are available separately, are estimated to have a stand-alone value of $600,000, and are earned over the warranty period as follows: 2023, 25%; 2024, 50%; and 2025, 25%. Cash/Accounts Receivables 2,500,000 Sales Revenue 1,900,000 Unearned Revenue 600,000 To record the sale of products in 2023

a. Also prepare the entry(ies) to record the $68,000 expenditure for servicing the warranty during 2023, and the adjusting entry required at year end, if any, under the revenue approach used for service-type warranties. Warranty Expense 68,000 Materials, Cash, Payables 68,000 To record expenditures related to servicing warranties Unearned Revenue 150,000 Warranty Revenue 150,000 To record adjustment for warranties revenue earned by the end of 2023

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BE 13.32: Yuen Corporation Yuen Corporation shows the financial position and results for the three years ended December 31, 2023, 2024, and 2025 (in thousands). a. For each year, calculate the current ratio and quick ratio, and for 2024 and 2025, calculate the days payables outstanding ratio. Based on the information provided in the statement of financial position, we can calculate the required ratios as follows: Current Ratio Current Ratio = Current Assets Current Liabilities 2025 2024 2023 Current Assets 8,250 7,800 7,300 Current Liabilities 3,800 3,700 3,650 Current Ratio 2.17 2.11 2.00 Quick Ratio Quick Ratio = Current Assets − Inventory Current Liabilities 2025 2024 2023 Current Assets 8,250 7,800 7,300 Less: Inventory 4,900 4,600 4,000 Current Liabilities 3,800 3,700 3,650 Quick Ratio 0.88 0.86 0.90 Days Payable Outstanding Ratio DPO Ratio = Accounts Payable ×Number of Day Cost of Goods Sold 2025 2024 2023 Accounts Payable 1,550 1,700 1,750 Number of Days 365 365 365 Cost of Goods Sold 15,000 18,000 17,000 Days Payable Outstanding Ratio 37.72 34.47 37.57

b. Graph the year-over-year trend on a graph using Excel. Comment on your results. 2023 2024 2025 1.90 1.95 2.00 2.05 2.10 2.15 2.20 2.00 2.11 2.17 2.00 2.11 2.17 Year-Over-Year Comparison of Yuen Corporation's Current Ratio Year End Current Ratio From the above chart of Yuen Corporation’s current ratio year-over-year, we can see that the company’s current ratio is on the rise over the years continually growing at an average rate of 0.09 points. Since the current ratio measures a company’s ability to pay short-term obligations (current liabilities) through its current assets, we can say that Yuen Corporation is quite capable of covering its short-term liabilities through the use of its current assets. While it is a positive to have a strong current ratio as a measure of a company’s liquidity at a single point in time, further analysis both internally and externally is required to ensure that the company’s assets are being managed efficiently as a high amount of current assets due to inefficient management of resources can inflate the current ratio, skewing the relevance of the ratio.

2023 2024 2025 0.84 0.85 0.86 0.87 0.88 0.89 0.90 0.91 0.90 0.86 0.88 Year-Over-Year Comparison of Yuen Corporation's Quick Ratio Year End Quick Ratio In a deeper analysis of the company’s financial position, despite the upwards growth in the current ratio we can see from the quick ratio or “acid test” calculations that there was a slight dip in the company’s liquidity in 2024. Since the quick ratio measures a company’s ability to meet short-term debts and obligations based on its most liquid asset (assets that are most easily convertible to cash), we can determine that in 2023 at its strongest performance, Yuen Corporation has $0.90 of liquid assets to cover for every $1 of current liabilities the company has taken on. However, in 2024, this number dipped down to about $0.86 in liquid assets for every $1 of current liabilities, suggesting that the company’s ability to pay its short-term obligations without the need to sell its inventory and or obtain additional financing has been slightly hampered. By the end of 2025, it seems the company was able to improve its liquidity to bounce back from the 2024 dip.

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2023 2024 2025 32.00 33.00 34.00 35.00 36.00 37.00 38.00 39.00 37.57 34.47 37.72 Year-Over-Year Comparison of Yuen Corporation's Days Payable Outstanding Ratio Year End Days Payable Outstanding Ratio Lastly, in an analysis of the company’s days payable outstanding, we are able to get a clearer idea of why there was a dip in the company’s quick ratio. In this chart, we can see that the average number of days it has taken the company to pay its creditors has decreased in 2024, suggesting that the company has an increased cash outflow in 2024. The increased cash outflow from the company to pay its creditors resulted in a lower amount reported for current assets (more specifically cash, a highly liquid asset) and therefore affected the calculations of the quick ratio. Since the days payable outstanding ratio takes into consideration the average amount of days it takes for a company to pay its creditors, the ratio also indicates how efficiently a company is allocating and using its resources including the use of their cash available for short-term financing/investment activities and to pay short-term obligations as they come due.

