Reference no: EM133119604

Question - Greflow Communications Ltd manufactures component parts for cellular telephones. The business was restructured in 2021 which included refinancing debt and obtaining additional loan obligations. You are the accountant and the following entries relate to the year ended December 31, 2021.

A. On February 1st, the company borrowed $500,000, by signing a one-year 5% interest-bearing note at BRN Financial Bank.

B. On March 1st, the company purchased equipment for $350,000 from LaserFuse Equipment Limited. This was financed by paying 50,000 in cash and borrowing the balance of $300,000 by signing a one-year $350,000 zero coupon note from XN International.

C. On March 5th, the company purchased metal parts from Metalcell Company Limited for $1,000,000 with related terms 2.5/10, n/15.  Greyflow paid for this purchase on March 18th. Purchases and accounts payable are recorded at net amounts.

D. Greflow had a loan obligation of $500,000 which was due on March 31, 2022 plus interest of $24,000 accrued from April 1, 2021. This was refinanced with a new maturity date of March 31, 2023 with interest of 6% per annum payable at maturity. The agreement was reached on January 31, 2022 and the financial statements were authorized to be issued on March 31st 2022.

E. There was an explosion at the plant on December 23, 2021 with damages estimated at $1,385,000. The company has insurance to cover such incidents totaling $5,000,000 if the incident was an accident and $1,000,000 if it was due to company error. The incident was investigated and the explosion found to be due to a faulty gas tank that was last serviced on July 15, 2021. The company policy was to service every 6 months however industry standards was generally 3 months. Management was advised by legal counsel that there was a high probability the company would be held responsible for the damages. Employees were not injured during the incident however the employees' union has indicated that there are discussions underway relating to filing a $3,000,000 claim for unsafe working conditions.

F. The company sells cell phone component parts at an average price of $7,000. Each customer is offered a separate 4-year service type warranty contract of $500. With this contract, the company would carry out periodic services and replace defective parts. During 2021, the company sold 1,000 cell phone component parts and 800 warranty contracts for cash. It estimates the 4-year warranty costs as $300 for parts and $100 for labour and accounts for warranties separately. Assume sales occurred on December 31, 2021, and straight-line recognition of warranty revenues occurs.

Required -

i. Prepare the journal entries necessary to record the transactions above using appropriate dates.

ii. Prepare the adjusting entries necessary at December 31, 2021 in order to properly report interest expense related to the above transactions. Assume straight-line amortization.

iii. Complete the current and long-term liabilities section of the Statement of Financial Position as at December 31, 2021.

iv. Calculate the current ratio and acid test ratio if the current assets at December 31, 2021?