You have just been hired as an accountant by Blaze Trailer Enterprises (“Blaze”). Blaze is an Ilderton-based manufacturer of travel trailer campers. The company is privately held by five investors, each of whom has been actively involved in the business. You will be reporting to Rudi Dil, the company’s controller. The 2020 fiscal year end has just ended, and Rudi has asked you to provide a report on several issues described below.
Blaze offers a three-year limited warranty on travel trailer campers. Blaze’s warranty claims history is as follows:
A new manufacturing process was implemented at the beginning of 2020, which is expected to significantly decrease the number of warranty issues in the future. Your analysis of Blaze’s ledger shows that all the warranty claims were expensed as incurred in 2020. There is no warranty accrual.
The new process equipment was financed by a promissory note signed with the equipment vendor on January 2, 2020. The note is repayable in two instalments of $800,000 on each of December 31, 2021 and December 31, 2022. The note carries a 2% interest rate, with interest payable each year on December 31. The price of the equipment was a little more than management expected to pay, but the deal came with a very attractive financing offer. The best rate Blaze was able to negotiate for bank financing was 5% and that required personal guarantees from the owners – so they didn’t go the bank financing route. Your analysis of Blaze’s ledger show that the note payable was recorded at a value of $1,600,000 and interest of $32,000 was expensed and paid as of December 31, 2020.
Blaze’s employees are paid semi-monthly. The last paycheque for fiscal 2020 was paid on December 31, 2020, for the pay period ending December 31, the company’s year-end. All employees are salaried, and fall within three pay levels:
You looked at the December 31 payroll, and noted that the staff simply entered the “net pay” amounts, based on the amounts paid in the previous pay ending December 15, 2020. The journal entry made (same journal entry for December 15, 2020) was as follows:
Year
|
Total Sales
|
Claims paid re: current year sales
|
Claims paid re: one-year prior sales
|
Claims paid re: two-year prior sales
|
2020
|
$3,842,000
|
$14,670
|
$28,540
|
$60,450
|
2019
|
4,277,000
|
21,880
|
31,190
|
48,880
|
2018
|
3,628,000
|
18,230
|
34,000
|
39,950
|
2017
|
3,296,000
|
27,620
|
18,728
|
36,310
|
Level
|
Semi- monthly salary
|
# of employees
|
Income Tax withholding rate (% of gross pay)
|
1
|
$5,100
|
2
|
30%
|
2
|
$2,305
|
7
|
20%
|
3
|
$1,750
|
28
|
15%
|
DR Payroll (Level 1)
DR Payroll (Level 2)
DR Payroll (Level 3)
CR Cash 57,392.58
7,140.00 11,841.48 38,411.10
Copyright © 2020 Property of Christina Maco (UWO)
The only deductions withheld by Blaze are EI, CPP and income tax. The EI rate is 1.66% with a maximum annual deduction per employee of $858.22. The employer’s obligation for Employment Insurance is 1.4 times the amount of the employee deduction. For CPP, 4.95% is charged to both the employee and the employer, up to an annual maximum of $2,593.80. December payroll remittances are due to the CRA by January 15, 2021.Required:
Prepare a report outlining your recommendations for Blaze. Be sure to describe the accounting issue, and explain how it has been accounted for according to the case facts (or state that it hasn’t been accounted for yet), and provide any necessary recommendations.
Your report should include the following:
Warranties
A discussion of the GAAP-compliant approaches that could be used to account for Blaze’s warranties, and a recommendation as to how the company should account for the warranties. Reference all the relevant criteria in the CPA Handbook section using the Handbook section number(s) and paragraph number(s) to support the approach you recommended. You do NOT need to copy the relevant sentences/paragraphs from the CPA Handbook into your report.
The CPA Handbook can be accessed through the Western Libraries’ website. Do a search for “CPA Canada standards”.
The journal entries required to correct Blaze’s ledger to reflect the recommended approach for the 2020 financial statements.
Detailed calculations and explanations for the amounts in your journal entries.
Note Payable
The journal entries required to correct Blaze’s note payable balance and any related accruals, or a statement that no adjustment is necessary.
Detailed calculations and explanations for the amounts in your journal entries, or a detailed explanation of why no adjustment is necessary.
The financial statement presentation and related amounts that will appear on Blaze’s December 31, 2020 balance sheet including any related note disclosure.
Payroll liabilities
The journal entries required to correct Blaze’s payroll liabilities ledger as at year end. Ensure that all year end accruals are accounted for.
Detailed calculations and explanations for the amounts in your journal entries.
Where your journal entries involve estimated amounts, a discussion of the criteria and evidence you used in making your estimate.
You will be taken to the CPA Handbook collection. Select "view online", and then click on the link
"CPA Canada standards & guidance collection (CPACHB)".