question archive Zerox sales sells photocopiers and provides parts and services to its customers
Zerox sales sells photocopiers and provides parts and services to its customers
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Zerox sales sells photocopiers and provides parts and services to its customers. The company has 40 employees and provide employees with a benefit plan. You are the controller and are looking at the liability section of the balance sheet and have identified several areas for consideration.
For each of the areas answer the related questions assuming private entity GAAP is used. Indicate how your answer would be different if the company used IFRS.
- The company obtained two notes payable this year. Note one is for $300,000 and is due April 30, 2021 and bears interest at a rate of 6% annually. It was issued April 1, 2020. The company was negotiating to refinance this debt through a share issue. The financial statements were issued on February 28, 2021 and the deal had not been finalized. Note two is for $280,000 cash Zerox received in exchange for the $300,000 non-interest bearing instrument. It was issued on March 16, 2020. It is due on March 15, 2021. You were successful in refinancing this amount prior to February 28, 2021 when the statements were issued. The new due date is two years later. The company has a December 31, 2020 year end.
- Prepare the journal entries for each note.
- Indicate how each note will be presented on the balance sheet.
- The company remits HST quarterly. The company had sales of $1,200,000 and made purchases of $900,000 during the quarter excluding HST. The HST rate is 15%. A customer retuned a sale in the amount of $1,800 plus HST.
- Record the journal entries for the sales, purchases and remittance of HST. Assume the company uses a periodic inventory system.
- The payroll for December was as follows: Total payroll $220,000 all of which is considered pensionable and insurable, income taxes in the amount of $62,500 were withheld as well as $1,300 in union dues. CPP rate for employees and employers is 4.95%. EI rate for employees is 1.88% and employers must pay 1.4 times the employees rate.
a. Prepare the December journal entries including the remittance.
- The company includes a new photocopier warranty with each photocopier that it sells. The company sold 98 new copiers at total sales revenue of $750,000. Included with the sales are warranties which you estimate to be worth 5% of the sales price and provide two years of coverage. You are interested in knowing the difference to the bottom line of using the expense approach that is used now and the revenue approach that is expected to be required in the future. The company expects actual warranty costs be $76,000. Actual costs incurred in year one are $33,000.
- Show all the journal for the sales and the warranty using the expense method.
- Show all the journal entries for the sales and the warranty using the revenue method.
- Compare the net income under each method.
- As part of a promotion in the parts department the past three years, coupons have been given for each service call that Xerox provided to customers. Service calls are billed to the customer at $105 per call. After ten service calls the customer will be entitled to the next call free of charge. The company made 1,700 service calls during the year. It expects that 70% of the customers will redeem the coupons for the free service call. The cost of the labor and materials for the service call is $55.00. During the year 75 customers redeemed their coupons.
- Record all journal entries related to coupons / premiums.
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ANSWER:
Required 1a) Prepare the journal entries for each note.
Note 1)
| Date | Particulars | Debit | Credit |
| April 1 | Cash | 300,000 | |
| To Notes Payable | 300,000 | ||
| (Note issued) | |||
| Dec 31 | Interest Expense | 13,500? | |
| To Interest Payable | 13,500? | ||
| (Interest due) |
Working Notes:
Calculating Interest Expense
Issue date – 1 April, 2020
Maturity date – 30 April, 2021
Rate of interest – 6% p.a.
Total interest for the year 2020 = 300,000 * 6% * (9 / 12) = 13,500?
Note 2)
| Date | Particulars | Debit | Credit |
| Mar 16 | Cash | 280,000 | |
| Discount on Notes Payable | 20,000 | ||
| To Notes Payable | 300,000 | ||
| (Note issued) | |||
| Dec 31 | Interest Expense | 20,000 | |
| To Discount on Notes Payable | 20,000 | ||
| (Writing off discount with interest expense) | |||
| Feb | Notes Payable | 300,000 | |
| To Share Capital | 300,000 | ||
| (Refinancing the note by issuing share) |
Required 1b) Indicate how each note will be presented on the balance sheet.
