Question

Yukon territorial government entered into an agreement with HEMI to open a warehouse in Whitehorse. The agreement required the Yukon territorial government to prepay $10,000,000 for future equipment purchases and to buy all of its equipment from HEMI over the next 5 years. The government also agreed to only use $9,000,000 of the prepayment (i.e., give HEMI a “breakage” ifequipment is supplied from the Whitehorse warehouse). In 2019, HEMI supplied $1,800,000 of equipment from its Whitehorse warehouse. The Unearned Revenues general ledger account is at a balance of $8,200,000 ($10,000,000 less $1,800,000). No adjustment has been made for the “breakage”. Accountant wants you to compute the “breakage” revenue that HEMI can recognize for the year-ended December 31, 2019 showing your calculations. Provide an adjusting journal entry to recognize the breakage revenue.

2. HEMI took out a mortgage of $150,000,000 on September 1, 2019 to purchase the land and building(noted in the Capital Assets section above). This amount has been recorded in the Mortgage Payable general ledger account. Accountant has recorded the blended interest and principal monthly payments in the Interest Expense general ledger account. You have been provided with the following amortization schedule for the mortgage payable:

Month	Opening balance	Interest expense	Payment	Closing balance
September, 2019	150,000,000	525,000	1,532,976	148,992,024
October, 2019	148,992,024	521,472	1,532,976	147,980,520
November, 2019	147,980,520	517,932	1,532,976	146,965,476
December, 2019	146,965,476	514,379	1,532,976	145,946,879
Total		2,078,783	6,131,904

The Accountant wants you to complete the following:

a. Using the above amortization schedule, calculate the total principal reduction in the 2019 fiscal year (show your calculations).

b. Provide an adjusting journal entry to move the amount you computed in Part (a) above from Interest Expense to reduction in Mortgage Payable.

c. $12,500,000 of mortgage principal will be paid in the next 12 months. Provide an adjusting journal entry to move this amount to Current Portion of Mortgage Payable account.

3. On November 4, 2019 HEMI was sued for $50,000,000 in damages because one of its transmissions was incorrectly installed by Suncor repair technicians which resulted in significantproperty damage.   HEMI’s lawyers are of the opinion that the lawsuit is without any merit as the transmission supplied by HEMI was working properly. The problem was with the incorrect installation of the transmission. HEMI plans to defend itself through the Canadian legal system which may take as long as 3 years.  The Accountant has recorded$40,000,000 in the general ledger because$10,000,000 of damages will be paid for HEMI’s insurance company. The Accountant wants you to explain the appropriate accounting treatment for this contingent loss. Provide an adjusting journal entry, if any, to properly account this contingent loss considering that the contingent loss is already recorded in the accounting records.

Answer 1

The breakage revenue will be computed as under: Amount of equipment supplied / Total payment received x Amount of breakage assessed = $1,800,000 / $10,000,000 x $1,000,000 = $180,000.

The journal entry would be:

Unearned revenue (Debit)          $180,000

                To Breakage revenue (Credit)    $180,000

Normally a debit is done to gift card liability but since the amount is part of unearned revenue we will debit the same.

Note: We have followed the redemption pattern method out of the three methods of recognizing breakage.

I have done question 1. Please note for each additional question you need to create separate questions.