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Problem 13-4 Sheffield Corp., a leader in the commercial cleaning industry, acquired and installed, at a...

Problem 13-4

Sheffield Corp., a leader in the commercial cleaning industry, acquired and installed, at a total cost of $109,700 plus 15% HST, three underground tanks to store hazardous liquid solutions needed in the cleaning process. The tanks were ready for use on February 28, 2020.

The provincial ministry of the environment regulates the use of such tanks and requires them to be disposed of after 10 years of use. Sheffield estimates that the cost of digging up and removing the tanks in 2030 will be $29,510. An appropriate interest or discount rate is 5%.

Sheffield also manufactures commercial cleaning machines that it sells to dry cleaning establishments throughout Nova Scotia. During 2020, Sheffield sold 20 machines at a price of $11,920 each plus 15% HST. The machines were sold with a two-year warranty for parts and labour. Similar warranty agreements are available separately and are estimated to have a stand-alone value of $969. Sales in 2020 occurred evenly throughout the year. Any revenue related to the warranty agreements is assumed to be earned evenly over the two-year contract term as follows: 2020, 25%, 2021, 50%, and 2022, 25%. Sheffield estimates the total cost of servicing the warranties will be $11,181 over the two-year contract term. Sheffield incurred actual warranty expenditures of $2,898 in 2020.

Answer the following, assuming Sheffield follows IFRS and has a December 31 fiscal year end.

Click here to view the factor table PRESENT VALUE OF 1.
Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1.
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, 2020? (Round answer to 0 decimal places, e.g. 5,275. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Storage Tanks account, net of accumulated depreciation $
What is the balance of the asset retirement obligation liability at December 31, 2022, assuming there has been no change to the estimate of the final cost of disposal? (Round answer to 0 decimal places, e.g. 5,275.)
Asset Retirement Obligation $
Determine the balance of the warranty-related liability that would be reported on the December 31, 2020 SFP. Ignore HST and assume that Sheffield uses the service-type approach to account for warranties.
Unearned Revenue $
Determine the warranty expense that would be reported on Sheffield’s 2020 income statement.
Warranty Expense $
Sheffield has been permitted to file its HST return on December 31 each year and either send a cheque or request a refund on this date. Assuming there are no other HST transactions during the year, will Sheffield be sending a cheque or requesting a refund on December 31, 2020?
Sheffield will

request a refundsend a cheque

.

What will be the amount of the cheque paid or refund claimed?
Amount $
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Expert Solution

Cost of Storage tank account
Cost of Storage tank account $   109,700.00
Present value of Cost of digging up and removing tank WN1 $       6,828.00
Total $   116,528.00
WN1
Calculation of Present Value of Cost of Digging up $     29,510.00
Interest rate $                0.05
Present value factor (30,5%) $                0.23
Present value of Cost of digging up and removing tank $       6,828.02
1)
Balance of Storage Tank A/c 31 Dec 2020
Cost of Storage tank a/con 28 Feb 2020 $   116,528.00
Depreciation 116528/10*10/12 $       9,711.00
Balance of Storage Tank A/c 31 Dec 2020 $   106,817.00
2)
Assets Retirement Obligation liability on 31 Dec 2022
Balance as on Assets Retirement Obligation liability 31 Dec 2021 (6828*1.05) $      7,166.00
Balance as on Assets Retirement Obligation liability 31 Dec 2022 7166*1.05 $      7,525.00
3)
Warranty Related Liability As on 31 Dec 2020
20 machines are sold
Warranty Cost per machine 969
Total Warranty Cost of all machine 969*20 19380
Warranty Contract 2 Years
Warranty recognised at the end of 31 Dec 2020 25%
Warranty Liability 19380*75% 14535
Unearned Revenue 14535-11181*75% 6149
4) Warranty Expense that would be reported 2020 in Income statement
Actual warranty expenditures 2898
5)
Output Tax liabilty
Output tax on Sale of Machine 11920*20machines*15% $   35,760.00
Output Tax on Warranty aggreements 969*20machines*15%*25% $         727.00
Input Tax
Cost of Servicing warranty aggreement 11181*15%*25% $       (419.00)
Cost of Storage Tank 109700*15% $ (16,455.00)
Output Tax Liabilty $   19,613.00
Payment to be made in HST return
We have assumed Input Tax is claimed on purchase of Storage tank instead of adding into cost of storage tank

ekkarill92 answered 1 year ago
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