Accounting Principles 7th Canadian Edition Volume 2 Solution – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

CHAPTER 10

ADVANCE \d6

Current Liabilities and Payroll

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives	Questions	Brief Exercises	Exercises	Problems Set A	Problems Set B
Account for determinable or certain current liabilities.	1, 2, 3, 4, 5, 6, 7, 12	1, 2, 3, 4, 5, 6, 7, 16, 17	1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 14	1, 2, 3, 4, 5	1, 2, 3, 4, 5
Account for uncertain liabilities.	8, 9, 10, 11, 12, 13, 14, 15, 16	8, 9, 10, 11, 12,  13, 16	11, 12, 13, 14, 15	1, 2, 5, 6, 7, 8,	1, 2, 5, 6, 7, 8,
Determine payroll costs and record payroll transactions.	17, 18, 19, 20	14, 15, 16	1, 16, 17, *20	5, 9, 10,	5, 9, 10,
Prepare the current liabilities section of the balance sheet.	21, 22, 23	16, 17, 18	10, 18, 19	3, 4, 5, 8, 11, 12,	3, 4, 5, 8, 11, 12,
*5. Calculate mandatory payroll deductions (Appendix 10A).	*24, *25	*19, *20	*20, *21	*13	*13

ASSIGNMENT CHARACTERISTICS TABLE

Problem Number	Description	Difficulty Level	Time Allotted (min.)
1A	Prepare current liability entries and adjusting entries.	Moderate	15-25
2A	Prepare current liability entries, adjusting entries and current liability section.	Moderate	25-35
3A	Calculate current and non-current portion of notes payable, and interest payable.	Moderate	15-25
4A	Record note transactions; show financial statement presentation.	Moderate	30-40
5A	Record current liability transactions; prepare current liabilities section.	Moderate	30-40
6A	Record warranty transactions.	Moderate	15-25
7A	Record customer loyalty program and gift card transactions; determine impact on financial statements.	Moderate	15-25
8A	Discuss reporting of contingencies and record provisions.	Moderate	15-25
9A	Prepare payroll register and record payroll.	Moderate	25-35
10A	Record payroll transactions and calculate balances in payroll liability accounts.	Moderate	25-35
11A	Prepare current liabilities section; calculate and comment on ratios.	Moderate	25-35
12A	Prepare current liabilities section; calculate and comment on ratios.	Moderate	25-35
*13A	Calculate payroll deductions; prepare payroll register.	Moderate	25-35
1B	Prepare current liability entries and adjusting entries.	Moderate	15-25
2B	Prepare current liability entries, adjusting entries and current liability section.	Moderate	25-35
3B	Calculate current and non-current portion of notes payable, and interest payable.	Moderate	15-25
4B	Record note transactions; show financial statement presentation.	Moderate	30-40
5B	Record current liability transactions; prepare current liabilities section.	Moderate	30-40

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Number	Description	Difficulty Level	Time Allotted (min.)
6B	Record warranty transactions.	Moderate	15-25
7B	Record customer loyalty program and gift card transactions; determine impact on financial statements.	Moderate	15-25
8B	Discuss reporting of contingencies and record provisions.	Moderate	15-25
9B	Prepare payroll register and record payroll.	Moderate	25-35
10B	Record payroll transactions and calculate balances in payroll liability accounts.	Moderate	25-35
11B	Prepare current liabilities section; calculate and comment on ratios.	Moderate	25-35
12B	Prepare current liabilities section; calculate and comment on ratios.	Moderate	25-35
*13B	Calculate payroll deductions; prepare payroll register.	Moderate	25-35

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

Learning Objectives	Knowledge	Comprehension	Application	Analysis	Synthesis	Evaluation
Account for determinable or certain current liabilities.	Q10-1  Q10-2 Q10-4 Q10-5 Q10-12  BE10-16	Q10-6 Q10-7  E10-14	Q10-3 BE10-1 BE10-2 BE10-3 BE10-4 BE10-5 BE10-6 BE10-7 BE10-17 E10-1 E10-2 E10-3 E10-4 E10-5 E10-6	E10-7 E10-8 E10-9 E10-10 P10-1A P10-2A P10-3A P10-4A P10-5A P10-1B P10-2B P10-3B P10-4B P10-5B
2. Account for uncertain liabilities.	Q10-12  BE10-16	Q10-8 Q10-9  Q10-10 Q10-11  Q10-13 Q10-14 Q10-15 Q10-16  BE10-12 E10-14	BE10-8 BE10-9 BE10-10 BE10-11 BE10-13 E10-11 E10-12 E10-13 E10-15 P10-1A P10-2A	P10-5A P10-6A P10-7A P10-8A P10-1B P10-2B P10-5B P10-6B P10-7B P10-8B
3. Determine payroll costs and record payroll transactions.	Q10-19 BE10-13	Q10-17 Q10-18 Q10-20	BE10-14 BE10-15 BE10-16 E10-1 E10-16 E10-17 *E10-20	P10-5A P10-9A P10-10A  P10-5B P10-9B P10-10B
4. Prepare the current liabilities section of the balance sheet.	Q10-21 Q10-22 Q10-23 BE10-16		BE10-17 BE10-18 E10-10 E10-18 E10-19 P10-3A P10-4A P10-5A P10-8A	P10-10A P10-11A P10-12A P10-3B P10-4B P10-5B P10-8B P10-11B  P10-12B
*5. Calculate mandatory payroll deductions (Appendix 10A).	*Q10-24 *Q10-25		*BE10-19 *BE10-20 *E10-20 *E10-21	*P10-13A *P10-13B
Broadening Your    Perspective			Santé Smoothie Saga Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4	BYP10-1	BYP10-2 BYP10-5

ANSWERS TO QUESTIONS

1. A determinable liability is also referred to as a certain liability or a known liability. Examples include accounts payable, salaries payable, HST payable, and CPP and EI payable.

2. The transaction does not meet the definition of a liability. A liability is defined as a present obligation, arising from past events, to make future payments of assets or services.  A commitment to purchase is usually not an obligation and no past event (a purchase) has occurred since goods have not been delivered or services received.

3. (a) Cash 400,000

Unearned Revenue400,000

(5,000 × $80)

(b)Unearned Revenue66,667

Service Revenue66,667

($400,000 ÷ 6)

4. Interest payable is calculated as the product of the principal, the interest rate, and the fraction of the year in the accrual. The amount of interest payable at the fiscal year end is calculated with reference to the amount of time since the last interest payment if regular interest payments are required.

5. An operating line of credit is a pre-authorized bank loan that allows a company to borrow up to a pre-set limit, and repay the loan, as needed. When the company borrows against its line of credit, the cash account balance is increased and notes payable are increased.

A bank overdraft occurs when a bank account is overdrawn due to withdrawals and cheques in excess of deposit amounts.  In this case, the cash account will show a credit balance. There is no separate liability shown, as the overdraft is itself a liability.

6. The roommate is confusing different taxes. Incorporated businesses pay income tax on profits. Those taxes do appear as expenses on the income statement. Sales taxes, on the other hand, do not appear on the income statement. Merchants are directed by law to charge sales taxes on the selling price of most goods and services. In doing so, the merchant is acting as an agent of the federal and provincial governments when the business is charging, collecting, and remitting the sales taxes when due. Until the sales taxes are remitted, they appear as current liabilities on the balance sheet.

7. Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date.

QUESTIONS (Continued)

8. I don’t agree. Although you don’t know which specific appliances will be returned for repair, you can estimate the cost of repairs that will be required under warranty based on past experience or industry information. If repair costs are not recorded until units are brought in, liabilities on the balance sheet will be understated and the expenses will not be properly matched with revenue on the income statement. If sales are increasing, this will probably result in an overstatement of income.

9. Future savings provided to customers through customer loyalty programs produces a future performance obligation.  This future performance obligation results in unearned revenue, in that the entity has promised to deliver goods or services in the future. When the promised goods or services are delivered, the performance obligation is met, and this results in the recognition of the related revenue. 

10. The company should estimate the number of vouchers that will likely be used and the stand-alone value of these vouchers. The total of the standalone value of the vouchers and the stand-alone value of the restaurant meals sold should be used to allocate the revenue to current sales and unearned revenue. When the vouchers are redeemed, the restaurant has satisfied its future performance obligation and it can then recognize this unearned revenue as earned.

11. Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote.

A determinable liability has a known amount, payee, and due date. An estimated liability is an obligation that exists but whose amount and timing are uncertain. There is no uncertainty about the existence of a determinable liability and an estimated liability. Under ASPE, a contingent liability is an obligation that is uncertain with respect to existence, timing, and amount. The existence of a contingent liability depends on the resolution of a future event outside of the company’s control. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. Contingent liabilities are possible obligations that the company probably will not have to settle, or obligations for which the amount cannot be reliably measured.

QUESTIONS (Continued)

13. Under ASPE, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. An estimated liability is an obligation that exists but whose amount and timing are uncertain. A contingent liability may be recognized as an estimated liability if it is likely that a present obligation exists and the amount can be reliably estimated. Under IFRS, a contingent liability is a possible obligation that does not meet the criteria for recognition and does not meet the definition of a liability. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities.

14. Under ASPE, if a contingent liability is both likely to occur and reasonably estimable, it is recorded in the accounts. If its likelihood is not determinable, or if it is not reasonably estimable, it is not recorded in the accounts but disclosed in a note. If it is unlikely to occur, but could have a substantial negative effect on the company’s financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed.

15. Under IFRS, a contingent liability is never recorded because it is a possible liability that does not meet the criteria for recognition, either because it is not probable or the amount cannot be reliably measured. The criteria for recognition of an estimated liability are that it is probable a present obligation exists and that the amount can be reliably estimated. Under IFRS, the threshold for recognizing liabilities is “probable” rather than “likely” as used under ASPE. This threshold is generally considered lower.

16. If the chance of a contingency occurring is considered small, it should still be disclosed if the occurrence could have a substantial effect on the company’s financial position.

17. Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as income tax, union dues, etc. Gross pay should be recorded as wages or salaries expense.

18. Employee payroll deductions are the amounts subtracted from an employee’s gross pay in determining net pay. Mandatory employee payroll deductions include federal and provincial income taxes, Canada Pension Plan, and Employment Insurance. When an employer withholds these amounts from an employee pay cheque, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees’ funds, these withholdings are a liability for the employer until they are remitted to the government. Employee payroll deductions also include voluntary deductions for things such as insurance, pensions, union dues, and donations to charities.

QUESTIONS (Continued)

18. (Continued)

Employer payroll deductions are amounts the employer is expected to pay. These include CPP where the employer is expected to pay the same amount as the employee and EI where the employer is expected to pay 1.4 times the amount the employee has paid. These are expenses for the employer over and above gross pay.

19. The employee earnings record is used in (1) determining when an employee has earned the maximum earnings subject to CPP and EI deductions, (2) filing information returns with the CRA, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year on the T4 form.

The payroll register accumulates gross earnings, deductions, and net pay for all employees for each pay period. It provides the documentation to support the preparation of the paycheque for each employee.

20. Income tax, CPP, and EI deductions are remitted to the Receiver General, usually on a monthly basis. Workplace, Health, Safety, and Compensation is remitted quarterly (or monthly depending on the province) to the Workplace, Health, Safety and Compensation Commission (or similar body depending on the province). Other deductions are paid to different organizations, such as the United Way, and would normally be made on a monthly basis.

21. Current liabilities are usually listed in order of their liquidity, by maturity date. It may not be possible to list current liabilities in order of liquidity because of the varying maturity dates that may exist for certain specific obligations. They are also often listed in order of magnitude with the largest items listed first.

22. If companies have used their line of credit and are overdrawn or show a negative cash balance, the amount is included in current liabilities and called bank indebtedness, bank overdraft, or bank advances. Note disclosure will include security or collateral that was required by the bank, the maximum amount that can be withdrawn, as well as the interest rate charged on the bank overdraft. Terms associated with notes payable are also disclosed.

23. A company can determine if its current liabilities are too high by monitoring the relationship of current assets to current liabilities and calculating the current ratio (current assets ÷ current liabilities). This relationship is critical in evaluating a company’s short-term ability to repay debt.

