just the 3rd and fourth question
1 ACCO320 Assignment 1 Due date February 13 This assignment is a group work (no more than 4 students). You also can do it individually if you prefer. The assignment should be submitted by February 13, 2020, in class (hard copy and typed). Please clearly indicate each participants’ student number, first and last names on your copies. Hand written copies and late assignments are not accepted. Question I Automobile Inc. has recently introduced new magnetic brake rotors for use in high end car models. It introduced the product sometime early in January 2020 and had sold 300,000 units in the first year ending December 31. Each unit is sold for $500 and carries a two-year repair or replacement warranty. Warranties on similar products are available with competitors at $75 each. After some research, it was determined that 35% of the warranty revenues would be recognized in the year of sale and the balance in the year following the sale. The company estimates its warranty expenses to be $25 per unit and has recorded $3 million as actual warranty costs in the first year. Prepare the entries required, using the service-type approach, to record the transactions: a] on the sales of the rotors in the first year. b] for the warranty costs in the first year. c] adjustments at the end of the first year. Prepare the entries required, using the assurance-type approach, to record the transactions: d] on the sales of the rotors in the first year. e] for the warranty costs in the first year. f] adjustments at the end of the first year. g] Is the cash basis for recording warranty expenses permitted under accounting practice? Give the conditions when this practice is permissible Question II Garden Limited owes Ontario National Bank $6,000,000. The debt is a 10-year, 10% note. During 2019, Garden’s business declined due to a slowing regional economy and the company felt that it was not in position to pay this debt commitment. On November 1st, 2019, Garden Limited approached its banker to renegotiate the term of its impending debt. The bank agrees to forgo the annual interest due on the note as at December 31, 2019. Further, it agreed to extend the term of the note by 4 years and to reduce the maturity value of the note to $4,500,000. The bank asks Garden limited to make a cash payment of 900,000 on December 2019. The bank also agreed to decrease the coupon rate from 10% to 8%. The 2 new terms become effective as at January 1, 2020. The market rate was 12% on that date. Garden Limited and Ontario National Bank follow IFRS. Instructions (a) Using time value of money tables or a financial calculator, Review the economic substance of the debt renegotiation and determine if Garden Limited can record a gain under this term modification. If yes, calculate the gain (show your computations and work clearly). (b) Prepare the journal entries to record this transaction on Garden Limited books at January 1, 2020 (show your computations and work clearly). (c) Prepare the journal entries to record the transaction on Ontario National Bank books at January 1, 2020 (show your computations and work clearly). (d) Prepare the journal entries on Garden Limited books at December 31, 2020. Question III The accountant of Alpha TD provide you with the following notes and require you to answer the questions related to ARO: 1. Leased land from Quebec government for a maximum period of 25 years. Installation of five oil wells at a total cost of $2,500,000 and capitalized to Extraction Assets. These are amortized over their expected productive life- 20 years on a straight-line basis. 2. Commenced operations on January 1, 2016. 3. Accountant recorded $498,312 as Asset Retirement Obligation on January 1, 2016. 4. Annual interest costs will be $14,949 in 2016. The CEO then states “I think the retirement costs are too high but this information came from the audit partner at our CPA, CA firm so we will rely on it. I have not approved anyone’s retirement lately! We need cost cutting strategies here. Imagine we even have to pay interest on it!” Required: 1. Calculate the annual interest (called also discount rate)? 2. Provide the journal entries required to record the following (in accordance with IFRS): a] The asset retirement obligation recorded on January 1, 2016. b] The depreciation expense incurred for the Extraction Assets for 2016. c] The annual interest accruing on the Asset Retirement Obligation for 2017. 3. Assume that on December 31, 2035, the company were to incur an actual cost of $823,000 to safely retire the Extraction assets. Provide the journal entry required to record this transaction 4. Assume an increase in ARO due to oil production occurred at the end of the first year. Prepare the journal entry required under IFRS. 5. how to record the increase of the ARO at the end of the first year if the company is following ASPE. Calculate depreciation expense for the second year and prepare journal entry to record asset depreciation. 3 Question IV On January 1, 2020, Alpha, Inc., had issued 1,200 9% 10-year convertible bonds at 111. Each $1,000 bond could be converted at the option of the holder into 40 common shares. Interest was being paid on July 1 and January 1. Included with each bond were twelve detachable warrants. Each warrant entitled the holder to purchase one share at $13 from the company. The underwriter estimated the market value of the bonds alone, excluding warrants and conversion rights, to be $1,245,000. The warrants had a market value of $5 each at the date of issue. The company uses ASPE for its accounts and amortizes the bonds using straight line. a] Prepare an appropriate journal entry to record this issue of the bonds without crediting the full amount received to liability b] How should we record the interest paid on July 1, 2020? Prepare an appropriate journal entry to record this transaction. c] On July 1, 2023, bondholders used 40% of their warrants to purchase shares. The market price of the shares was $36 each on that day. Prepare an appropriate journal entry to record this transaction. d] On January 1, 2024, after paying off all interest and recording it, 40% of the bondholders submitted their respective bonds for conversion. The company’s shares were being traded at $40 on that day. Prepare the appropriate journal entry, using the book value method, to record the bond conversion. e] How many shares would have been issued from the bond conversion. Question III Question III Question IV