Reference no: EM131553886

Question 1

Ocean Ltd has recently engaged in a project for building a shipyard. It has the following time table for payment of material and labour cost. The construction work began on 1 February, 2016 and was completed on 31 December 2016.

Date	Payment
1 Feb, 2016	$1,500,000
1 May, 2016	900,000
1 Jul, 2016	800,660
1 Sep,2016	600,000
31 Oct, 2016	480,000
31 Dec, 2016	220,000

During the year, the company specifically issued the following for financing the construction works:

1. $2,000,000 of 10-year, 6% bond payable, issued on 1 February, 2016 with interest payable annually on 1 February.

2. $1,500,000 ordinary shares were issued on 1 July, 2016.

The company also has the following general debts outstanding:

1. $600,000, 4%, 5-year note payable dated 1 January, 2012*
2. $1,800,000, 8%, 8-year note payable dated 1 January, 2014*

*Interest on both notes payable will be payable annually on 1 January. The company has its financial year ended on 31 December.

Required:

Determine for the year ended 31 December, 2016, the amounts of each of the following:

(a) The weighted-average accumulated expenditure (the "WAAC") for capitalization of interest cost.

(b) Avoidable interest.

(c) The amount of interest capitalisation.

Question 2

At the year ended 31 December, 2016, the accountant of Roadway Company prepares journal entries to record the depreciation expenses and impairment of an assembly machine. The machine was purchased in January 2014 for $1,200,000 and had an estimated useful life of 10 years with no residual value. At 31 December, 2016, new technology was introduced that rendered this assembly machine a bit obsolescence. He estimates that the present value of expected future net cash flows on the assembly machine will be $650,000 (value-in-use) and that the fair value less selling cost will be $620,000. Roadway Company plans to continue using this assembly machine in its production. The company uses straight-line depreciation.

Required:.

(a) Prepare the journal entry to record the depreciation and impairment (if any) at 31 December, 2016.

(b) Prepare any journal entries for the machine at 31 December, 2017 if the recoverable amount of the machine at 31 December, 2017 is estimated to be $600,000.

Question 3

Susanna is an inexperience accountant who has maintained only the "Intangible Asset" account to record ALL of the company's intangible assets and does not use separate account to record the different classes of intangible assets. Here is what Susanna has entered into the Intangible Asset account:

Intangible Assets

1.1.2016	7-year franchise; expiration date 31.12.2022	$35,000
1.3.2016	Advance rental payment to rent a warehouse	48,000
	(2-year lease term)
1.4.2016	Patent purchase from a scientist (10-year life)	120,000
1.6.2016	Cost of developing a secret formula on a new baby food but the product is yet to prove successful (indefinite life)	93,000
1.7.2016	Trademark purchase (indefmite life)	130,000
1.9.2016	Legal fee paid in unsuccessful defence of a patent infringement suit against a competitor	65,000
1.10.2016	Research and development costs of which the product did not achieve economic viability still	180,000
		671.000

Required:

(a) Prepare the necessary journal entries to eliminate the Intangible Assets accounts, and to set up separate accounts for each distinct types of intangible assets.

(b) Prepare the adjusting journal entries as of 31 December, 2016, and to record any necessary amortization.

Question 4

Luxury Inc. is an air conditioners manufacturer who will provide to its customers a 3-year assurance-type warranty against defects. Base on past experience, the estimated warranty costs related to sales amounts are: first year after sale - 1% of sales; second year after sale - 3% of sales; and third year after sale - 4% of sales. Set forth below are the sales and actual warranty expenses for the first 3 years of operation:

	Sales	Actual Warranty Expenses
2014	$800,000	$12,000
2015	1,200,000	39,000
2016	1,500,000	92,000

Luxury Inc. uses 31 December as its fmancial year end.

Required:

Compute the amount that Luxury Inc. should report as a liability in its 31 December, 2016, statement of financial position. Assume that all sales arc made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above.