Financial Accounting: Liabilities & Equities (FA3) Exam Review

FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc.
Question 1 (5 marks)
Zara’s Painting Supplies Ltd. entered into a non-cancellable contract with Paint Factory
Inc. to purchase 10,000 litres of paint at $20 per litre (total contract price $200,000). The
contract was signed on September 28, 2003. The paint was delivered on January 15,
2004. Paint Factory sells all of its product on 30-day terms.
At December 31, 2003, the market price of the paint was $18 per litre. When the paint
was delivered on January 15, 2004, the market price was still $18 per litre.
Required: Prepare all required journal entries for Zara’s Painting Supplies as at
September 28, 2003; December 31, 2003; and January 15, 2004. If a journal entry is not
required for a particular date, write ―No Entry Necessary‖ and briefly explain why.
September 28, 2003
1 No entry necessary. Commitments are not normally recorded in the accounting system.
December 31, 2003
1 Estimated loss on purchase commitment [10,000 litres ($18 – $20)] ...... 20,000
1 Estimated liability on non-cancellable purchase commitment ......................20,000
January 15, 2004
1 Inventory (paint)...................................................................... 180,000
1 Estimated liability on non-cancellable purchase commitment ........ 20,000
1 Accounts payable ........................................................................................200,000
Question 2 (13 marks)
On November 1, 2002, Zoë Ltd. issued $1,000,000 of 10% bonds payable to yield 8%.
Bond issue costs of $36,000 were paid and recorded in a separate ledger account. The
bonds were 10-year bonds dated May 1, 2002. Interest is payable semi-annually on April
30 and October 31. The bond issue costs are amortized on a straight-line basis. The bond
discount or premium is amortized using the effective rate method. Zoë, which has a
December 31 year end, does not make any adjusting entries throughout the year.
Required
3.5 a. Calculate the issue price of the bonds and record the required journal entry(ies) to
reflect the issuance of the bonds and payment of the bond issue costs.
2.5 b. Prepare the adjusting journal entry(ies) that would be required on December 31,
2002.
7 c. On February 28, 2003, $500,000 par value of the bonds were retired at 102 plus
accrued interest. Prepare the required journal entry(ies).
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