QUESTIONS (Continued)

*24. Contribution rates for CPP are set by the federal government (Quebec government for QPP) and are adjusted every January if applicable. Employee contributions under the Canada Pension Plan Act are set at a percentage of pensionable earnings (currently 4.95%). Pensionable earnings are gross earnings less a basic yearly exemption (currently $3,500). A maximum ceiling or limit is imposed on pensionable earnings ($53,600 for 2015). The exemption and ceiling are prorated to the relevant pay period (e.g., weekly, biweekly, semimonthly, monthly).

Contribution rates for EI are based upon a percentage (currently 1.88%) of insurable earnings, to a maximum earnings ceiling ($49,500 for 2015). In most cases, insured earnings are gross earnings plus any taxable benefits.

*25. The amount deducted from an employee’s salary for income tax is determined by using payroll accounting software programs, CRA payroll deduction tables easily accessible online, or using the payroll deductions online calculator. The income tax that should be withheld from gross salary is based on the number of personal tax credits claimed by an employee as shown on their TD1 form.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

No

Yes

Yes for $30,000

Yes

Yes

Yes

BRIEF EXERCISE 10-2

(a) Cash 240,000

Unearned Revenue 240,000

(2,000 × $120)

(b) Unearned Revenue 40,000

Service Revenue 40,000

($240,000 ÷ 6)

BRIEF EXERCISE 10-3

(a) Cash 270,000

Unearned Revenue 270,000

(15,000 × $18)

(b) Unearned Revenue 22,500

Revenue 22,500

($270,000 ÷ 12)

BRIEF EXERCISE 10-4

(a)

2017

July 1 Cash 60,000

Notes Payable 60,000

(b)

2017

Dec. 31 Interest Expense 

($60,000 × 4% × 6/12) 1,200

Interest Payable 1,200

(c)

2018

July 1 Interest Expense 

($60,000 × 4% × 6/12) 1,200

Interest Payable 1,200 

Notes Payable 60,000

Cash 62,400

BRIEF EXERCISE 10-5

(a)

Calculation of sales tax payable – Ottawa store:

HST payable = $7,200 × 13% = $936

Calculation of sales tax payable – Regina store:

GST payable = $8,400 × 5% = $420

PST payable = $8,400 × 5% = $420

 

BRIEF EXERCISE 10-5 (Continued)

(b) 

Ottawa store:

Mar. 12 Cash 8,136

Sales 7,200

HST Payable 936

Regina store:

Mar. 12 Cash 9,240

Sales 8,400

GST Payable 420

PST Payable 420

BRIEF EXERCISE 10-6

(a) 

May 10, 2017:

Calculation of sales tax collected:

HST: $1,800 × 13% × 40 = $9,360

May 17, 2017:

Calculation of sales tax collected:

HST: $1,800 x 13% x 95 = $22,230

(b)

May. 10 Cash 81,360

Sales ($1,800 × 40) 72,000

HST Payable 9,360

May 17 Cash 193,230

Sales ($1,800 x 95) 171,000

HST Payable 22,230

BRIEF EXERCISE 10-7

Mar. 31 Property Tax Expense ($9,600 × 3/12) 2,400

Property Tax Payable 2,400

June 30 Property Tax Payable 2,400

Property Tax Expense ($9,600 × 3/12) 2,400

Prepaid Property Tax ($9,600 × 6/12) 4,800

Cash 9,600

Dec. 31 Property Tax Expense 4,800

Prepaid Property Tax 4,800

BRIEF EXERCISE 10-8

 Dec. 31 Warranty Expense 18,700

  Warranty Liability 18,700

[(4,400 units × 5%) × $85/unit]

BRIEF EXERCISE 10-9

July 3 Unearned Revenue–Loyalty Program 50

    Sales 50

To recognize the loyalty program redemption.

Note: Each time One-Stop has a point redemption it satisfies the related performance obligation and therefore the unearned revenue becomes earned. 

BRIEF EXERCISE 10-10

(a) Stand-alone book sales (50,000 novels × $8) = $400,000

Stand-alone value of coupons = 50,000*10%*$2   =   10,000 Total Value $ 410,000

Allocate as follows:

Earned revenue= ($400,000/$410,000)*$400,000 = 390,244

Unearned revenue= ($10,000/$410,000)*$400,000 =    9,756

(b)

July Cash 400,000

Sales 390,244 

Unearned Revenue–Loyalty Program 9,756 

BRIEF EXERCISE 10-11

Dec. 2017 Cash 4,750

Unearned Revenue 4,750

Jan. 2018 Unearned Revenue 2,425

Sales 2,425

Cost of Goods Sold 1,070

Merchandise Inventory 1,070

BRIEF EXERCISE 10-12

(a) (2) Disclosed: This liability should be disclosed. The outcome is neither likely nor unlikely (not determinable). The treatment would be the same under both IFRS and ASPE.

(b) (1) Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and ASPE.

BRIEF EXERCISE 10-12 (Continued)

(c) (1) Recorded under IFRS: This liability is “probable” and can be reasonably estimated. 

(2) Disclosed under ASPE: The outcome is not “likely”; the chance of occurrence is not considered sufficiently high.

BRIEF EXERCISE 10-13

The arguments for recording this liability are that the outcome is probable and the amount can be estimated. Since the company is public, IFRS applies. In this case, the lawsuit is considered an estimated liability and is recorded since the loss is considered probable. Management may be reluctant to disclose this information separately on the financial statements for fear it will be taken as an admission of guilt.

BRIEF EXERCISE 10-14

(a) 

Gross pay:

Regular pay (40 × $12.50) $500.00

Overtime pay (6 × $18.75)   112.50 $612.50

Less: ADVANCE \l0CPP contributions $26.99

EI premiums 11.21

Income tax withheld 94.56   132.76

Net pay $479.74

(b)

Employer costs:

CPP contributions $26.99

EI premiums ($11.21 × 1.4) 15.69

$42.68

The employer does not bear any costs for employee income taxes.

BRIEF EXERCISE 10-15

Aug. 22 Employee Benefits Expense 5,123

CPP Payable 3,330

EI Payable ($1,281 × 1.4) 1,793

BRIEF EXERCISE 10-16

(a) Current liability

(b) Current liability

(c) Current liability

(d) Current liability

(e) Current liability

(f) Current asset

(g) Disclosed in the notes to the financial statements as a contingent liability

(h) Current liability

(i) Current asset

(j) Current liability ($5,000) and long-term liability ($70,000)

BRIEF EXERCISE 10-17

(a) Current liability: $12,000

Non-current liability: $48,000

Only the portion of principal to be repaid in 2018 would be 

shown as a current liability. 

(b) Current liability: $24,000 ($2,000 per month × 12 months)

Non-current liability: $66,000 ($96,000 – [$2,000 × 3] – $24,000)

The principal repayments of $2,000 per month to be repaid in 

2018 would be shown as a current liability. 

BRIEF EXERCISE 10-18

(a)

SUNCOR ENERGY INC.

(Partial) Balance Sheet

December 31, 2014

(in millions)

 

Liabilities

Current liabilities

Accounts payable and accrued liabilities $5,704

Income taxes payable 1,058

Current portion of provisions 752

Short-term debt       806

Current portion of long-term debt       34

Total current liabilities $8,354

Note: This presentation lists the accounts in order of size, with the largest one (accounts payable and accrued liabilities) listed first. Other alternatives are also possible, such as listing the accounts in order of liquidity, by estimated maturity date.

(b)

Current Ratio = Current Assets ÷ Current Liabilities

$13,916* ÷ $8,354 = 1.67 to 1

* $4,275 + $5,495 + $680 + $3,466 = $13,916

Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷ Current Liabilities

($4,275 + $5,495 + $680) ÷ $8,354 = 1.25 to 1

*BRIEF EXERCISE 10-19

Monthly Pay = ($60,100/year ÷ 12 months) = $5,008.33

(a) January 2015:

CPP deduction = ($5,008.33 – [$3,500 ÷ 12]) × 4.95% = $233.47

EI deduction = $5,008.33 × 1.88% = $94.16

(b) December 2015:

No deductions for CPP or EI. The cumulative salary up to November 30, 2015 is $55,091.63 ($5,008.33 × 11). The cumulative salary exceeds the annual maximum pensionable earnings of $53,600 and maximum insurable earnings of $49,500.

*BRIEF EXERCISE 10-20

Gross salary for the week = $1,075

(a) CPP [($1,075.00 − $67.31) × 4.95%] $49.88 

EI ($1,075 × 1.88%) 20.21

(b) Federal income tax (claim code 1) 130.95

Ontario income tax (claim code 1)     65.20

Total deductions $266.24

SOLUTIONS TO EXERCISES

EXERCISE 10-1

March 1 Supplies 350

Accounts Payable 350

5 Cash 200 Unearned Revenue 200

12 Unearned Revenue 200 Service Revenue 200

15 Salaries Expense 5,000

CPP Payable 230

EI Payable 94

Income Tax Payable 1,400

Cash 3,276

30 Accounts Payable 350

Cash 350

EXERCISE 10-2

2017

July 1 Cash 50,000

Notes Payable 50,000

Nov. 1 Cash 60,000

Notes Payable 60,000

Dec. 31 Interest Expense 2,600

Interest Payable 2,600

($50,000 × 8% × 6/12) = $2,000

+ ($60,000 × 6% × 2/12) = $600

2018

Feb. 1 Notes Payable 60,000

Interest Payable 600

Interest Expense 300 Cash 60,900

($60,000 × 6% × 1/12) = $300

Apr. 1 Notes Payable 50,000

Interest Payable 2,000

Interest Expense 1,000 Cash 53,000

($50,000 × 8% × 3/12) = $1,000

EXERCISE 10-3

(a) June 1 Cash 90,000

Notes Payable 90,000

(b) June 30 Interest Expense 450

Interest Payable 450

($90,000 × 6% × 1/12) = $450

(c) Dec. 1 Notes Payable 90,000

Interest Payable 2,700

Cash 92,700

(d) Total financing cost was $2,700 ($90,000 × 6% × 6/12)

  EXERCISE 10-4

Novack Company

2017

June 1 Equipment 50,000

Accounts Payable 50,000

July 1 Accounts Payable 50,000

Notes Payable 50,000

Aug. 1 Interest Expense 292

Cash 292

($50,000 × 7% × 1/12)

Aug. 31 Interest Expense 292

Interest Payable 292

Sep. 1 Interest Payable 292

Cash 292

Oct. 1 Interest Expense 292

Notes Payable 50,000

Cash 50,292

 

EXERCISE 10-5

(a) Tundra Trees

Mar. 1 Equipment 30,000

Notes Payable 30,000

July 31 Interest Expense 1,000

Interest Payable 1,000

($30,000 × 8% × 5/12)

Oct. 1 Interest Expense* 400 Interest Payable 1,000 Notes Payable 30,000 Cash 31,400

* ($30,000 × 8% × 2/12)

(b) Edworthy Equipment

Mar. 1 Notes Receivable 30,000

Sales 30,000

1 Cost of Goods Sold 18,000

Merchandise Inventory 18,000

May 31 Interest Receivable 600

Interest Revenue 600

($30,000 × 8% × 3/12)

Oct. 1 Cash 31,400

Interest Receivable 600

Interest Revenue* 800

Notes Receivable 30,000

* ($30,000 × 8% × 4/12)

EXERCISE 10-6

1. Sainsbury 

April 10 Cash 14,916

Sales 13,200

HST Payable ($13,200 × 13%) 1,716

2. Montgomery 

April 21 Cash 31,500

Sales 30,000

GST Payable ($30,000 × 5%) 1,500

3. Winslow

April 27 Cash 28,112

Sales 25,100

GST Payable ($25,100 × 5%) 1,255

PST Payable ($25,100 × 7%) 1,757

ADVANCE \u1

EXERCISE 10-7

(a) Quebec

April 10 Cash 91,980

Sales ($80,000) 80,000 GST Payable ($80,000 x 5%) 4,000

QST Payable ($80,000 x 9.975%) 7,980

(b) Nova Scotia

April 10 Cash 92,000

Sales 80,000

HST Payable ($80,000x 15%) 12,000

(c) Alberta

April 10 Cash 84,000

Sales 80,000 GST Payable ($80,000 x 5%) 4,000EXERCISE 10-8

2017

(a) Oct. 31 Cash 21,000

Unearned Revenue 21,000

(100 × $210)

(b)

1. Nov. 30 Unearned Revenue 3,500

Admission Revenue 3,500

($21,000 × 1/6)

2018

2. Mar. 31 Unearned Revenue 3,500

Admission Revenue 3,500

($21,000 × 1/6)*

3. Apr. 30 Unearned Revenue 3,500

Admission Revenue 3,500

($21,000 × 1/6)*

* Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2017, January 31, 2018, and February 28, 2018.