NOTE 1 – It will appear as Notes Payable in the liabilities side of the Balance sheet.
NOTE 2 – The amount of note 2 will get subsumed in the Share Capital of the company.
Required 2a) Record the journal entries for the sales, purchases and remittance of HST. Assume the company uses a periodic inventory system.
| Particulars | Debit | Credit | |
| 1 | Cash | 1,198,200 | |
| Sales Return | 1,800 | ||
| To Sales | 1,200,000 | ||
| (To record sales) | |||
| 2 | Purchases | 900,000 | |
| To Cash | 900,000 | ||
| (To record purchases) | |||
| 3 | Profit and loss | 44,730? | |
| To Provision for HST liability | 44,730 | ||
| (For HST Liability) | |||
| 4 | Provision for HST liability | 44,730 | |
| To Cash | 44,730 | ||
| (Payment of HST) |
HST Liability = (1,200,000 - 1,800 - 900,000) * 15% = 44,730?
Required 3a) Prepare the December journal entries including the remittance.
| Particulars | Debit | Credit |
| Salaries | 220,000 | |
| To Provision for Income tax on Salaries | 62,500 | |
| To Provision for Union Dues | 1,300 | |
| To Provision for CPP(employees) (220,000 * 4.95%) | 10,890? | |
| To Provision for CPP(employers) (220,000 * 4.95%) | 10,890 | |
| To Provision for EI (employees) (220,000 * 1.88%) | 4,136? | |
| To Provision for EI (employers) (220,000 * 1.88% * 1.4) | 5,790 | |
| To Cash | 124,494? |
Required 4a) Show all the journal for the sales and the warranty using the expense method.
| Particulars | Debit | Credit |
| Cash | 750,000 | |
| To Sales | 750,000 | |
| (To record sale of photocopier) | ||
| Warranty Expense | 76,000 | |
| To Estimated warranty liability | 76,000 | |
| (Recognition of warranty expense) | ||
| Warranty liability | 33,000 | |
| To Cash | 33,000 | |
| (Incured warranty costs) |
Required 4b) Show all the journal entries for the sales and the warranty using the revenue method.
| Particulars | Debit | Credit |
| Accounts receivable | 750,000 | |
| To Sales | 712,500? | |
| To Unearned warranty revenue (750,000 * 5%) | 37,500? | |
| ((To record sale of photocopier) | ||
| Warranty expenses | 33,000 | |
| To Cash | 33,000 | |
| (Recognition of warranty expense) | ||
| Unearned warranty revenue (37,500 / 2) | 18,750? | |
| To Warranty revenue | 18,750 |
Required 4c) Compare the net income under each method.
| Prticulars | Amount |
| Net Income: Expense type | |
| Sales | 750,000 |
| Less: Warranty Expense | (33,000) |
| Net Income | 717,000 |
| Net Income: Revenue Type | |
| Sales | 712,500 |
| Add: Warranty revenue | 18,750 |
| Less: Warranty expenses | (33,000) |
| Net Income | 698,250? |
Required 5a) Record all journal entries related to coupons / premiums.
| Particulars | Debit | Credit |
| Cash (1,700 * 105) | 178,500? | |
| To Sales | 178,500? | |
| (To record sales or calls provided) | ||
| Premium Expense | 6,545? | |
| To Premium Liability | 6,545? | |
| (accrual of premium/coupon) | ||
| Premium Liability (75 * 55) | 4,125? | |
| To Inventory (Coupons) | 4,125? | |
| (redemption of premium/coupons) |
Total calls made = 1,700
Hence, no. of free calls valid for redemption = 1,700 / 10 = 170
as 10 calls lead to 1 free call
Now, sales price of each call = $105
Cost price of each call = $55
Thus, total estimated premium liability:
Total free calls valid = 170
Expected redemption = 70% * 170 = 119 calls
Cost for 119 calls = 119 * 55 = 6,545?
