Question

1. Smart Buy Inc. a publicly-traded company, is an electronic retailer of products such as computers, laptops, and tablets. Smart Buy provides a three-year expense type warranty to repair any manufacturer's defects. Smart Buy estimates that the cost of warranty claims will be 5% of all sales in the year. Total sales for 20X5 were $1.2 million, and the claims for warranty repairs in the year totalled $18,900. What is the amount of the provision for warranty payable that should be reported on Smart Buy's December 31, 20X5, statement of financial position? The opening balance in the provision for warranty payable account is nil.

a) $18,900 b) $41,100 c) $60,000 d) $78,900

2. Ferris Farriers Corp. (FFC) issued $10,000,000, 4.0%, eight-year bonds on June 1, 20X2, when the market rate of interest for similar bonds was 3.0%. Interest is first payable on November 30, 20X2, and semi-annually thereafter on each May 31 and November 30. FFC paid its lawyers $25,000 for drafting the bond indenture (contract). FFC classifies the bonds at fair value through profit or loss (FVPL). FFC, a publicly-traded company, only makes adjusting entries at its December 31 year-end. What amount of interest expense will FFC recognize on November 30, 20X2?

a) $150,000 b) $160,598 c) $162,039 d) $200,000

Answer 1

1. Option b : $41,100

Sales during the year = $ 1,200,000

Cost of warranty claims expected (1,200,000x5%) =$60,000

Cost of warranty already incurred = $ 18,900

Provision for warranty payable needed (60000-18900) = $41,100

2. Option d : $200,000

Bond value = $ 10,000,000

Interest rate = 4%

Period till November 20X2 = 6 months

Interest for the period = (((10,000,000x4%)x(6/12)) = $200,000