(c) Parts 1, 2 and 3.

Unearned Revenue
Date	Explanation	Ref.	Debit	Credit	Balance

2017

Oct.  31 21,000 21,000

Nov. 30 Adjusting entry 3,500 17,500

Dec. 31 Adjusting entry 3,500 14,000

2018

Jan. 31 Adjusting entry 3,500 10,500

Feb. 28 Adjusting entry 3,500 7,000

Mar. 31 Adjusting entry 3,500 3,500

Apr. 30 Adjusting entry 3,500 0

EXERCISE 10-9

2017

(a) Nov. Cash 270,000

Unearned Revenue 270,000

(15,000 × $18)

(b) Dec. 31 Unearned Revenue 22,500

Revenue 22,500

($270,000 × 1/12)

2018

(c) Mar. 31 Unearned Revenue 67,500

Revenue 67,500

($270,000 × 3/12)

EXERCISE 10-10

(a) May 31 Property Tax Expense 

($24,000 × 1/12) 2,000

Property Tax Payable 2,000

The company would have accrued property tax expense on a monthly basis using the 2016 monthly expense of $2,200 per month. An adjustment would be required when the property tax bill is received for the over accrual:

May 31 Property Tax Payable 800

Property Tax Expense 800

[($24,000 × 1/12) – $2,200] × 4 months

The company accrues property tax expense on June 30, 2017 for one month.

July 31 Property Tax Payable

($24,000 × 6/12) 12,000

Property Tax Expense

($24,000 × 1/12) 2,000

Prepaid Property Tax

($24,000 × 5/12) 10,000

Cash 24,000

The company makes monthly adjusting entries for property tax expense on from August to December, as follows:

Property Tax Expense 2,000

Prepaid Property Tax 2,000

(b) Since the company’s fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable.

 

Income Statement, Year Ended December 31, 2017 (Partial)

Operating expenses

Property tax expense $24,000

EXERCISE 10-10 (Continued)

(b) (Continued)

Prepaid Property Tax
Date	Explanation	Ref.	Debit	Credit	Balance

Jul. 31 10,000 10,000

Aug. 31 2,000 8,000

Sep. 30 2,000 6,000

Oct. 31 2,000 4,000

Nov. 30 2,000 2,000

Dec. 31 2,000 0

Property Tax Expense
Date	Explanation	Ref.	Debit	Credit	Balance

Jan. 31 2,200 2,200

Feb. 28 2,200 4,400

Mar. 31 2,200 6,600

Apr. 30 2,200 8,800

May 31 2,000 10,800

May 31 800 10,000

June 30 2,000 12,000

July 31 2,000 14,000

Aug. 31 2,000 16,000

Sep. 30 2,000 18,000

Oct. 31 2,000 20,000

Nov. 30 2,000 22,000

Dec. 31 2,000 24,000

EXERCISE 10-11

(a) Estimated warranty costs for November and December sales:

Number of units sold (30,000 + 32,000) 62,000

Estimated rate of defective units   × 2.5%

Total estimated defective units 1,550

Average warranty repair cost     × $20

Estimated warranty costs for Nov. and Dec. $31,000

Dec. 31 Warranty Expense 31,000

Warranty Liability 31,000

ADVANCE \d6(b) Dec. 31 Warranty Liability 21,600

Repair Parts Inventory,

Salaries Payable, Cash, etc. 21,600

(450 + 630) x $20 = $21,600

(c) 

Income Statement, Year Ended December 31, 2017 (Partial)

Operating expenses

Warranty expense $31,000

Balance Sheet, at December 31, 2017 (Partial)

Current Liabilities

Warranty liability ($31,000 – $21,600) $9,400

EXERCISE 10-12

(a) Warranty expense:

2015: ($2,000 × 500 units sold × 5%) = $50,000

2016: ($2,000 × 600 units sold × 5%) = $60,000

2017: ($2,000 × 525 units sold × 5%) = $52,500

(b) Warranty liability at the end of the year:

Estimated warranty expense for 2015: $50,000

Less: Cost incurred in 2015   (30,000)

Warranty liability at end of 2015: 20,000

 

Add: Estimated warranty expense for 2016: 60,000

Less: Cost incurred 2016 (46,000)

Warranty liability at end of 2016: 34,000

Add: Estimated warranty expense for 2017: 52,500

Less: Cost incurred 2017 (53,500)

Warranty liability at end of 2017: $33,000

EXERCISE 10-13

(a) 2016: 900,000 × 35% × $0.01 = $3,150

2017: 1,200,000 × 35% × $0.01 = $4,200

(b) 2016- Stand-alone sales= $300,000

Total value of goods =$300,000 + $3,150= $303,150

Amount to allocate to revenue = $300,000*($300,000/$303,150) = $296,883

Amount to allocate to unearned revenue–rewards program = 

= $300,000* ($3,150/$303,150) = $3,117

2016 Cash 300,000

Sales 296,883

Unearned Revenue–Loyalty Program 3,117

2017- Stand-alone sales= $400,000

Total value of goods = $400,000 + $4,200 = $404,200

Amount to allocate to revenue= $400,000 X ($400,000/$404,200) = $395,844

Amount to allocate to unearned revenue–rewards program = $400,000 X ($4,200/$404,200) = $4,156

2017 Cash 400,000

Sales 395,844

Unearned Revenue–Loyalty Program 4,156

EXERCISE 10-13 (Continued)

(c)

When the points are redeemed, the following entry would be done:

 

Unearned Revenue–Loyalty Program XXX

Cash XXX

Sales XXX

Cost of Goods Sold XXX

Inventory       XXX

The redemption of the points increases net income as the unearned revenue is now recognized as earned. There is no impact on cash when the points are redeemed as the entry is to debit Unearned Revenue–Loyalty Program and credit Sales. 

 

 

EXERCISE 10-14

(1) (a) Estimable. The amount and timing with respect to brake replacement is uncertain. The existence of the liability to replace the brakes is certain and the amount can be reasonably estimated. The liability should be recorded in the financial statements.

(b) Not required.

(2) (a) Estimable. The amount and timing with respect to “money back, no questions asked” guarantee is uncertain. The existence of the money back guarantee is certain.

(b) Not required.

(3) Same as (2) above.

(4) (a) Determinable. The timing with respect to the prizes to be distributed is uncertain. The existence of the liability and the cost of the trip are certain. The liability should be recorded in the financial statements.

(b) Not required.

(5) (a) Contingent Liability under both IFRS and ASPE. The contingent liability is neither likely nor unlikely and the amount cannot be reasonably estimated.

(b) Under both IFRS and ASPE, the contingent liability would be disclosed in the notes to the financial statements because the outcome and the amount are both unknown.

EXERCISE 10-15

(a) The company should record an estimate of the cost of replacing the cribs in its financial statements. This liability is probable and can be reasonably estimated. The company also has a contingent liability with respect to the lawsuit. If the probability of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either possible (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is probable the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be accrued as an estimated liability.

(b) If Sleep-a-Bye Baby Company’s lawyers advise that it is likely that the company will have to pay damages of $100,000, then a journal entry should be recorded. The liability is likely and the amount can be reasonably estimated. The journal entry would be as follows:

Loss due to Damages 100,000

Liability for Damages Due to Unsafe Cribs 100,000

(c) If Sleep-a-Bye Baby Company is a private company, the answer to part (a) will be changed to assess the likelihood of loss from the lawsuit as “likely” rather than “probable”. If the likelihood of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either “likely” (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is “likely” the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be recorded. Part (b) stays the same, since the higher threshold of “likely” was applied. 

EXERCISE 10-16

(a)

Apr. 30 Salaries Expense 46,600

CPP Payable 2,162

EI Payable 853

Income Tax Payable 9,011

Cash 34,574

(b)

Apr. 30 Employee Benefits Expense 5,686

CPP Payable 2,162

EI Payable ($853 × 1.4) 1,194

Workers’ Compensation Payable

($46,600 × 1%) 466

Vacation Pay Payable ($46,600 × 4%) 1,864

(c)

May 15 CPP Payable ($2,162 + $2,162) 4,324

EI Payable ($853 + $1,194) 2,047

Income Tax Payable 9,011

Cash 15,382

 

EXERCISE 10-17

(a) AHMAD COMPANY

Payroll Register

Week Ended May 31

Gross Earnings

Deductions

Employee

 

Total

Hours

 

Regular

 

Overtime

 

Gross

Pay

 

CPP

EI

Income

 Tax

 

Health

Insurance

 

Total

 

Net

Pay

A. Kassam

H. Faas

G. Labute

Totals

 

47

45

46

 

$   520.00

560.00

    600.00

$1,680.00

 

$136.50

105.00

135.00

$376.50

 

$ 656.50

665.00

    735.00

$2,056.50

 

$29.17

29.59

  33.05

$91.81

$12.34

12.50

  13.82

$38.66

$ 85.55

87.10

  102.55

$275.20

 

$10.00

15.00

  15.00

$40.00

 

$137.06

144.19

  164.42

$445.67

 

$  519.44

520.81

   570.58

$1,610.83

(b) May 31 Salaries Expense 2,056.50

CPP Payable 91.81

EI Payable 38.66

Income Tax Payable 275.20

Health Insurance Payable 40.00

Salaries Payable 1,610.83

31 Employee Benefits Expense 309.32

CPP Payable ($91.81 × 1) 91.81

EI Payable ($38.66 × 1.4) 54.12

Workers’ Compensation Payable ($2,056.50 × 2%) 41.13

Vacation Pay Payable ($2,056.50 × 4%) 82.26

Health Insurance Payable 40.00

EXERCISE 10-18

	Principal	Date Issued	Rate	Term	Current Portion	Non-Current Portion	Interest Payable
1.	$60,000	3/31/16	6%	6 yrs.	$10,000	$50,000	$2,700
2.	$30,000	7/1/16	4%	7 mo.	$30,000	$0	$600
3.	$120,000	9/1/16	5%	30 mo.	$48,000	$60,000	$450

Current Portion:

Note 1: One payment of $10,000 will be made in the 

coming year.

Note 3: $48,000 = 12 monthly payments × $4,000

Non-Current Portion:

Note 1: $50,000 = $60,000 – $10,000 

Note 3: $60,000 = $120,000 – (3 payments in 2016 × $4,000) – $48,000 

Interest Payable:

Note 1: $2,700 = $60,000 × 6% × 9/12

Note 2: $600 = $30,000 × 4% × 6/12

Note 3: $450 = [$120,000 – (3 payments in 2016 × $4,000)] × 5% × 1/12

EXERCISE 10-19

MEDLEN MODELS

(Partial) Balance Sheet

December 31, 2017

 

Current liabilities

Accounts payable $ 63,000

Salaries payable 32,000

Unearned revenue 70,000

Notes Payable 40,000

Litigation liability 25,000

Mortgage payable—current portion     90,000

Total current liabilities $320,000

*EXERCISE 10-20

(a) Gross Pay = (40 hours × $22.60) + (4 hours × [$22.60 × 1.5])

= $904.00 + $135.60 = $1,039.60

Deductions (using Illustration 10A-3):

CPP [($1,039.60 – ($3,500 ÷ 52)) × 4.95%] $48.13

EI ($1,039.60 × 1.88%) 19.54

Federal income tax (claim code 1) 123.05

Ontario income tax (claim code 1)     61.70

Total deductions $252.42

(b) June 15 Salaries Expense 1,039.60

CPP Payable 48.13

EI Payable 19.54

Income Tax Payable ($123.05 + $61.70) 184.75

Cash 787.18

(c) June 15 Employee Benefits Expense 75.49

CPP Payable 48.13

EI Payable ($19.54 × 1.4) 27.36 

 

*EXERCISE 10-21

Month		Gross Salary		Cumulative Salary		CPP 4.95%		EI 1.88%
Jan. – Oct. November December Totals		$47,500.00 4,750.00     4,750.00 $57,000.00		$47,500.00 52,250.00 57,000.00		$ 2,206.90 220.69       52.36 $2,479.95	2 1 3	$893.00 37.60            0 $930.60	4 5

1. CPP = ($4,750 – [$3,500 ÷ 12]) × 4.95% = $220.69

2. CPP = $220.69/month × 10 months = $2,206.90

3. CPP = $52.36 (annual CPP maximum – CPP to end of November = maximum to be deducted in November [$2,479.95 – ($220.69 × 11)

