AFM 291 Intermediate Accounting - Fall 2019 Midterm#2 Solution Final with Marker Comments - University of Waterloo

AFM 291 Intermediate Accounting - Fall 2019 Midterm#2 Solution Final with Marker Comments - University of Waterloo AFM 291 Fall 2019 Midterm#2 Solution Final with Marker Comments Question #1 (43 marks) Spa Equipment Limited (SEL) sells sauna kits, whirlpools and lounge chairs to spas (and recently to gyms and fit ness clubs) located across Canada. SEL trades on the TSX and has a September 30th year-end. SEL went public in 2016 and the share price has been rising steadily. The top stock analysts from the Health Care sector have been promoting investment in SEL. An interest rate of 5% would reflect an appropriate credit risk associated with any debt that SEL undertakes. SEL has a long-term bank loan of $2,900,000 at an annual rate of 5% outstanding throughout the September 30, 2019, fiscal year. All sales are on credit and the company uses a periodic inventory system. There are 3 standard sizes of Sauna kits. The kit consists of pre-cut cedar wood, a heating unit and a door. The wood is cut and finished and the door is constructed at the plant. The wood, door and heating unit are then packaged and stored in the finished goods warehouse awaiting shipment. When an order is received, the package is shipped and assembled on site at the customer’s location. You are a member of the audit team working on the September 30, 2019, year-end. The year-end inventory count has taken place; however, the journal entry to allocate Goods Available for Sale to closing inventory and cost of goods sold has not been recorded. The closing entries have not yet been recorded. Whirlpools: SEL has been purchasing completed whirlpools from a company in Ontario for resale to SEL’s customers. A manufacturer of whirlpools from British Columbia approached SEL and offered deferred payment terms on an order of whirlpools, in order to encourage SEL to purchase from them. On October 1, 2018 SEL took delivery of a shipment of whirlpools from the B.C. company and, in addition to a cash deposit of $30,000, a non-interest bearing note was signed. The note payment terms require $20,000 to be paid on each of October 1, 2019 and 2020. All of these whirlpools were sold during 2019. S