LeerView KW: Electronic Screens and Warranty

Selling Price for Extended Warranty Contracts

leerView [KW] sells several high quality electronic products. One of these is an electronic screenwhich it sells at $1,700 each with a standard one-year warranty. It also sells to its customers a separatethree-year extended warranty, commencing after the end of the standard warranty. KW offers itscustomers who have purchased such extended warranties a service, when necessary, to perform eitherappropriate repairs or to replace the defective unit.The company estimates, based upon its experience from prior years, the total warranty costs for thestandard warranty to average $50 per screen, being $30 for parts and $20 for labor. It also expects theaverage three-year extended warranty costs to be $80 for parts and $160 for labor for each contract. Itfurther assumes that the warranty costs for the extended warranty contracts will be incurred as follows:20% in 20X2, 50% in 20X3 and the balance in 20X4. And finally, KW expects to recognize warrantyrevenues based on the proportion of costs incurred out of the total estimated costs.During 20X1, the company sold 600 screens and 540 extended warranty contracts for cash. During theyear, it also incurred some actual costs associated with the standard warranties related to the 20X1 salesof screens. The cost for parts were 150% of the labor costs. On December 31, 20X1, KW reported thefollowing:Current Liabilities:Estimated Liability Under Warranty $ 15,300Unearned Warranty Revenue $151,200KW incurred actual costs associated with the standard warranties related to the 20X1 sales of screens, in20X2 amounting to $17,700 and the cost for parts therein amounted to $11,800. It further incurred actualcosts associated with the extended warranty contracts which were consistent with what the company hadexpected to incur.Required:

1. Determine the selling price for each extended warranty contract.

2. Present all journal entries to be prepared, in proper format, in 20X1 in order to record all of the warranty related transactions and adjustments for 20X1.

3. Present all journal entries to be prepared, in proper format, in 20X2 in order to record all of thetransactions related to the standard warranties of 20X1.

4. Present all journal entries to be prepared, in proper format, in 20X2 in order to record all of thetransactions related to the extended warranties of 20X1.5. What liabilities related to warranties, would be reported on the December 31, 20X2 Balance Sheet.

Show how these would be classified.QUESTION IIYou have started on a new job with the designation of VP-Special Assignments and Issues. Before youcould even get comfortable in your supersoft executive leather chair, in strides your boss, Ackque Feegerzcarrying a sheaf of papers. “Ah, nothing looks better than a busy accountant on a Monday morning,” thenlooked at his watch and added, “you are already 15 minutes behind schedule. We do not pay for idle timeand so from tomorrow, do come in at least an hour before office starts.” Then he deposited several fileson your desk, remarked, “Do please sort these out before 11:00 AM and begin with File I. Don’t botherme with petty questions. You are expected to take independent decisions, my man,” and he was gone.His note pinned on the folder informed you that it was essential for you to show sufficient details in yourresponses. And thus you started your day with this File I!The company, Digi Communications, Inc., [DCI], began as a small startup firm in the late twentiethcentury but in five years, it grew rapidly and expanded competitively into several areas of this industry. Itis currently operating internationally and its shares are listed on the NYSE.You now begin with the file related to the obligations for asset retirement. On January 1, 2016, DCI, withgreat fanfare and publicity, opened an inter galactic satellite tracking station equipped with the latestelectronic equipment located somewhere in the Rocky mountains of Alberta. The company had obtaineda provincially issued permit to install 3 large tracking antennae and two telescopes to provide users withupto date telecommunication and weather data. The permit was issued to operate the equipment initiallyfor ten years, beginning January 1, 2016. Thecompany was required to assume the legal and financialobligations under the provincial removal and restoration laws, to dismantle and remove all constructedstructures and to restore the site to its original state at the end of the contract.You had noticed the remark in the note pinned on the ARO file by Mr. Feegerz, “Oh, I didn’t realize wehad to pay for closing down this circus in Alberta. Wasting good money on star gazing. Look into thisissue please.” Under this plan, the company capitalized the cost in its books as Space TrackingEquipment. They also recorded the present value of the estimated future obligation to restore the sites.The cost would be amortized on a straight line basis over a ten-year life.You reviewed some of the operating figures related to previous years. DCI had reported on its balancesheet, dated December 31, 2018, $871,851 as the balance of the Asset Retirement Obligation. Thecompany had also recorded a depreciation expense of $1,031,169 for the Space Tracking Equipment forthe year 2018. The company’s estimated its cost of capital to be 7%.Required:

Prepare all appropriate journal entries (under IFRS unless specifically mentioned otherwise), to recordthe transactions listed below. Be sure to show your computation work in detail.

a] The amount of the obligation associated with the cost of the site restoration which was recorded onJanuary 1, 2016 upon the construction of the satellite tracking station.

b] For Section [b] only, assume the company is applying ASPE. The finance costs on the outstandingliability for the year ended December 31, 2018.

c] Determine the cost which DCI incurred to install the 3 large tracking antennae and two telescopeswhich were classified as Space Tracking Equipment.d] Now assume that it is time to dismantle the Space Tracking Equipment at the end of its 10-year life.DCI issued 2,000 5-year 6% bonds, par value $1,000 to Environmental Engineers, Inc., a restorationcompany to undertake and complete the required restoration work. Prepare the required journal entry,in proper format, to record this transaction.

Assume for Sections [e] and [f] below, that the company estimates that an additional futurerestoration cost of $48,000 occurs as a result of activities during 2018. This additional cost isassociated with the use of the equipment installed at the tracking station and is to be recorded at theend of 2018.

e] Record this transaction under

p IFRS requirements.

p ASPE requirements.

f] Determine the annual depreciation expense amount (No Journal Entry Required) to be reported onDecember 31, 2019 following the transaction in [c] above underp IFRS requirements.