4. EI = $4,750 × 1.88% = $89.30

EI = $86.93/month × 10 months = $893.00

5. EI = ($49,500 maximum insurable earnings – $47,500) × 1.88% = $37.60 

SOLUTIONS TO PROBLEMS

PROBLEM 10-1A

Feb. 2 Supplies 2,500

Accounts Payable 2,500

10 Cash 48,816

Sales 43,200

GST Payable 2,160

PST Payable 3,456

15 Cash 35,000

Notes Payable 35,000

21 Salaries Expense 50,000

CPP Payable 2,308

EI Payable 940

Income Tax Payable 8,900

Salaries Payable 37,852

21 Employee Benefits Expense 3,624

CPP Payable 2,308

EI Payable ($940 x 1.4) 1,316

28 Interest Expense 87.50

Interest Payable 87.50

($35,000 x 6% x 1/12 X .5)

28 Warranty Expense 14,000

Warranty Liability 14,000

 

28 Salaries Payable 37,852

Cash 37,852

PROBLEM 10-1A (Continued)

Mar. 1 GST Payable 2,160

PST Payable 3,456

Cash 5,616

2 Accounts Payable 2,500

Cash 2,500

15 CPP Payable ($2,308 x 2) 4,616

EI Payable ($940 + $1,316) 2,256

Income Tax Payable 8,900

Cash 15,772

Taking It Further:

Some additional mandatory employee benefits paid entirely by the employer include payments to fund the workplace health, safety, and compensation plan. Vacations are also mandatory and the amounts and limits vary among provinces. The remaining benefits are not mandatory and have more to do with the negotiated employment package with employees. The latter could include full or partial payments into pension plans, savings plans, and medical or life insurance related coverage. Finally, again based on a business’ practice, paid absences for sick leave, for example, are additional employee benefits paid by the employer.

Mandatory and negotiated employee benefit costs are accounted for as expenses when incurred.

 

PROBLEM 10-2A

(a)

Jan. 2 Cash 27,000

Notes Payable 27,000

5 Cash 23,165

Sales 20,500

HST Payable ($20,500 x 13%) 2,665

12 Unearned Revenue 10,000

Service Revenue 8,849

HST Payable 1,151

14 HST Payable 7,700

Cash 7,700

20 Accounts Receivable 50,850

Sales (900 X $50) 45,000

HST Payable ($45,000 x 13%) 5,850

 

25 Cash 14,125

Sales 12,500

HST Payable ($12,500 x 13%) 1,625

 

(b)

31 Interest Expense 135

Interest Payable 135

($27,000 x 6% x 1/12)

31 Warranty Expense 3,150

Warranty Liability 3,150

($45,000 x 7%)

PROBLEM 10-2A (Continued)

(c)

ACCARDO COMPANY

(Partial) Balance Sheet

January 31, 2017

 

Current liabilities

Accounts payable $52,000

HST payable ($2,665 + $1,151+ $5,850 + $1,625) 11,291

Interest payable 135

Warranty liability 3,150

Unearned revenue ($16,000 – $10,000) 6,000

Notes payable   27,000

Total current liabilities $99,576

Taking It Further:

Warranty liabilities and the related expenses are accrued at the time of the sale of the product on which the warranty applies. Merchants accrue the expenses before a customer has any issues with the product in order to recognize the expense in the same accounting period as the sale. This fulfills the matching principle in the conceptual framework of accounting. Doing so also honours the accrual basis of accounting. Failing to do so could result in the benefit of the sale occurring in one accounting period and the related expenses being incurred in a subsequent accounting period. This latter treatment would provide financial information that would be misleading to the financial statement users.

 

PROBLEM 10-3A

(a)  (b)  (c) Original

Principal  Date issued RateTerm Current Portion  Non-current Portion  Interest Payable 1 $   35,000 Aug. 1/175.0%10months $  35,000  $            –  $   145.83 ¹2 $   15,000 Sept. 1/174.0%4months $  15,000  $            –  $   200.00 ²3 $   26,000 Nov. 1/174.5%6months $  26,000  $            –  $   195.00 ³4 $   60,000 Mar. 31/173.5%5years $  12,000 $   48,000  $1,575.00 ⁴5 $ 100,000 Oct. 1/175.0%6years $  24,000 ⁷ $   72,000 ⁸ $   400.00 ⁵6 $   40,000 Jan. 31/165.0%4years $  10,000 $   20,000 ⁹ $            – ⁶

¹ $145.83 = $35,000 × 5.0% × 1/12 ⁷ current: $24,000 = $2,000 × 12 months

² $200.00 = $15,000 × 4.0% × 4/12 ⁸ non-current: $72,000 = $100,000 – $24,000 – $4,000

³ $195.00 = $26,000 × 4.5% × 2/12

⁴ $1,575.00 = $60,000 × 3.5% × 9/12 ⁹ non-current: $20,000 = $40,000 – ($10,000 × 2)

⁵ $400.00 = $96,000 × 5.0% × 1/12

⁶ Interest was paid on December 31, 2017

PROBLEM 10-3A (Continued)

Taking It Further:

For the maker, a note payable bears interest which is an additional cost. Some liabilities, such as accounts payable to suppliers are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal.

For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

 

 

PROBLEM 10-4A

(a) Jan. 12 Merchandise Inventory 25,000

Accounts Payable 25,000

31 Accounts Payable 25,000

Notes Payable 25,000

Feb. 28 Interest Expense 146

($25,000 × 7% × 1/12)

Cash 146

Mar. 31 Notes Payable 14,000

Interest Payable 490

Interest Expense 

($14,000 × 7% × 3/12) 245

Cash 14,735

Mar. 31 Interest Expense 146

($25,000 × 7% × 1/12)

Cash 146

Apr. 30 Notes Payable 25,000

Interest Expense 

($25,000 × 7% × 1/12) 146

Cash 25,146

Aug. 1 Equipment 41,000

Cash 11,000

Notes Payable 30,000

Sept. 30 Cash 100,000

Notes Payable 100,000

Dec. 31 Interest Expense 1,250

($100,000 × 5% × 3/12)

Cash 1,250

PROBLEM 10-4A (Continued)

(a) (Continued)

 

Dec. 31 Interest Expense 750

($30,000 × 6% × 5/12)

Interest Payable 750

(b)

LEARNSTREAM COMPANY

(Partial) Balance Sheet

December 31, 2017

 

Current liabilities

Notes payable $30,000

Current portion of long-term notes payable 10,000

Interest payable         750

40,750

Long-term liabilities

Notes payable $100,000

Less current portion   (10,000) 90,000

(c)

LEARNSTREAM COMPANY

(Partial) Income Statement

Year Ended December 31, 2017

 

Other expense

Interest expense $2,683

($146 X 3) + $245 +$1,250 +$ 750) = $2,683PROBLEM 10-4A (Continued)

Taking It Further:

Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the portion of long-term debt that is repayable in the current term. This classification is important because it represents amounts that must be settled within the next year and is an important factor in assessing the company’s liquidity.

 

PROBLEM 10-5A

(a) Jan. 2 Cash 46,000

Notes Payable 46,000

5 Cash 9,718

Sales 8,600

HST Payable ($8,600 × 13%) 1,118

Cost of Goods Sold 4,100

Merchandise Inventory 4,100

12 Unearned Revenue 8,000

Service Revenue 7,080

HST Payable 920

14 HST Payable 8,630

Cash 8,630

15 CPP Payable 1,320

EI Payable 680

Income Tax Payable 3,340

Cash 5,340

17 Accounts Payable 14,800

Cash 14,800

20 Accounts Receivable 118,085

Sales (1,900 × $55) 104,500

HST Payable ($104,500 × 13%) 13,585

Cost of Goods Sold (1,900 × $25) 47,500

Merchandise Inventory 47,500

 

 

PROBLEM 10-5A (Continued)

(a) (Continued)

Jan. 29 Unearned Revenue–Loyalty 

  Program 2,300

HST Payable 265

Revenue from Rewards Program 2,035

($2,300 − $265)

 

31 Cash 250,000

Sales 244,141

Unearned Revenue–Loyalty Program     5,859

 

Stand-alone sales $250,000

Stand-alone value of loyalty points

(30,000 × $1 × 20%)     6,000 

Total Value $256,000

Allocate as follows:

Earned revenue= ($250,000/$256,000) X $250,000 = $244,141

Unearned revenue= ($6,000/$256,000) X $250,000 =    $5,859

              31 Salaries Expense 18,750

CPP Payable 764

EI Payable 343

Income Tax Payable 3,481

Salaries Payable 14,162

31 Salaries Payable 14,162

Cash 14,162

(b)

(1) Jan. 31 Interest Expense 268

Interest Payable 268

($46,000 × 7% × 1/12)

PROBLEM 10-5A (Continued)

(b) (Continued)

 

(2) Jan. 31 Warranty Expense 

(1,900 × 9% × $10) 1,710

Warranty Liability 1,710

(3) Jan. 31 Employee Benefits Expense 1,994

CPP Payable 764

EI Payable ($343 × 1.4) 480

Vacation Pay Payable 750

($18,750 x 4%) = $750

(4) Jan. 31 Property Tax Expense

($8,820 ÷ 12) 735

Property Tax Payable 735

 (c)

SHUMWAY SOFTWARE COMPANY

(Partial) Balance Sheet

January 31, 2017

 

Current liabilities

Notes payable $  46,000

Accounts payable ($40,000 – $14,800) 25,200

Unearned revenue ($15,300 – $8,000 7,300

Unearned revenue–loyalty program 

($3,700 – $2,300 + $5,859) 7,259

HST payable 

($8,630 + $1,118 + $920 – $8,630 + $13,585 + $265) 15,888

Income tax payable ($3,340 – $3,340 + $3,481) 3,481

CPP payable ($1,320 – $1,320 + $764 + $764) 1,528

EI payable ($680 – $680 + $343 + $480) 823

Vacation pay payable ($8,660 + $750) 9,410

Property tax payable 735

Warranty liability 1,710

Interest payable         268

  Total current liabilities $  119,602

PROBLEM 10-5A (Continued)

Taking It Further:

Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries payable are credited.

 

PROBLEM 10-6A

(a) Warranty expense

2015 – (1,500 × 5% × $30) = $2,250

2016 – (1,700 × 5% × $30) = $2,550

2017 – (1,800 × 5% × $30) = $2,700

Warranty liability at year end

2015 – ($0 – $2,250 + $2,250) = $0

2016 – ($0 – $2,400 + $2,550) = $150

2017 – ($150 – $2,640 + $2,700) = $210

Note:  See analysis of Warranty Liability account in (b) below.

(b)

2015 Warranty Liability 2,250

Repair Parts Inventory 2,250

Warranty Expense (1,500 × 5% × $30) 2,250

Warranty Liability 2,250

2016 Warranty Liability 2,400

Repair Parts Inventory 2,400

Warranty Expense (1,700 × 5% × $30) 2,550

Warranty Liability 2,550

2017 Warranty Liability 2,640

Repair Parts Inventory 2,640

Warranty Expense (1,800 × 5% × $30) 2,700

Warranty Liability 2,700

PROBLEM 10-6A (Continued)

(b) (Continued)

Warranty Liability
Date	Explanation	Ref.	Debit	Credit	Balance

2015

During 2,250 2,250 Dr

Dec. 31 2,250 0

2016

During 2,400 2,400 Dr

Dec. 31 2,550 150

2017

During 2,640 2,490 Dr

Dec. 31 2,700 210

(c) Percentage of units returned for repair =

Number of units returned ÷ Number of units sold

Returned Sold

2015 75 1,500

2016 90 1,700

2017 105 1,800

270 5,000

Percentage returned = 270 ÷ 5,000 = 5.4%

Average actual warranty cost per unit =

Total actual warranty costs ÷ Total units returned

Actual costs

2015 $2,250

2016 2,400

2017   2,640

$7,290

Average warranty cost per unit over the three-year period: 

$7,290 ÷ 270 = $27

PROBLEM 10-6A (Continued)

Taking It Further:

Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $150. The revised warranty expense for 2017 is calculated as follows:

Warranty expense 2017:

1,800 × 7% × $27 = $3,402

Warranty liability at December 31, 2017:

$150 – $2,640 + $3,402 = $912

 

PROBLEM 10-7A

(a) 1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues.