BE 13.35: Abel Inc. a. In Excel, use a pivot table and insert a calculated field to calculate the current ratio. Abel Inc. Current Ratios Current Assets Current Liabilities Current Ratios 2022 Q1 350355 123582 2.84 Q2 362709 98532 3.68 Q3 349960 119251 2.93 Q4 298521 131838 2.26 2023 Q1 352483 111963 3.15 Q2 360373 113977 3.16 Q3 359016 112530 3.19 Q4 374705 153125 2.45 Grand Total 2808122 964798 2.91 b. Visualize the current ratio trend using a line graph by quarter and by year. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2022 2023 - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 2.84 3.68 2.93 2.26 3.15 3.16 3.19 2.45 Abel Inc's Current Ratio 2022-2023 Date in Time (Quarters and Years) Current Ratio

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E 13.1: Balance Sheet Classification of Various Liabilities a. How would each of the above items be reported on the balance sheet according to ASPE? If you identify an item as a liability, indicate whether or not it is a financial liability. b. Would your classification of any of the above items change if they were reported on an SFP prepared according to IFRS? Ite m Description SFP Classification? Financial or Non-Financial Liability? 1 accrued vacation pay Liability Financial Liability 2 income tax instalments paid in excess of the income tax liability on the year’s income Asset N/A 3 service-type warranties issued on appliances sold Liability Non-Financial Liability 4 a bank overdraft, with no other accounts at the same financial institution Liability Financial Liability 5 employee payroll deductions unremitted Liability Financial Liability 6 accrued but unpaid bonus to officer Liability Financial Liability 7 a deposit received from a customer to guarantee performance of a contract Asset N/A 8 sales tax payable Liability Financial Liability 9 gift certificates sold to customers but not yet redeemed Liability Non-Financial Liability 10 premium offers outstanding Liability Non-Financial Liability 11 a royalty fee owing on units produced Liability Financial Liability 12 travel advances given to sales employees for future business trips Liability Financial Liability 13 current maturities of long-term debts to be paid from current assets Liability Non-Financial Liability 14 cash dividends declared but unpaid Liability Financial Liability 15 dividends in arrears on preferred shares Note Disclosure N/A 16 loans from officers Liability Financial Liability 17 HST collected on sales, in excess of HST paid on purchases Liability Financial Liability 18 an asset retirement obligation Liability Financial Liability 19 the portion of a credit facility that has been used Liability Financial Liability

E 13.2: Darby Corporation The following are selected 2023 transactions of Darby Corporation. Sept. 1: Purchased inventory from Orion Ltd. on account for $50,000. Darby uses a periodic inventory system. Oct. 1: Issued a $50,000, 12-month, 8% note to Orion in payment of Darby’s account. Oct. 1: Borrowed $75,000 from the bank by signing a 12-month, non–interest-bearing $81,000 note. a. Prepare journal entries for the selected transactions above. Journal Entry: September 1, 2023 Asset - Inventory 50,000 Accounts Payable – Orion Ltd. 50,000 To record purchase of inventory from Orion Ltd. on account Journal Entry: October 1, 2023 Accounts Payable - Orion Ltd. 50,000 Notes Payable - Orion Ltd. 50,000 To record issuance of 12-month, 8% note to Orion Ltd. in payment of account Journal Entry: October 1, 2023 Cash 75,000 Notes Payable - Bank 75,000 To record issuance of 12-month, non-interest-bearing note to the bank to secure cash b. Prepare adjusting entries at December 31, 2023. Interest Expense 1,000 Interest Payable - Orion Ltd. 1,000 To record interest expense accrued on note payable to Orion Ltd. Interest Expense = FaceValueof Note×Interest Rate× Period Interest Expense = $ 50,000 × 8% × ( 3 months 12 months ) = $ 1,000 Interest Expense 1,500 Note Payable - Bank 1,500 To record interest expense accrued on note payable to Bank Interest Expense =( FutureValue of Note − Present Value of Note ) × Period Interest Expense =( $ 81,000 − $ 75,000 ) × ( 3 months 12 months ) = $ 1,000

c. Calculate the net liability, in total, to be reported on the December 31, 2023 SFP for (1) the interest-bearing note and (2) the non–interest-bearing note. 1. Interest-Bearing Note to Orion Ltd Note Payable 50,000 Interest Payable 1,000 Net Liability 51,000 2. Non-Interest-Bearing Note to the Bank Note Payable 75,000 Interest Accrued in Note Payable 1,500 Net Liability 76,500

