Question

Jacks sales sells photocopiers and provides parts and services to its customers. The company has 30 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.

1. As part of a promotion in the parts department the past three years, coupons have been given for each service call that Jacks provided to customers. Service calls are billed to the customer at $85 per call. After ten service calls the customer will be entitled to the next call free of charge. The company made 2,500 service calls during the year. It expects that 65% of the customers will redeem the coupons for the free service call. The cost of the labor and materials for the service call is $35.00. During the year 125 customers redeemed their coupons.
   1. Record all journal entries related to coupons / premiums.

1. The company obtained two notes payable this year. Note one is for $200,000 and is due March 31, 2020 and bears interest at a rate of 6% annually. It was issued April 1, 2019. The company was negotiating to refinance this debt through a share issue. The financial statements were issued on February 28, 2020 and the deal had not been finalized. Note two is for $320,000 cash received in exchange for the $340,000 non interest bearing instrument. It was issued on March 16, 2019. It is due on March 15, 2020. You were successful in refinancing this amount prior to February 28, 2020 when the statements were issued. The new due date is two years later. The company has a December 31, 2019 year end.
   1. Prepare the journal entries for each note.
   2. Indicate how each note will be presented on the balance sheet.

Answer 1

ANSWER OF PART 1 -

DATE	PARTICULARS	DEBIT ($)	CREDIT ($)
1	CASH (2500*85)	212,500
	SALES		212,500
	(ENTRY FOR SALES OR CALLS PROVIDED)
2	PREMIUM EXPENSE	5,705
	PREMIUM LIABILITY		5,705
	(entry for accrual of premium/coupon)
3	PREMIUM LIABILITY (125*35)	4,375
	INVENTORY (coupons)		4,375
	(entry for redemption of premium/coupons)

Working notes:

Total calls made = 2500

Hence, no. of free calls valid for redemption = 2500/10 = 250 calls

(* as 10 calls lead to 1 free call)

Now, sales price of each call = $85                                  Cost price of each call = $35

Thus, total estimated premium liability:

               Total free calls valid = 250

               Expected redemption = 65% = 162.5 = 163 calls

Cost for 163 calls = 163*35 = $5,705

ANSWER TO PART 2:

NOTE 1:

DATE	PARTICULARS	DEBIT ($)	CREDIT ($)
Apr 01	CASH	200,000
	NOTES PAYABLE		200,000
	(entry for obtaining the note.)
Dec 31	INTEREST EXPENSE	9000
	INTEREST PAYABLE		9000
	(entry for interest due)

WORKING NOTES: INTEREST EXPENSE

Issue date – 1^st April, 2019                                     Maturity date – 31^st march, 2020

Rate of interest – 6% p.a.

Total interest for the year 2019 – 200,000 * 6 * 9/12 = $ 9000

NOTE 2:

DATE	PARTICULARS	DEBIT ($)	CREDIT ($)
Mar. 16	CASH	320,000
	DISCOUNT ON NOTES PAYABLE	20,000
	NOTES PAYABLE		340,000
	(entry for obtaining notes payable)
end	INTEREST EXPENSE	20,000
	DISCOUNT ON NOTES PAYABLE		20,000
	(entry for writing off discount with interest expense)
Feb.	NOTES PAYABLE	340,000
	SHARE CAPITAL		340,000
	(entry for refinancing the note with share issue)

PRESENTATION IN BALANCE SHEET:

NOTE 1 – It will appear as NOTES PAYABLE in the liabilities side.

NOTE 2 – The amount of note 2 will get subsumed in the SHARE CAPITAL of the company.