ACCOUNTING UNIT EXERCISE

Instructions

Students are to complete the exercises in Word (or some other compatible word processor)

Question 1

Time Traveler Magazine completed the following transactions during 2016:

· Aug 31: Sold one-year subscriptions, collecting cash of $1,500, plus HST of 13%.

· Dec 31: Remitted (paid) HST to Canada Revenue Agency (CRA).

· Dec 31: Made the necessary adjustment at year-end.

Journalize these transactions and then report any liability on the company’s balance sheet at December 31st.

Question 2

During its first year of operations Keene Limited had sales of $76,500. The company offers a 2-year limited warranty on all sales and expects that warranty costs for the first year will average 0.5% of sales with an additional 1.5% in the second year. During the current year the company spent $1,200 on warranty repairs.

Prepare all journal entries related to the warranty for the current year.

How will the warranty liability be reported on the company’s year-end balance sheet?

Question 3

On January 31, 2016 Muscle Sports Cars issued 10-year, 6% bonds with a face value of $100,000. The bonds were issued at 97 and pay interest on January 31 and July 31. Muscle amortizes their bonds by the straight-line method.

Record (a) issuance of the bonds on January 31, (b) the semi-annual interest payment and discount amortization on July 31, and (c) the interest accrual and discount amortization on December 31.

Question 4

On June 30, 2016, the market interest rate is 7%. Starship Enterprises issues $500,000 of 8%, 20-year bonds at 110.625. The bonds pay interest on June 30 and December 31. Starship amortizes bonds by the effective-interest method.

Record issuance of the bonds on June 30, 2016, the payment of interest at December 31, 2016, and the semi-annual interest payment on June 30 2017.

Question 5

Alliance Agreement Corporation is considering two plans for raising $2,500,000 to expand its current operations. The first plan involves the sale of $2,500,000, 8%, 10-year bonds sold at face value. The second plan involves selling 50,000 common shares at $50 each. Alliance Agreement Corporation currently has outstanding 200,000 shares of stock and net income of $900,000. Either plan is expected to generate additional income of $400,000 before interest and taxes. The income tax rate is 30%. Calculate earnings per share for both plans.

Evaluation

Financial Accounting focuses heavily on finding solutions to numerical problems. With that in mind, most units will include a number of problems. For each problem, you will need to provide more than a simple numerical response. Your solutions should thoroughly address the issue and present the findings in a meaningful format similar to those developed within the chapters and as part of the review exercises solutions. Part value may be assigned for incorrect responses providing evidence of understanding of the principles exist.