AFM 291 Intermediate Financial Accounting 1 - Fall 2019 Midterm #1 Solution Paper LEARN - University of Waterloo. Q&A

AFM 291 Fall 2019 Midterm #1 Solution Paper LEARN - University of Waterloo. Q&A Question #1 (41 marks) The home page of the Harley-Davidson (HD) website includes the tag line “THE FUTURE HAS ARRIVED AND IT’S ELECTRIC”. ...

AFM 291 Fall 2019 Midterm #1 Solution Paper LEARN - University of Waterloo. Q&A Question #1 (41 marks) The home page of the Harley-Davidson (HD) website includes the tag line “THE FUTURE HAS ARRIVED AND IT’S ELECTRIC”. The website1 goes on to promote the new LIVEWIRE motorcycle. HD has a December 31st year-end. While the following information is based on this real company, the scenarios created below are fictitious and are used only for purposes of this AFM 291 midterm. It is February 21, 2019 and you are a member of the financial reporting team finalizing the 2018 financial statements. Assume HD reports using IFRS. Assume the credit risk associated with dealership debt arrangements would require an annual interest rate of 5%. All sales are on credit and the company uses a perpetual inventory system. Gas powered motorcycles have a 40% gross profit margin and the new Livewire electric motorcycle has a 45% gross profit margin. HD uses an input method to recognize performance obligations satisfied over time. 1. Livewire Contract (see the end of Question #1 for the required): The electric motorcycle market is in its early stages. To encourage sales of the new Livewire electric motorcycle in British Columbia, HD entered into a contract with a Vancouver HD motorcycle dealership to order a large shipment of electric motorcycles. The contract price is $660,000 and the contract provides that the dealership would pay $300,000 at the time of delivery of the motorcycles which took place on January 1, 2018. The remainder would be paid in 3 equal payments on January 1, 2019, 2020 and 2021. A note was signed to support this contractual arrangement. 1 https://www.harley-davidson.com/ca/en/index.html Continue Question #1 2. HD Warranty Arrangements (see the end of Question #1 for the required): As part of the selling price of all motorcycles, HD provides a limited 2-year manufacturer’s warranty that provides assurance that the motorcycles will function as expected. The company also sells a comprehensive parts and service warranty that covers all repairs for the first three years of ownership. This warranty is more comprehensive than the manufacturer’s warranty. These 3-year service contracts are paid for in full at the time of signing the service contract. As the Livewire is a new product, HD will use the assurance warranty history of its gas-powered motorcycle products to account for Livewire sales. Historically, the assurance warranty costs are approximately 3% of the selling price of the motorcycles. The service warranty costs are expected to be approximately 50% of the selling price of the service contract. Sales during the 2018 fiscal year: Gas powered motorcycles Livewire electric motorcycles $4,998,0001,729,000 3-year parts and service warranty contracts 832,000 2018 Actual Warranty Costs: Assurance Warranty (gas & electric) – parts Assurance Warranty (gas & electric) – labour $29,000140,000 Parts and service warranty (gas & electric) - parts 45,000 Parts and service warranty (gas & electric) – labour 62,000 Note regarding assurance and service labour: assume that HD’s payroll system has already recorded the 2018 payroll costs (i.e., all labour costs above have already been recorded as Repair Wages Expense). 3. Management Bonus Payments (see the end of Question #1 for the required): The amount of the 2018 year-end management bonus payments was calculated on January 29, 2019. The details of the payments are outlined in a contract with management that has been in place for several years. Normally the payable amount cannot be determined until many elements of the year-end financial statement process is complete. A payment of $487,000 was made on February 1, 2019, and charged to Administrative Salaries Expense in the 2019-20 fiscal year records.