2. Increases revenues and profit (form of unearned revenue)

3. No effect on revenues, expenses, and profit

4. Increases revenues, expenses (cost of goods sold), and profit

(b) 2016:

1. Cash 4,560,000

Sales 4,447,334

Unearned Revenue–Loyalty Program 112,666

  

Stand-alone gas sales $4,560,000

Stand-alone value of loyalty coupons

((3,800,000 x $0.038 x 80%)     115,520 Total Value $4,675,520

Allocate as follows:

Earned revenue= ($4,560,000/$4,675,520) X $4,560,000 = $4,447,334

Unearned revenue = ($115,520/$4,675,520) X $4,560,000 = $112,666

2. Unearned Revenue-Loyalty Program 46,000

Revenue from Rewards Program 46,000

PROBLEM 10-7A (Continued)

(b)  (Continued)

2017:

 

3.  Cash 6,045,000

Sales 5,906,870

Unearned Revenue–Loyalty Program 138,130

  

Stand-alone gas sales $6,045,000

Stand-alone value of loyalty coupons

(4,650,000 x $0.038 x 80%)     141,360 Total Value $6,186,360

Allocate as follows:

Earned revenue= ($6,045,000/$6,186,360) x $6,045,000 =$5,906,870

Unearned revenue= ($141,360 /$6,186,360) x $6,045,000 = $138,130

4.   Unearned Revenue–Loyalty Program 53,500

Revenue from Rewards Program 53,500

      Cash 82,000

Unearned Revenue 82,000

Unearned Revenue 45,000

Sales 45,000

PROBLEM 10-7A (Continued)

(c) 

Unearned Revenue–Loyalty Program
Date	Explanation	Ref.	Debit	Credit	Balance

2016

During 112,666 112,666

Dec. 31 46,000       66,666

2017

During 138,130     204,796

Dec. 31 53,500 151,296

Unearned Revenue
Date	Explanation	Ref.	Debit	Credit	Balance

2017

During 82,000 82,000

Dec. 31 45,000 37,000

 

Taking It Further:

Management should consider the following factors:

The historical rate of redemption on the grocery coupons. Some coupons will never be redeemed and management needs to determine over time, if the estimated redemption rate should be revised. 

Factors to consider for the gift cards include long periods of inactivity by customers, or low residual balances. These factors increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where there is a remote chance they will be used can be transferred to a revenue account.

 

PROBLEM 10-8A

1. Note disclosure: It does not appear that it is probable that the company will lose the lawsuit. If the possibility of loss is considered remote, Mega Company would not need to disclose the lawsuit.

2. Note disclosure: Since it is likely that the company will lose the lawsuit, but the amount of the liability cannot be reliably measured, the lawsuit should be disclosed.

3. Accrue in the financial statements: Because Mega has negotiated a settlement, it now has a liability and the amount is measurable.

Taking It Further:

Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Thus a benefit of recording the accrual is that it allows users of financial statements to make better informed decisions. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios.

The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are probable and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

PROBLEM 10-9A

ADVANCE \d6(a)

SURE VALUE HARDWARE

Payroll Register

Week Ended March 14, 2017

Gross Earnings

Deductions

 

Employee

 

Hours

 

Regular

 

Over-

time

 

Gross

Pay

 

CPP

 

EI   

 

Income Tax

 

United Way

 

Total

 

Net Pay

 

I. Dahl

F. Gualtieri

G. Ho

A. Israeli

     Totals

 

37.5

42.5

43.5

45

 

$637.50

660.00

620.00

     600.00

$2,517.50

 

0

$61.88

81.38

 112.50

$255.76

 

$637.50

721.88

701.38

   712.50

$2,773.26

 

$27.80

  32.40

 31.39

    31.94

$123.53

 

$11.83

13.57

13.19

  13.40

$51.99

 

$82.25

91.20

97.50

  107.75

$378.70

 

 $ 7.50

  8.00

  5.00

  10.00

$30.50

 

$129.38

145.17

147.08

  163.09

$584.72

 

$508.12

576.71

554.30

    549.41

$2,188.54

 

PROBLEM 10-9A (Continued)

(b) Mar. 14 Salaries Expense 2,773.26

CPP Payable 123.53

EI Payable 51.99

Income Tax Payable 378.70

United Way Contributions Payable 30.50

Salaries Payable 2,188.54

14 Employee Benefits Expense 307.25

CPP Payable ($123.53 × 1) 123.53

EI Payable ($51.99 × 1.4) 72.79

Vacation Pay Liability 110.93

Vacation pay liability = $2,773.26 × 4%

(c) Mar. 14 Salaries Payable 2,188.54

Cash 2,188.54

(d) Apr. 15 CPP Payable 

($123.53 + $123.53) 247.06

EI Payable ($51.99 + $72.79) 124.78

Income Tax Payable 378.70

Cash 750.54

PROBLEM 10-9A (Continued)

Taking It Further:

The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll.

A proprietor is not required, nor able, to pay EI on business profit for purposes of collecting employment insurance if he or she is not working. However, a proprietor can choose to pay EI for special benefits such as sickness or maternity benefits. Business profit is considered pensionable earnings for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

PROBLEM 10-10A

(a) 

Feb. 4 Union Dues Payable 1,450

Cash 1,450

7 Disability Insurance Payable 1,280

Life Insurance Payable 855

Cash 2,135

13 CPP Payable 7,887

EI Payable 3,755

Income Tax Payable 16,252

Cash 27,894

20 Workers’ Compensation Payable 4,275

Cash 4,275

28 Salaries Expense 92,600

CPP Payable 4,281

EI Payable 1,695

Income Tax Payable 17,595

Union Dues Payable 1,574

Disability Insurance Payable 1,380

Salaries Payable 66,075

28 Salaries Payable 66,075

Cash 66,075

28 Employee Benefits Expense 15,914

CPP Payable 4,281

EI Payable ($1,695 × 1.4) 2,373

Workers’ Compensation Payable 

($92,600 × 5%) 4,630

Vacation Pay Payable ($92,600 × 4%) 3,704

Life Insurance Payable ($92,600 × 1%) 926

PROBLEM 10-10A (Continued)

(b)

Canada Pension Plan Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  7,887

13 7,887 0

28 4,281 4,281

28 4,281 8,562

Employment Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  3,755

13 3,755 0

28 1,695 1,695

28 2,373 4,068

Income Tax Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  16,252

13 16,252 0

28 17,595 17,595

Workers’ Compensation Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  4,275

20 4,275 0

28 4,630 4,630

PROBLEM 10-10A (Continued)

(b) (Continued)

Union Dues Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  1,450

4 1,450 0

28 1,574 1,574

Life Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  855

7 855 0

28 926 926

Vacation Pay Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  20,520

28 3,704 24,224

Disability Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 1 Balance  1,280

7 1,280 0

28 1,380 1,380

Salaries Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Feb. 28  66,075 66,075

28 66,075 0

PROBLEM 10-10A (Continued)

Taking It Further:

The employee earning record is required to determine the employee’s total earnings for the year and total deductions. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits.

The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

 

PROBLEM 10-11A

(a)

LIGHTHOUSE DISTRIBUTORS

(Partial) Balance Sheet

September 30, 2017

 

Current liabilities

Bank indebtedness $ 62,500

Accounts payable 90,000

Warranty liability 22,500

Property taxes payable 10,000

CPP payable 7,500

EI payable 3,750

Workers’ compensation payable 1,250

Vacation pay payable 13,500

Income tax payable 35,000

HST payable 15,000

Interest payable 10,000

Unearned revenue–loyalty program 5,000

Unearned card revenue 30,000

Current portion of notes payable 12,000

Current portion of mortgage payable     10,000

Total current liabilities $328,000

(b) Current assets:

$182,000 + $275,000 + $12,500 = $469,500

 

Current ratio: 

$469,500 ÷ $328,000 = 1.43:1

Acid-test ratio: 

$182,000 ÷ $328,000 = 0.55:1

PROBLEM 10-11A (Continued)

(c) LightHouse Distributors did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to LightHouse from the bank. LightHouse is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but LightHouse still has $75,000 available in its line of credit for immediate cash needs.

Taking It Further:

The accountant is not correct. Recording a full year of property tax expense when the payment is made, on the basis that the payment is unavoidable is not proper accounting. The property taxes are paid for a full calendar year of services to be delivered by the municipality or city. These services are not obtained at the time of the tax payment. The payment should be allocated to property tax expense in all accounting periods that benefit from the services provided during the year. The expense for property taxes is recognized through the passage of time, evenly over the fiscal year.

 

PROBLEM 10-12A

(a)

MAPLE LEAF FOODS INC.

(Partial) Balance Sheet

December 31, 2014

(in thousands)

 

Current liabilities

Accounts payable and accruals $275,249

Income taxes payable 26,614

Current portion of long-term debt   472

Other current liabilities 24,383

Provisions     60,443

Total current liabilities $387,161

(b) Current assets = $496,328 + $60,396 + $105,743 + $270,401 + $110,209 + $20,157 = $1,063,234

Current ratio: $1,063,234 ÷ $387,161 = 2.75:1

Acid-test ratio: ($496,328 + $60,396 + $110,209) ÷ $387,161 = 1.72:1

(c) Current ratio Dec. 31, 2013:

$1,183,171 ÷ $966,522 = 1.22:1

Acid-test ratio Dec. 31, 2013: ($506,670 + $111,034+ 115,514) ÷ $966,522 = 0.76:1

Both the current ratio and the asset test ratio improved considerably in 2014. 

PROBLEM 10-12A (Continued)

Taking It Further:

In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory.

We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those that can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of Maple Leaf Foods Inc. the acid-test ratio is less than  the current ratio indicating that the company has a high proportion of less liquid current assets.

Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

*PROBLEM 10-13A

ADVANCE \d6(a)

WESTERN ELECTRIC COMPANY

Payroll Register

Week Ended June 9, 2015

Deductions

EmployeeGross Pay

CPPEIFederal Income TaxOntario Income TaxTotal DeductionsNet PayC. Tanm

T. Ng

O. Stavtech

A. Mandell

     Totals $945.00

1,130.00

1,130.00

1,067.00

$4,272.00 $43.45

52.60

52.60

49.48

$198.13¹

²

²

³

$17.77

21.24

21.24

20.06

$80.31⁴

⁵

⁵

⁶

$99.85

125.90

141.50

128.30

$495.55 $52.10

64.45

69.60

    64.10

$250.25 $213.17

264.19

284.94

261.94   

$1,024.24 $731.83

865.81

845.06

  805.06

$3,247.76

1.  CPP = ($945.00 – [$3,500 ÷ 52]) × 4.95% = $43.45

2.  CPP = ($1,130.00 – [$3,500 ÷ 52]) × 4.95% = $52.60

3.  CPP = ($1,067.00 – [$3,500 ÷ 52]) × 4.95% = $49.48

4.  EI = $945.00 × 1.88% = $17.77

5.  EI = $1,130.00 × 1.88% = $21.24

6.  EI = $1,067.00 × 1.88% = $20.06

*PROBLEM 10-13A (Continued)

(b) Semi-monthly Payroll Ended June 15, 2015:

Employee		Annual Salary		Gross Pay		CPP 4.95%		EI 1.88%
S. Goodspeed M. Giancarlo H. Ridley		$43,440 64,770 76,880		$1,810.00 2,698.75 3,203.33		$ 82.38 126.37 151.35	1 2 3	$34.03 50.74 60.22	4 5 6

1.  CPP = ($1,810.00 – [$3,500 ÷ 24]) × 4.95% = $82.38

2.  CPP = ($2,698.75 – [$3,500 ÷ 24]) × 4.95% = $126.37

3.  CPP = ($3,203.33 – [$3,500 ÷ 24]) × 4.95% = $151.35

4.  EI = $1,810.00 × 1.88% = $34.03

5.  EI = $2,698.75 × 1.88% = $50.74

6.  EI = $3,203.33 × 1.88% = $60.22

(c) Pay period in which CPP maximum is reached = Maximum annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). 

Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period).

S. Goodspeed: His annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. He will not reach the maximum CPP and EI payments for 2015.

M. Giancarlo: 

Pay period in which CPP maximum is reached = $2,479.95 ÷ $126.37 = 19.6; rounded up to pay period 20 (October 31).

