Meticulous
Corp., a leader in the commercial cleaning industry, acquired and installed, at
a total cost of $110,000 plus 15% HST (Harmonized Sales Tax), three underground
tanks for the storage of hazardous liquid solutions needed in the cleaning
process. The tanks were ready for use on February 28, 2011.
The
provincial ministry of the environment regulates the use of such tanks and
requires them to be disposed of after 10 years of use. Meticulous estimates
that the cost of digging up and removing the tanks in 2021 will be $28,000. An
appropriate interest or discount rate is 6%.
Meticulous
also manufactures commercial cleaning machines that it sells to dry cleaning
establishments throughout Nova Scotia. During 2011, Meticulous sold 20 machines
at a price of $12,000 each plus 15% HST. The machines were sold with a
three-year warranty for parts and labour. Because Meticulous has been in
business since 1983, the company accountant was able to estimate that the
warranty costs are likely to be 1% of the selling price in the first year, 1.5%
in the second, and 2.5% in the third. Meticulous keeps track of warranty costs by
year of manufacture and sale in order to eval uate the performance of company
employees.
Instructions
Answer
the following, assuming Meticulous follows IFRS and has a December 31 fiscal
year end.
(a)
Assuming straight-line depreciation and no residual value for the tanks at the
end of their 10-year useful life, what is the balance in the asset Storage
Tanks account, net of accumulated depreciation, at December 31, 2011?
(b)
What is the balance of the asset retirement obligation liability at December 31,
2013, assuming there has been no change to the estimate of the final cost of
disposal?
(c)
Assume that Meticulous incurred actual warranty expenditures of $1,500 in 2011
and $3,720 in 2012. Determine the balance of the Estimated Liability under
Warranties on 2011 sales that would be reported on the December 31, 2012
balance sheet. Ignore HST and assume that Meticulous uses the expense approach
to account for warranties.
(d)
Determine the Warranty Expense relating to 2011 sales that would be reported on
Meticulous's 2011 income statement.
(e)
Meticulous follows a policy of filing its HST return on December 31 each year
and either sending a cheque or requesting a refund on this date. Assuming there
are no other HST transactions during the year, will Meticulous be sending a
cheque or requesting a refund on December 31, 2011? What will be the amount of
the cheque paid or refund claimed?
(a)
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Cost of storage tanks...................................................................
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$110,000
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Asset retirement cost ($28,000 X
.55839)
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[PV of $28,000 (n=10, i=6%)]..................................................
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15,635
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Balance in asset account, Feb. 28,
2011
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$125,635
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Depreciation for 2011 ($125,635 ÷
10 X 10/12):.....................
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$10,470
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Presentation on Dec. 31, 2011
balance sheet:
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Asset cost..................................................................................
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$125,635
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Less: Accumulated depreciation..........................................
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(10,470)
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$115,165
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(b)
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Asset retirement obligation (ARO),
Feb. 28, 2011 (from above).....................................................
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$15,635
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2011 interest expense (accretion in
PE GAAP)
($15,635 X 6% X 10/12)..........................................................
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782
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Balance of ARO, December 31, 2011
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16,417
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2012 interest expense (accretion in
PE GAAP)
($16,417 X 6%)........................................................................
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985
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Balance of ARO, December 31, 2012
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17,402
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2013 interest expense (accretion in
PE GAAP)
($17,402 X 6%)........................................................................
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1,044
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Balance of ARO, December 31, 2013
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$18,446
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(c)
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2011 sales: 20 machines X $12,000.........................................
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$240,000
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Original estimated liability under
warranties:
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[$240,000 X (1% + 1.5% + 2.5%)]..........................................
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$12,000
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Less: Warranty expenditures – 2011
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(1,500)
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– 2012
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(3,720)
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Balance in Estimated Liability
Under
Warranties account, December 31, 2012............................
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$ 6,780
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(d)
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Warranty expense on 2011 income
statement
(20 machines X $12,000 X 5%)............................................
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$12,000
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(e)
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HST collected on sales (and
therefore
payable to the government)
(20 machines X $12,000 X 15%)............................................
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$36,000
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HST paid on purchase of underground
tanks
(and therefore recoverable from government)
($110,000 X 15%).....................................................................
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16,500
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$19,500
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Meticulous will be sending a cheque to the federal government for $19,500
to pay its net HST liability.