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E 13.15: Offshore Corporation On January 1, 2023, Offshore Corporation erected a drilling platform at a cost of $5,460,000. Offshore is legally required to dismantle and remove the platform at the end of its six-year useful life, at an estimated cost of $950,000. Offshore estimates that 70% of the cost of dismantling and removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the cost is caused by using the platform in production. The present value of the increase in asset retirement obligation related to the production of oil in 2023 and 2024 was $32,328 and $34,914, respectively. The estimated residual value of the drilling platform is zero, and Offshore uses straight-line depreciation. Offshore prepares financial statements in accordance with IFRS. a. Prepare the journal entries to record the acquisition of the drilling platform and the asset retirement obligation for the platform on January 1, 2023. An appropriate interest or discount rate is 8%. Use (1) factor Table A.2, (2) a financial calculator, or (3) Excel function PV in your calculations. (Hint: For a review of present value concepts, see Chapter 3 of Volume 1.) Round amounts to the nearest dollar. Using the appropriate interest rate, we can calculate the present value of the Asset Retirement Obligation (ARO) under IFRS as following: Present Value of ARO Estimated ARO Cost 950,000 Percentage of ARO Cost Due to Asset Acquisition 70% Amount of ARO Cost to Report Under IFRS 665,000 Discount Rate 8% Useful Life (Years) 6 Amount of ARO Cost to Report Under IFRS 665,000 Present Value [=PV(Rate,Nper,Pmt,FV,Type)] 419,063 We can therefore record the acquisition of the drilling platform and the ARO on January 1, 2023 as follows: Long-Term Asset - Drilling Platform 5,460,000 Cash / Accounts Payable 5,460,000 To record acquisition of drilling platform Long-Term Asset - Drilling Platform 419,063 Asset Retirement Obligation – Drilling Platform 419,063

To record asset retirement obligations of the drilling platform b. Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2023. Depreciation Expense 910,000 Accumulated Depreciation - Drilling Platform 910,000 To record accumulated depreciation on drilling platform Depreciation Expense = Cost of Asset − Salvage Value Useful Lifeof Asset Depreciation Expense = $ 5,460,000 − $ 0 6 years = $ 910,000 per year Interest Expense 33,525 Asset Retirement Obligation - Drilling Platform 33,525 To record interest accrued relating to ARO liability Interest Expense = PresentValue of ARO Relating ¿ Acquisition ×Discount Rate Interest Expense = $ 419,063 × 8% = $ 33,525 Inventory - Oil 32,328 Asset Retirement Obligation - Drilling Platform 32,328 To record increase in ARO due to Oil production in 2023 c. Prepare any journal entries required for the platform and the asset retirement obligation at December 31, 2024. Depreciation Expense 910,000 Accumulated Depreciation - Drilling Platform 910,000 To record accumulated depreciation on drilling platform Inventory - Oil 34,914 Asset Retirement Obligation - Drilling Platform 34,914 To record increase in ARO due to Oil production in 2024 Interest Expense 36,111 Asset Retirement Obligation - Drilling Platform 36,111 To record interest accrued relating to ARO liability Interest Expense = PresentValue of ARO Relating ¿ Acquisition ×Discount Rate

Interest Expense = $ 451,391 × 8% = $ 36 , 111 d. Assume that on December 31, 2028, Offshore dismantles and removes the platform at a cost of $922,000. Prepare the journal entry to record the settlement of the asset retirement obligation. Also assume its carrying amount at that time is $950,000. Journal Entry: December 31, 2028 Asset Retirement Obligation - Drilling Platform 950,000 Gain on Settlement of ARO 28,000 Cash/Accounts Payable 922,000 To record ARO settlement of Drilling platform in 2028

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E 13.20: Cool Sound Ltd. Cool Sound Ltd. manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar sales are as follows: first year after sale— 2% of sales; second year after sale—3% of sales; and third year after sale—4% of sales. a. Calculate the amount that Cool Sound should report as warranty expense on its 2023 income statement and as a warranty liability on its December 31, 2023 SFP using the assurance-type warranty (expense-based approach). Assume that all sales are made evenly throughout each year and that warranty expenditures are also evenly spaced according to the rates above. Using the assurance-type warranty (expensed-based approach) the amount that Cool Sound should report as warranty expense on its 2023 income statement and as a warranty liability on its December 31, 2023 Statement of Financial Position would be $93,240 This is calculated as follows: EstimatedWarrantyCost = ∑ ( Total Sales ∈ Year 202 X × Percentageof Sales ∈ Warranty Period ) Estimated WarrantyCost = ∑ ( $ 1,036,000 + 2% First Yearafter Sale ) + ( $ 1,036,000 + 3% SecondYear After Sale ) + Estimated WarrantyCost = $ 93,240 Alternatively, this can be calculated in Excel: 2023 Total Sales in the Year of 2023 Estimated Warranty Cost as a Percentage of Sales Estimated Warranty Cost First Year 1,036,000 2% 20,720 Second Year 1,036,000 3% 31,080 Third Year 1,036,000 4% 41,440 Total Warranty Liability 93,240 b. Are assurance-type warranties recorded differently in IFRS and ASPE? No, assurance-type warranties are not recorded differently under IFRS and ASPE accounting standards. IFRS 15 requires assurance-type warranties to be recorded under the expense-based approach, which historically has already been used under ASPE.

c. Assume that Cool Sound’s warranty expenditures in the first year after sale end up being 4% of sales, which is twice as much as was forecast. How would management account for this change? To account for variances between the forecasted warranty liabilities and the actual warranty expenditures incurred, an adjusting entry would be made in addition to the entry to record the cost of servicing the warranty liability. The amount on the adjusting entry would be equal to the amount needed to correct the balance on the warranty liability to $0. d. Describe how data analytics could help Cool Sound reduce future uncertainty concerning estimating warranty expenses.

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