COMMERCE 450 FALL 2009

ASSIGNMENT #1

SHOW YOUR WORK FOR ALL CALCULATIONS NAME _____________________

SECTION # _________________

Question #1.1

Eddy Shack Inc. (Shack) is building a new scoreboard for the local hockey arena at a cost of
$2,000,000. Shack received a down payment of $500,000 from local businesses to support the
project, and now needs to borrow $1,500,000 to complete the project. Shack issued $1,500,000
of 10.5%, 10-year bonds. The bonds were issued on January 1st, 2009, and pay interest
annually on each December 31st. On that day, bonds of similar risk and length were yielding
10%. The company had to pay $50,000 in issue costs related to the bond sale. The issue costs
are amortised on a SL basis.
Shack has a December 31 year end.

Required

(a) Prepare the journal entry to record the issuance of the bonds and the bond related costs
incurred on January 1, 2009.

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(b) Prepare a bond amortisation table up to and including December 31st, 2012.

(c) Assume that on December 31, 2012, Shack retires ½ of the bonds through a public
market acquisition. On that date, the market value of the bonds had risen to yield 12%.
Prepare the required journal entry(s) to record the events on December 31, 2012
assuming that the December 31, 2012 interest payment has not yet been made.

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(d) For this part only, assume that Shack has an October 31 year end. Prepare the adjusting
journal entries, if any, required on October 31and December 31st, 2009.

October 31st, 2009

December 31st, 2009 – assuming that the year end accrual was not reversed.

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Question #1.2

Integrative Arts Ltd. (IA) prepared a bond to be issued on December 1. 2009. The $30,000, 3
year bonds pay 6% annual (3% semi-annually) interest on May 31 and November 30. The
effective interest rate on the planned issue date was 8%. Due to circumstances beyond IA’s
control, the bonds were not sold until February 28, 2010 at a price of $28,546 plus accrued
interest. IA has a December 31, year end.

Required

a. Calculate the present value of the bond assuming that it had been issued on December
1, 2009.

b. Prepare an amortization schedule using the effective-interest method over the life of the
bond.

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 c. Prepare the journal entry(s) at February 28, 2010 when the bonds were sold, and on
May 31, 2010 when the first interest payment is made.

February 28, 2010

May 31, 2010

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Question #1.3

Required
For each of the following situations concerning Z Company (Z), indicate the appropriate
accounting treatment required by GAAP. If an item should be recorded in the ledger, provide the
journal entry. If note disclosure is required, then indicate the key items to disclose. If no action is
required, write “no action.”

a. A customer has sued Z for $10 million dollars and it is likely that they will come to a
negotiated settlement for an amount that is less than the $10 million. The amount cannot
be estimated reliably at this time, but the amount would have a significant and material
impact on the financial position of Z.

b. Z has guaranteed a $5 million dollar loan for another company. This amount is material
but there is no real possibility of any payment ever needing to be made.

c. Z is currently undergoing a GST audit by CRA concerning the last 5 years. The auditors
have not provided the details of any issues that they have uncovered.

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d. Z had a PST audit earlier in the year which resulted in a $785,000 assessment. This
would have a serious impact on its financial position. Z has appealed the decision and
although they feel that they have a good chance of winning, the outcome at this date is
not determinable.

e. A review of the minutes of the Board of Directors indicated that the board passed a
resolution to issue some additional common shares in the next year.

f. Z is being sued by B Company (B) for $4 million. The suit results from a failed
collaboration to utilize B’s patented technology in a product being manufactured by Z .
They failed to negotiate a contract and the two broke off any further negotiations. Z used
the patented technology, owned by B, in sales to customers.

Z admits in an affidavit that they improperly used the technology and generated profits of
$1.5 million related to the technology. B is suing for the profits plus additional damages.
Z’s lawyer is unsure how the remainder of the case, beyond relinquishing the profits, will
be resolved.