The Wong family incorporated Alberta Wholesale Limited AWL o

The Wong family incorporated Alberta Wholesale Limited (AWL) on January 1, 20X1 when the company issued common shares to several family members for cash. After obtaining mortgage financing, the company constructed a warehouse and began a food wholesale business.
The company has a small accounting staff that recorded transactions throughout the year. The company’s CEO knows that cash is correct because she has reviewed the bank reconciliation. However, she was unable to hire a professionally trained CFO and is concerned that the draft financial statements prepared by her staff (Exhibit I), which are prepared using IFRS, may have errors including the final calculation of income tax expense based on a 30% income tax rate.
The CEO has hired you to correct any accounting errors made by her staff by:
1. Providing a memo listing any adjusting entries that the company needs to make along with comments explaining why the company recorded items incorrectly and how and why the company should have recorded the transaction along with supporting calculations relating to adjustments. You should have at least one adjusting journal entry (you may need several entries for some issues) for each of the following issues. If an issue deals with more than one transaction, try to have an adjusting entry for each transaction within the issue.

Issue 1
AWL bought furniture costing $180,000 on May 31, 20X1. It has no residual value, a useful life of 5 years and the company is depreciating it on a straight-line basis. Some shelving that cost $36,000 (included in this furniture amount), was traded in on December 1. In exchange for the old shelving, the company received new shelving that normally retails for $44,000. The company paid no cash was doing this trade.

Issue 2
In June, a customer approached the company wanting to lock in the prices of products that they purchase from AWL. As negotiations progressed, AWL offered to sell the customer products next year at a discount if the customer paid AWL $600,000 immediately. The customer however, had no cash but instead gave AWL a government bond that has a maturity value of $600,000. AWL received the bond on July 1, 20X1. The company that created the bond issued it on July 1, 20X0 and it matures on June 30, 20X5. AWL plans to trade the bond in the future. The stated interest rate is 4% and the bond pays interest semi-annually on December 31 and June 30. When AWL received the bond, market interest rates were 3%. AWL sold a portion of these bonds with a par value of $400,000 immediately after receiving the interest payment on December 31, 20X1. At that time, market interest rates were 2%.

Solution

ISSUE 1 :

Purchase of furniture :

Furniture A/C Dr $180000

To Cash A/C $180000

Entry for depreciation:

Profit & Loss A/C Dr $36000

To Depreciation $36000

Trade on Assets:

Furniture A/C Dr $40000

Profit & Loss A/C Dr $4000

To Old Furniture $36000

To Trader A/C $4000