*PROBLEM 10-13A (Continued)

(c) (Continued)

Pay period in which EI maximum is reached = $930.60 ÷ $50.74 = 18.34; rounded up to pay period 19 (October 15).

H. Ridley: 

Pay period in which CPP maximum is reached = $2,479.95 ÷ $151.35 = 16.39; rounded up to pay period 17 (September 15).

Pay period in which EI maximum is reached = $930.60 ÷ $60.22 = 15.45; rounded up to pay period 16 (August 31).

Taking It Further:

The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company.  The amounts of CPP, EI, and income tax to be deducted are all dependent upon the length of the pay period, thus different tables are required.

 

PROBLEM 10-1B

Feb. 1 Cash 30,000

Notes Payable 30,000

8 Accounts Receivable 16,385

Sales 14,500

HST Payable 1,885

 

14 Salaries Expense 15,000

CPP Payable 692

EI Payable 282

Income Tax Payable 2,700

Salaries Payable 11,326

14 Employee Benefits Expense 1,087

CPP Payable 692

EI Payable ($282 x 1.4) 395

15 Furniture 1,975

Accounts Payable 1,975

21 Salaries Payable 11,326

Cash 11,326

28 Interest Expense 125

Interest Payable 125

($30,000 x 5% x 1/12)

28 Warranty Expense 500

Warranty Liability 500

PROBLEM 10-1B (Continued)

Taking It Further:

The accountant is mostly correct. Accounts payable are an example of a current liability that can be expected to be paid within the next year. However, unearned revenue is a current liability that will not be paid within the year, but can be expected to be extinguished by goods or services being provided.

 

PROBLEM 10-2B

(a)Jan.  1 Cash 30,000

Notes Payable 30,000

5 Cash 11,648

Sales 10,400

GST Payable ($10,400 x 5%) 520

PST Payable ($10,400 x 7%) 728

12 Unearned Revenue 9,000

Service Revenue 8,036

GST Payable 402

PST Payable 562

 

14 GST Payable 5,800

Cash 5,800

20 Accounts Receivable 52,416 Sales (900 X $52) 46,800

GST Payable ($46,800 x 5%) 2,340

PST Payable ($46,800 x 7%) 3,276

25 Cash 20,966

Sales 18,720

GST Payable ($18,720 x 5%) 936

PST Payable ($18,720 x 7%) 1,310

(b)

31 Interest Expense 200

Interest Payable 200

($30,000 x 8% x 1/12)

31 Warranty Expense 2,340

Warranty Liability 2,340

($46,800 x 5%)

PROBLEM 10-2B (Continued)

(c)

EDMISTON SOFTWARE COMPANY

(Partial) Balance Sheet

January 31, 2017

 

Current liabilities

Accounts payable $42,500

GST payable ($520 + $402 + $2,340 + $936) 4,198 PST payable ($728 + $562 + $3,276 + $1,310) 5,876

Interest payable 200

Warranty liability 2,340

Unearned revenue ($15,000 – $9,000) 6,000

Notes payable   30,000

Total current liabilities $91,114

Taking It Further:

James is incorrect. The payroll taxes withheld are amounts that belong to the employee. The employer is instructed by law to take from the gross pay of employees and remit these amounts for income taxes, CPP, and EI to the Receiver General. By doing so, these amounts reach the CPP and EI funds to finance the benefits to which employees are entitled. As well, the remittances represent instalments on individual employees’ tax liability accounts for federal and provincial income taxes withheld. The employer has already recognized the expense as part of the gross salaries paid to the employees.  The gross amount of the salaries is debited to Salaries Expense. The employee benefits are paid by the employer to the Receiver General along with the employer’s portion of CPP and EI payments, which are over and above what has been deducted from the employee’s pay.

 

PROBLEM 10-3B

(a)  (b)  (c) Principal  Date issued RateTerm Current Portion  Non-current Portion  Interest Payable 1 $   25,000 July 1/175.00%9months $  25,000  $            –  $   104.17 ¹2 $   10,000 Sept. 1/174.00%6months $  10,000  $            –  $   133.33 ²3 $   40,000 Nov. 1/174.50%7months $  40,000  $            –  $   300.00 ³4 $   80,000 May 31/173.75%5years $  16,000 $   64,000  $1,750.00 ⁴5 $ 126,000 Oct. 1/174.25%3years $  42,000 ⁷ $   77,000 ⁸ $   421.46 ⁵6 $   50,000 Mar. 31/165.00%4years $  12,500 ⁹ $   25,000 ⁹ $            – ⁶

¹ $104.17 = $25,000 × 5.0% × 1/12 ⁷ current: $42,000 = $3,500 × 12 months

² $133.33 = $10,000 × 4.0% × 4/12 ⁸ non-current: $77,000 = $126,000 – ($3,500 × 2) 

³ $300.00 = $40,000 × 4.5% × 2/12 – $42,000

⁴ $1,750.00 = $80,000 × 3.75% × 7/12 ⁹ non-current: $25,000 = $50,000 – ($12,500 × 2)

⁵ $421.46 = ($126,000 – [2 × $3,500]) × 4.25% × 1/12

⁶ Interest was paid on December 31, 2017

 

PROBLEM 10-3B (Continued)

Taking It Further:

For the maker, a note payable bears interest, which is an additional cost. Some liabilities, such as accounts payable to suppliers, are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal.

For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

 

PROBLEM 10-4B

(a) 2016:

Dec. 1 Interest Expense 

($15,000 × 6% × 1/12) 75

Interest Payable 375

Notes Payable 15,000

Cash 15,450

2017:

Apr. 1 Land 75,000

Notes Payable 75,000

 

Apr. 30 Equipment 8,000

Accounts Payable 8,000

May 31 Accounts Payable 8,000 Notes Payable 8,000

July 1 Interest Expense 1,313

($75,000 × 7% × 3/12) 

Cash 1,313

Aug. 31 Interest Expense 

($8,000 × 8% × 3/12) 160

Note Payable 8,000

Cash 8,160

Oct. 1 Interest Expense

($75,000 × 7% × 3/12) 1,313

Cash 1,313

Oct. 1 Cash 90,000

Notes Payable 90,000

31 Interest Expense 888

[($90,000 × 6% × 1/12) + ($1,313 × ⅓)]

Interest Payable 888

PROBLEM 10-4B (Continued)

(b)

MILEHI MOUNTAIN BIKES

(Partial) Balance Sheet

October 31, 2017

 

Current liabilities

Notes payable $75,000

Current portion of long-term notes payable 18,000

Interest payable       888

Total current liabilities 93,888

Long-term liabilities

Notes payable $90,000

Less current portion   (18,000 ) 72,000

(c)

MILEHI MOUNTAIN BIKES

(Partial) Income Statement

Year ended October 31, 2017

 

Other expenses

Interest expense $3,749*

*($75 + $1,313 + $160 + $1,313 + $888) 

Taking It Further:

Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the current maturity of the portion of long-term debt that is repayable in the current term. This classification is important because it shows the amount that must be settled within one year, which is an important factor in evaluating the company’s liquidity.

 

PROBLEM 10-5B

 (a) Jan. 5 Cash 17,854

Sales 15,800

HST Payable ($15,800 × 13%) 2,054

 

12 Unearned Revenue 7,000

HST Payable 805

Service Revenue                       6,195

14 HST Payable 11,390

Cash 11,390

15 CPP Payable 2,152

EI Payable 1,019

Income Tax Payable 4,563

Cash 7,734

16 Cash 18,000

Notes Payable 18,000

17 Accounts Payable 35,000

Cash 35,000

20 Accounts Receivable 33,900

Sales (500 × $60) 30,000

HST Payable ($30,000 × 13%) 3,900

30 Unearned Revenue- Loyalty 

  Program 1,750

HST Payable ($1,549 × 13%) 201

Service Revenue ($1,750 ÷ 1.13) 1,549

PROBLEM 10-5B (Continued)

(a) (Continued)

Jan. 31   Cash 500,000

Sales 495,050

Unearned Revenue–Loyalty Program 4,950

 

Stand-alone sales $500,000

Stand-alone value of loyalty points

(50,000 × 10% × $1)       5,000 

Total Value $505,000

Allocate as follows:

Earned revenue = ($500,000/$505,000) x $500,000 = $495,050

Unearned revenue = ($5,000/$505,000) x $500,000 = $4,950

31 Warranty Liability 875

Repair Parts Inventory 875

31 Salaries Expense 25,350

CPP Payable 1,183

EI Payable 464

Income Tax Payable 4,563

Salaries Payable 19,140

31 Salaries Payable 19,140

Cash 19,140

(b) Jan. 31 Interest Expense 45

Interest Payable 45

[($18,000 × 6% × 1/12) × 1/2]

31 Warranty Expense 300

Warranty Liability 300

(500 × 6% × $10)

31 Employee Benefits Expense 2,847

CPP Payable 1,183

EI Payable ($464 × 1.4) 650

Vacation Pay Payable ($25,350 × 4%) 1,014

PROBLEM 10-5B (Continued)

(c)

ZAUR COMPANY

(Partial) Balance Sheet

January 31, 2017

 

Liabilities

Current liabilities

Accounts payable ($63,700 – $35,000) $28,700

Notes payable 18,000

Vacation pay liability ($9,120 + $1,014) 10,134

Unearned revenue ($16,000 – $7,000) 9,000

Unearned revenue–loyalty program ($2,150 – $1,750 

+ $4,950) 5,350

     HST payable ($11,390 + $2,054 + $805 – $11,390 

+ $3,900 + $201) 6,960

Warranty liability ($5,750 – $875 + $300) 5,175

Income tax payable ($4,563 – $4,563 + $4,563) 4,563

CPP payable ($2,152 – $2,152 + $1,183 + $1,183) 2,366

EI payable ($1,019 – $1,019 + $464 + $650) 1,114

Interest payable         45

Total current liabilities $91,407

Taking It Further:

Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries Payable are credited.

 

PROBLEM 10-6B

(a) Warranty expense

2015 – (1,200 × 5% × $25) = $1,500

2016 – (1,320 × 5% × $25) = $1,650

2017 – (1,420 × 5% × $25) = $1,775

Warranty liability at year end

2015 – ($0 – $1,275 + $1,500) = $225

2016 – ($225 – $1,600 + $1,650) = $275

2017 – ($275 – $1,960 + $1,775) = $90

Note: See analysis of Warranty Liability account in (b) below.

(b)

2015

Warranty Liability 1,275

Repair Parts Inventory 1,275

Dec. 31 Warranty Expense (1,200 × 5% × $25) 1,500

Warranty Liability 1,500

2016

Warranty Liability 1,600

Repair Parts Inventory 1,600

Dec. 31 Warranty Expense (1,320 × 5% × $25) 1,650

Warranty Liability 1,650

2017

Warranty Liability 1,960

Repair Parts Inventory 1,960

Dec. 31 Warranty Expense (1,420 × 5% × $25) 1,775

Warranty Liability 1,775

PROBLEM 10-6B (Continued)

(b) (Continued)

Warranty Liability
Date	Explanation	Ref.	Debit	Credit	Balance

2015

During 1,275 1,275 Dr

Dec. 31 1,500 225

2016

During 1,600 1,375 Dr

Dec. 31 1,650 275

2017

During 1,960 1,685 Dr

Dec. 31 1,775 90

(c) Percentage of units returned for repair =

Number of units returned ÷ Number of units sold

Returned Sold

2015 60 1,200

2016 70 1,320

2017   80 1,420

210 3,940

Percentage returned = 210 ÷ 3,940 = 5.3%

Average actual warranty cost per unit =

Total actual warranty costs ÷ Total units returned

Actual costs

2015 $1,275

2016 1,600

2017   1,960

$4,835

Average warranty cost over the three-year period: 

$4,835 ÷ 210 = $23

PROBLEM 10-6B (Continued)

Taking It Further:

Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $275. The revised warranty expense for 2017 is calculated as follows:

Warranty expense 2017:

1,420 × 7% × $25 = $2,485

Warranty liability at December 31, 2017:

$275 – $1,960 + $2,485 = $800

 

PROBLEM 10-7B

(a) 1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues

        2. Increases revenues and profit

3. No effect on revenues, expenses, and profit

4. Increases revenues, expenses (cost of goods sold), and profit

2016:

1. Cash 1,050,000

Sales 1,037,037

Unearned Revenue–Loyalty Program 12,963

Stand-alone gas sales $1,050,000

Stand-alone value of loyalty coupons

(750,000 × $0.025 x 70%)       13,125 Total Value $1,063,125

Allocate as follows:

Earned revenue= ($1,050,000/$1,063,125) x $1,050,000 = $1,037,037

Unearned revenue= ($13,125/$1,063,125) x $1,050,000 = $12,963

 

 

2. Unearned Revenue–Loyalty Program 5,950

Revenue from Rewards Program 5,950

 

PROBLEM 10-7B (Continued)

(b)  (Continued)

2017:

3. Cash 1,255,000

Sales 1,240,983

Unearned Revenue–Loyalty Program 14,017

Stand-alone gas sales $1,255,000

Stand-alone value of loyalty coupons

(810,000 × $0.025 x 70%)       14,175 Total Value $1,269,175

Allocate as follows:

Earned revenue= ($1,255,000/$1,269,175) x $1,255,000 = $1,240,983

Unearned revenue= ($14,175 /$1,269,175) x $1,255,000 = $14,017

4. Unearned Revenue–Loyalty Program 9,500

Revenue from Rewards Program 9,500

5. Cash 3,950

Unearned Revenue 3,950

Unearned Revenue 1,500

Sales 1,500

PROBLEM 10-7B (Continued)

(c) 

Unearned Revenue–Loyalty Program
Date	Explanation	Ref.	Debit	Credit	Balance

2016

During 12,963 12,963

Dec. 31 5,950 7,013

2017

During 14,017 21,030

Dec. 31 9,500 11,530

Unearned Revenue
Date	Explanation	Ref.	Debit	Credit	Balance

2017

During 3,950 3,950

Dec. 31 1,500 2,450

 

Taking It Further:

Management should consider the following factors:

The historical rate of redemption on the service coupons should be reviewed and revised as needed to ensure an appropriate amount of revenue is being recorded and an appropriate amount of revenue is being deferred. 

 The likelihood of redemption of the gift cards. Factors such as long periods of inactivity by customers, or low residual balances increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where the likelihood of use is remote should be transferred to a revenue account.

 

PROBLEM 10-8B

1. Note disclosure: Since the amount of the liability cannot be reliably measured, the lawsuit cannot be recorded, but it should be disclosed.

2. It appears that it is unlikely that Big Fork will lose the lawsuit; therefore the company does not need to record or report it in the notes to the financial statements. If the loss from the lawsuit could have a substantial negative effect on the company’s financial position, then note disclosure is still desirable.

3. Accrue in the financial statements: It appears likely that the company will lose this claim as it was at fault and the claim of $250,000 appears to be a reasonable estimate.

Taking It Further:

Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. This allows users of financial statements to make better informed decisions. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are likely and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

PROBLEM 10-9B

ADVANCE \d6(a)

SCOOT SCOOTERS

Payroll Register

Week Ended February 17, 2015

Earnings

Deductions

EmployeeHoursRegularOvertimeGross Pay

CPPEIIncome TaxUnited WayTotalNet PayP. Kilchyk

B. Quon

C. Pospisil

B. Verwey

     Totals40

42

40

44$610.00

600.00

650.00

    580.00

$2,440.000

$45.00

0

    87.00

$132.00$610.00

645.00

650.00

   667.00

$2,572.00$26.86

28.60

28.84

   29.68

$113.98$11.16

11.80

11.90

 12.21

$47.07$76.60

83.70

84.10

 87.10

$331.50$5.00

7.25

5.50

   8.25

$26.00$119.62

131.35

130.34

137.24

$518.55$490.38

513.65

519.66

     529.76

$2,053.45PROBLEM 10-9B (Continued)

(b) Feb. 15 Salaries Expense 2,572.00

CPP Payable 113.98

EI Payable 47.07

Income Tax Payable 331.50

United Way Contributions Payable 26.00

Salaries Payable 2,053.45

15 Employee Benefits Expense 282.76

CPP Payable 113.98

EI Payable ($47.07 × 1.4) 65.90

Vacation Pay Payable 102.88

($2,572.00 × 4%)

ADVANCE \d6(c) Feb. 17 Salaries Payable 2,053.45

Cash 2,053.45

ADVANCE \d6(d) Mar. 15 CPP Payable ($113.98 + $113.98) 227.96

EI Payable ($47.07 + $65.90) 112.97

Income Tax Payable 331.50

Cash 672.43

PROBLEM 10-9B (Continued)

Taking It Further:

The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll.

Business profit is not considered insurable profit for EI purposes, so no EI is deducted from business profit or drawings. Business profit is considered pensionable profit for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

 

PROBLEM 10-10B

(a) 

Apr. 4 Union Dues Payable 1,285

Cash 1,285

7 Disability Insurance Payable 1,134

Life Insurance Payable 756

Cash 1,890

13 CPP Payable 6,907

EI Payable 3,320

Income Tax Payable 14,364

Cash 24,591

20 Workers’ Compensation Payable 3,780

Cash 3,780

28 Salaries Expense 83,160

CPP Payable 3,799

EI Payable 1,522

Income Tax Payable 15,800

Union Dues Payable 1,414

Disability Insurance Payable 1,247

Salaries Payable 59,378

28 Salaries Payable 59,378

Cash 59,378

28 Employee Benefits Expense 14,246

CPP Payable 3,799

EI Payable ($1,522 × 1.4) 2,131

Workers’ Compensation Payable 

($83,160 × 5%) 4,158

Vacation Pay Payable ($83,160 × 4%) 3,326

Life Insurance Payable ($83,160 × 1%) 832

PROBLEM 10-10B (Continued)

(b)

Canada Pension Plan Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  6,907

13 6,907 0

28 3,799 3,799

28 3,799 7,598

Income Tax Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  14,364

13 14,364 0

28 15,800 15,800

Employment Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  3,320

13 3,320 0

28 1,522 1,522

28 2,131 3,653

Workers’ Compensation Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  3,780

20 3,780 0

28 4,158 4,158

PROBLEM 10-10B (Continued)

(b) (Continued)

Union Dues Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  1,285

4 1,285 0

28 1,414 1,414

Disability Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  1,134

7 1,134 0

28 1,247 1,247

Vacation Pay Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  3,024

28 3,326 6,350

Life Insurance Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  756

7 756 0

28 832 832

Salaries Payable
Date	Explanation	Ref.	Debit	Credit	Balance

Apr. 1 Balance  0

28 59,378 59,378

28 59,378 0

PROBLEM 10-10B (Continued)

Taking It Further:

The employee earning record is required to determine the employee’s total earnings and total deductions for the year. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits purposes.

The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

 

PROBLEM 10-11B

(a)

CREATIVE CARPENTRY

(Partial) Balance Sheet

March 31, 2017

 

Current liabilities

Bank indebtedness $ 55,200

Accounts payable 60,000

Warranty liability 12,500

CPP payable 2,300

EI payable 1,750

Vacation pay payable 1,200

Income tax payable 25,000

HST payable 12,250

Interest payable 8,000

Unearned revenue 9,385

Notes payable 30,000

Current portion of mortgage payable     50,000

Total current liabilities $267,585

(b) Current assets:

$184,000 + $120,600 + $500 = $305,100

 

Current ratio: 

$305,100 ÷ $267,585 = 1.14:1

Acid-test ratio: 

$184,000 ÷ $267,585 = 0.69:1

PROBLEM 10-11B (Continued)

(c) Creative Carpentry did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to Creative from the bank. Creative is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but Creative still has $25,000 available in its line of credit for immediate cash needs.

Taking It Further:

When customers purchase gift cards from Creative Carpentry, no goods or services have yet been delivered by the business to earn the cash obtained. Consequently, the amount received for the gift cards is initially recorded to the Unearned Revenue account. Later on, when the card is redeemed, the Unearned Revenue account is reduced for the value redeemed and revenue is recorded, along with sales taxes if applicable. This fulfills the revenue recognition principle of accounting and provides a fair reporting of when revenue is being earned.

 

PROBLEM 10-12B

(a)

BCE INC.

(Partial) Balance Sheet

December 31, 2014

(in millions of dollars)

 

Current liabilities

Trade payables and other liabilities $4,398

Current tax liabilities 269

Dividends payable 534

Interest payable 145

Debt due within one year   3,743

Total current liabilities $9,089

(b) Current assets:

$142 + $424 + $333 + $198 + $379 + $3,069 = $4,545

Current ratio: 

$4,545 ÷ $9,089 = 0.50:1

Acid-test ratio: 

($142 + $424 + $3,069) ÷ $9,089 = 0.40:1

(c) Current ratio Dec. 31, 2013:

$5,070 ÷ $7,890 = 0.64:1

Acid-test ratio Dec. 31, 2013: ($335 + $3,043) ÷ $7,890 = 0.43:1

Both the current and acid-test ratios weakened in 2014.

PROBLEM 10-12B (Continued)

Taking It Further:

In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory.

We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those than can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of BCE Inc. the acid-test and current ratios are relatively close, indicating that the company has a high proportion of liquid current assets.

Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

*PROBLEM 10-13B

ADVANCE \d6(a)

SLOVAK PLUMBING COMPANY

Payroll Register

Week Ended May 12, 2015

			Deductions
Employee	Gross Pay	CPP		EI		Federal Income Tax	Ontario Income Tax	Total Deductions	Net Pay
D. Quinn K. Holub A. Lowhorn I. Kostra      Totals	$985.00 1,037.00 1,080.00   950.00 $4,052.00	$45.43 48.00 50.13   43.69 $187.25	1 2 3 4	$18.52 19.50 20.30 17.86 $76.18	5 6 7 8	$111.45 113.65 130.95   87.40 $443.45	$56.70 57.90 65.20   48.70 $228.50	$232.10 239.05 266.58 197.65 $935.38	$752.90 797.95 813.42   752.35 $3,116.62

1.  CPP = ($985.00 – [$3,500 ÷ 52]) × 4.95% = $45.43

2.  CPP = ($1,037.00 – [$3,500 ÷ 52]) × 4.95% = $48.00

3.  CPP = ($1,080.00 – [$3,500 ÷ 52]) × 4.95% = $50.13

4.  CPP = ($950.00 – [$3,500 ÷ 52]) × 4.95% = $43.69

5.  EI = $985.00 × 1.88% = $18.52

6.  EI = $1,037.00 × 1.88% = $19.50

7.  EI = $1,080.00 × 1.88% = $20.30

8.  EI = $950.00 × 1.88% = $17.86

*PROBLEM 10-13B (Continued)

(b) Semi-monthly Payroll Ended May 15, 2015:

Employee		Annual Salary		Gross Pay		CPP 4.95%		EI 1.88%
B. Dolina H. Koleno A. Krneta		$80,700 62,500 44,120		$3,362.50 2,604.17 1,838.33		$159.23 121.69 83.78	1 23	$63.22 48.96 34.56	4 5 6

1.  CPP = ($3,362.50 – [$3,500 ÷ 24]) × 4.95% = $159.23

2.  CPP = ($2,604.17 – [$3,500 ÷ 24]) × 4.95% = $121.69

3.  CPP = ($1,838.33 – [$3,500 ÷ 24]) × 4.95% = $83.78

4.  EI = $3,362.50 × 1.88% = $63.22

5.  EI = $2,604.17 × 1.88% = $48.96

6.  EI = $1,838.33 × 1.88% = $34.56

(c) Pay period in which CPP maximum is reached = Maximum annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). 

Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period).

B. Dolina: 

Pay period in which CPP maximum is reached = $2,479.95 ÷ $159.23 = 15.57; rounded up to pay period 16 (August 31).

Pay period in which EI maximum is reached = $930.60 ÷ $63.22 = 14.72; rounded up to pay period 15 (August 15).

*PROBLEM 10-13B (Continued)

(c) (Continued)

H. Koleno: 

Pay period in which CPP maximum is reached = $2,479.95 ÷ $121.69 = 20.38; rounded up to pay period 21 (November 15).

Pay period in which EI maximum is reached = $930.60 ÷ $48.96 = 19.01; rounded up to pay period 20 (October 31).

A. Krneta: Her annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. She will not reach the maximum CPP and EI payments for 2015.

Taking It Further:

The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts deducted for CPP, EI, and income taxes depends on the length of the pay period, thus different tables are necessary.

 

CUMULATIVE COVERAGE: CHAPTERS 3 TO 10

(a)

1. July 31 Operating Expenses 50

Accounts Receivable 650

Cash 700

2. 31 Bad Debt Expense 1,850

Allowance for Doubtful Accounts

($3,850 − $2,000) 1,850

3. 31 Interest Receivable 67

Interest Revenue

($10,000 × 8% × 1/12 months) 67

4. 31 Cost of Goods Sold 6,700

Merchandise Inventory 

($45,900 − $39,200) 6,700

5. 31 Operating Expenses 5,500

Prepaid Expenses 5,500

6. 31 Depreciation Expense

($5,600 + $5,120) 10,720

Amortization Expense 15,000

Accumulated Depreciation

—Building 5,600

Accumulated Depreciation

—Equipment 5,120

Accumulated Amortization

—Patent 15,000

Calculations

Building ($155,000 − $15,000) ÷ 25 years = $5,600

Equipment ($25,000 − $12,200) × 40%* = $5,120

*(2 × 1 ÷ 5 years)

Patent $75,000 ÷ 5 years = $15,000

CUMULATIVE COVERAGE (Continued)

(a) (Continued)

7. July 31 Interest Expense 621

Interest Payable

($124,200 × 6% × 1/12) 621

8. 31 Operating Expenses 1,975

Warranty Liability 1,975

CUMULATIVE COVERAGE (Continued)

(b)

LEBRUN COMPANY

Adjusted Trial Balance

July 31, 2017

 

Debit Credit

Cash $   15,850

Petty cash 200

Accounts receivable 39,150

Allowance for doubtful accounts $   3,850

Note receivable 10,000

Interest receivable 67

Merchandise inventory 39,200

Prepaid expenses 10,500

Land 50,000

Building 155,000

Accumulated depreciation—building 16,400

Equipment 25,000

Accumulated depreciation—equipment 17,320

Patent 75,000

Accumulated amortization—patent 30,000

Accounts payable 78,900

Interest payable 621

Warranty liability 7,975

Note payable 124,200

S. LeBrun, capital 124,700

S. LeBrun, drawings 54,000

Sales 750,000

Cost of goods sold 456,700

Bad debt expense 1,850

Operating expenses 188,745

Amortization expense 15,000

Depreciation expense 10,720

Interest revenue 467

Interest expense         7,451 _________

Total $1,154,433 $1,154,433

See the following page for calculations.

CUMULATIVE COVERAGE (Continued)

(b) This format not required but is presented to show calculations. 

Account	Unadjusted Trial Balance	Adjustments	Adjusted Trial Balance
	Dr.	Cr.	Dr	Cr.	Dr.	Cr.
Cash	16,550			(1)  700	15,850
Petty cash	200				200
Accounts receivable	38,500		(1)  650		39,150
Allowance for doubtful accounts		2,000		(2) 1,850		3,850
Note receivable	10,000				10,000
Interest receivable			(3)   67		67
Merchandise inventory	45,900			(4) 6,700	39,200
Prepaid expenses	16,000			(5) 5,500	10,500
Land	50,000				50,000
Building	155,000				155,000
Accumulated depreciation—building		10,800		(6) 5,600		16,400
Equipment	25,000				25,000
Accumulated depreciation—equipment		12,200		(6) 5,120		17,320
Patent	75,000				75,000
Accumulated amortization—patent		15,000		(6)15,000		30,000
Accounts payable		78,900				78,900

CUMULATIVE COVERAGE (Continued)

(b) (Continued)

Account	Unadjusted Trial Balance	Adjustments	Adjusted Trial Balance
	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
Interest payable				(7)  621		621
Warranty liability		6,000		(8) 1,975		7,975
Note payable		124,200				124,200
S. LeBrun, capital		124,700				124,700
S. LeBrun, drawings	54,000				54,000
Sales		750,000				750,000
Cost of goods sold	450,000		(4) 6,700		456,700
Bad debt expense			(2) 1,850		1,850
Operating expenses	181,220		(5) 5,500 (8) 1,975 (1)      50		188,745
Amortization expense			(6)15,000		15,000
Depreciation expense			(6)10,720		10,720
Interest revenue		400		(3)    67		467
Interest expense	6,830		(7)    621		7,451
Total	1,124,200	1,124,200	43,133	43,133	1,154,433	1,154,433

CUMULATIVE COVERAGE (Continued)

(c)

LEBRUN COMPANY

Income Statement

Year Ended July 31, 2017

ADVANCE \u7

ADVANCE \d6Sales revenues

Sales $750,000

Cost of goods sold   456,700

Gross profit 293,300

Operating and other expenses

Operating expenses $188,745

Amortization expense 15,000

Depreciation expense 10,720

Bad debt expense     1,850

Total expenses 0 216,315

Profit from operations 76,985

Other revenues

Interest revenue   467

Other expenses

Interest expense   7,451     6,984

Profit $70,001

LEBRUN COMPANY

Statement of Owner’s Equity

Year Ended July 31, 2017

ADVANCE \u7

ADVANCE \d6S. LeBrun, capital, August 1, 2016 $124,700

Add: Profit     70,001

194,701

Less: Drawings     54,000

S. LeBrun, capital, July 31, 2017 $140,701

CUMULATIVE COVERAGE (Continued)

(c) (Continued)

LEBRUN COMPANY

Balance Sheet

July 31, 2017

 

Assets

Current assets

Cash ($15,850 + $200) $  16,050

Accounts receivable $39,150

Less: Allowance for doubtful accounts     3,850 35,300

Note receivable 10,000

Interest receivable 67

Merchandise inventory 39,200

Prepaid expenses   10,500

Total current assets 111,117

Property, plant, and equipment

Land 50,000

Building $155,000

Less: Accumulated depreciation     16,400 138,600

Equipment 25,000

Less: Accumulated depreciation   17,320     7,680 196,280

 

Intangible assets

Patent 75,000

Less: Accumulated amortization   30,000     45,000

Total assets $352,397

CUMULATIVE COVERAGE (Continued)

(c) (Continued)

LEBRUN COMPANY

Balance Sheet (Continued)

July 31, 2017

 

Liabilities and Owner’s Equity

Current liabilities

Accounts payable $ 78,900

Interest payable 621

Warranty liability 7,975

Current portion of note payable     1,680

Total current liabilities 89,176

Long-term liabilities

Note payable ($124,200 − $1,680) 122,520

Total liabilities 211,696

Owner’s equity

S. LeBrun, capital   140,701

Total liabilities and owner’s equity $352,397

BYP10-1 FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at August 31, 2014, were $175,725,000. There was a $7,341,000 increase from the previous year ($175,725,000 – $168,384,000), which was equivalent to a 4.4% increase ($7,341,000 ÷ $168,384,000).

The first of two components of total current liabilities on August 31, 2014 was accounts payable and accrued liabilities for the lion’s share of the total followed by a modest amount for provisions. Since provisions usually involve estimates, the order used by Corus was liquidity order.

ADVANCE \d6(c) Current ratio: 2014

$217,394,000 ÷ $175,725,000 = 1.24:1

Current ratio: 2013

$310,070,000 ÷ $168,384,000 = 1.84:1

 

Receivables turnover: 2014

$833,016,000 ÷ [($183,009,000 + $164,302,000) ÷ 2] = 4.8 times 

Receivables turnover: 2013

$751,536,000 ÷ [($164,302,000 + $163,345,000) ÷2] = 4.6 times 

While the current ratio has deteriorated substantially, showing poor liquidity, the receivables turnover is very similar and slightly better than 2013.

ADVANCE \d6(d) As footnoted at the bottom of the Consolidated Statement of Financial Position, Corus directs us to the discussion of contingencies in note 27 to its financial statements.  A very short paragraph describes litigation matters arising out of the ordinary course and conduct of the business. In management’s opinion, the exposure from these matters is considered not material to the financial statements.

 

BYP10-2 INTERPRETING FINANCIAL STATEMENTS

Loblaw does not accrue legal proceedings, as they are not expected to have a material impact on the reported results. It also does not accrue the class action proceedings as the company cannot predict the outcome with certainty. These class action proceedings however, if successful, would result in material losses for the company and it is desirable to disclose these items because they would have a substantial negative effect on the company’s financial position.

 

BYP10-3 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

 

BYP10-4 COMMUNICATION ACTIVITY

RE: Accounting for Gift Certificates

TO: Show_Time_Movie_Theatre@gmail.com

FROM: Student@gmail.com

DATE:

In response to your request, I wish to answer your questions regarding the accounting for gift certificates in your theatre.

A liability is recorded when these certificates are sold because there is still a service to be provided by the theatre. The certificates sold are considered unearned revenue until they are redeemed and the service provided. At this point, the theatre’s obligation is fulfilled and the amounts can be transferred from a liability account to a revenue account.

The foregoing applies even though the gift certificates may, as you suggest, also generate additional revenues for the theatre.

Since the gift certificates have no expiry date, the theatre will always have a liability for any gift certificates produced and redeemed. However, based upon the experience of your theatre and the theatre industry in general, estimates could be developed for the proportion of gift certificates that will never be redeemed.

An entry would be made to reduce the liability related to unearned revenue, and to record the estimated amount that will never be redeemed as earned (or perhaps as a gain), rather than carrying an unlikely liability on your books in perpetuity.

BYP10-5 “ALL ABOUT YOU” ACTIVITY

(a) Some of the factors to consider in determining if a worker is an employee or self-employed include:

the level of control the payer has over the worker;

whether or not the worker provides the tools and equipment;

whether the worker can subcontract the work or hire assistants;

the degree of financial risk taken by the worker;

the degree of responsibility for investment and management held by the worker;

the worker’s opportunity for profit; and

any other relevant factors, such as written contracts.

(b) The amount of cash received each month is the gross pay less the payroll deductions:

Gross pay: $3,000.00

Less:

CPP Contribution $134.06

EI Contribution 54.90

Income taxes   409.35     598.31

Cash received (net pay) $2,401.69

The total amount of cash received in a year:

Annual salary ($3,000 × 12) $36,000.00

Less deductions:

CPP Contribution ($134.06 × 12) 1,608.72

EI Contribution ($54.90 × 12) 658.80

Income tax ($409.35 × 12)     4,912.20

Cash received (net pay) $28,820.28

BYP 10-5 (Continued)

(c) The total CPP paid in the year will be $134.06 × 12 = $1,608.72. Since the employee’s annual salary of $36,000 is less than the 2015 maximum pensionable earnings of $53,600, the employee will not reach the maximum annual contribution.

The total EI paid in the year will be $54.90 × 12 = $658.80. The employee’s annual salary is less than the 2015 maximum insurable earnings of $49,500, so the maximum annual employee EI premium will not be reached.

(d) If you are self-employed, you will receive the full $3,000 each month. As a self-employed individual, you will be responsible for making periodic instalmentt payments to CRA for personal income tax. The amount paid in income taxes may differ depending on the expenses that you may be able to claim as a self-employed individual.

If no expenses are claimed, the amount of CPP paid in a year will include the employee and the employer portion as follows: $1,608.72 × 2 = $3,217.44

If no expenses are claimed, and the individual has chosen to pay EI, the amount of EI paid in a year will include only the employee’s contribution of $658.80.

BYP 10-5 (Continued)

(e) Consulting revenue ($3,000 × 12) $36,000.00

Less deductions:

Income tax ($409.35 × 12) 4,912.20

CPP Contribution ($134.06 × 12 × 2)     3,217.44

Net pay $27,870.36

Based on the calculations in (c) and (e), it is preferable to be an employee because the net pay is higher.

The answer to (f) may change if there is more than one client. It would be likely that additional expenses, such as travelling to the client’s location would be incurred. As a self-employed consultant, these costs could be deductible for income tax purposes and could decrease the amount of taxes paid.

 

BYP10-6 Santé Smoothie Saga

1. The cash from the sale of gift certificates must be recorded as unearned revenue. Unearned revenue represents cash payments received in advance of earning the revenue because the service or goods has not been provided to the customer.  With a gift certificate, Natalie’s business owes a recipe book and all of the supplies needed to create two cups of smoothies. This is the same rationale as deposits received for pre-made smoothies.

2. If the sale of gift certificates is recorded as revenue, revenues on the income statement will be overstated and profit will also be overstated. The revenue is not earned until the recipe book and supplies are provided to customers. The gift certificate does not represent a good or service but rather an entitlement to receive goods in the future when they are redeemed.

If the gift certificates are never used, Natalie will need to use her past experience to determine what her liability is and the likelihood of the older gift certificates being redeemed. She can then recognize revenue on gift certificates unlikely to be redeemed.

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