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Weygandt, Kieso, Kimmel, Trenholm, Kinnear

Accounting Principles, Fifth Canadian Edition

CHAPTER 10
Current Liabilities and Payroll
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives 1. Account for determinable or certain current liabilities. 2. Account for estimated liabilities. 3. Account for contingencies. 4. Prepare payroll costs and record payroll transactions. 5. Prepare the current liabilities section of the balance sheet. *6. Calculate mandatory payroll deductions (Appendix 10A). Questions 1, 2, 3, 4, 5, 6, 12 Brief Exercises 1, 2, 3, 4, 14 Exercises 1, 2, 3, 4, 5, 9, 13 Problems Set A 1, 2, 3 Problems Set B 1, 2, 3

7, 8, 9, 10, 11, 12 12, 13, 14, 15, 16, 17 18, 19, 20, 21, 22, 23 24, 25, 26, 27

5, 6, 7, 8, 14 9, 10, 14

6, 7, 8, 9, 13 9, 10, 13

1, 3, 4, 5

1, 3, 4, 5

1, 6, 7

1, 6, 7

11, 12, 13, 14, *18 14, 15

11, 12, 13, *15 5, 14

1, 3, 8, 9

1, 3, 8, 9

1, 2, 3, 6, 7, 10

1, 2, 3, 6, 7, 10

*28, *29

*16, *17, *18

*15, *16

*11

*11

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear

Accounting Principles, Fifth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE


Problem Number 1A 2A Description Identify liabilities. Record note transactions; show financial statement presentation. Record current liability transactions; prepare current liabilities section. Record warranty transactions. Record customer loyalty program and gift card transactions; determine impact on financial statements. Discuss reporting of contingent liabilities and assets. Discuss reporting of contingent liability and asset. Prepare payroll register and record payroll. Record and post payroll transactions. Prepare current liabilities section; calculate and comment on ratios. Calculate payroll deductions. Identify liabilities. Record note transactions; show financial statement presentation. Record current liability transactions; prepare current liabilities section. Record warranty transactions. Record customer loyalty program and gift card transactions; determine impact on financial statements. Discuss reporting of contingent liabilities and assets. Discuss reporting of contingent asset. Prepare payroll register and record payroll. Difficulty Level Simple Moderate Time Allotted (min.) 10-15 30-40

3A

Moderate

30-40

4A 5A

Moderate Moderate

15-25 15-25

6A 7A 8A 9A 10A

Moderate Simple Moderate Moderate Moderate

15-25 10-15 25-35 25-35 15-25

*11A 1B 2B

Moderate Simple Moderate

25-35 10-15 30-40

3B

Moderate

30-40

4B 5B

Moderate Moderate

15-25 15-25

6B 7B 8B

Moderate Simple Moderate

15-25 10-15 25-35

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear

Accounting Principles, Fifth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE


Problem Number 9B 10B Description Record and post payroll transactions. Prepare current liabilities section; calculate and comment on ratios. Calculate payroll deductions. Difficulty Level Moderate Moderate Time Allotted (min.) 25-35 15-25

*11B

Moderate

25-35

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear

Accounting Principles, Fifth Canadian Edition

BLOOMS TAXONOMY TABLE


Correlation Chart between Blooms Taxonomy, Study Objectives and End-ofChapter Material
Study Objectives 1. Account for determinable or certain current liabilities. Knowledge Comprehension
Q10-1 Q10-2 Q10-3 Q10-12 BE10-14 Q10-4 Q10-5 Q10-6 E10-9

Application
BE10-1 BE10-2 BE10-3 BE10-4 E10-1 E10-2 E10-3 E10-4 BE10-5 BE10-6 BE10-7 BE10-8 E10-6 E10-7 E10-8 E10-13 BE10-10 E10-10 E10-13 P10-1A P10-6A P10-7A E10-5 E10-13 P10-1A P10-2A P10-3A P10-1B P10-2B P10-3B P10-1A P10-3A P10-4A P10-5A P10-1B P10-3B P10-4B P10-5B P10-1B P10-6B P10-7B

Analysis

Synthesis

Evaluation

2. Account for estimated liabilities.

Q10-12 BE10-14

Q10-7 Q10-8 Q10-9 Q10-10 Q10-11 E10-9

3. Account for contingencies.

Q10-12 BE10-14

4. Determine payroll costs and record payroll transactions.

Q10-21 Q10-23 BE10-14

Q10-13 Q10-14 Q10-15 Q10-16 Q10-17 BE10-9 E10-9 Q10-18 Q10-19 Q10-20 Q10-22

5. Prepare the current liabilities section of the balance sheet.

Q10-24 Q10-25 Q10-26 Q10-27 BE10-14

*6. Calculate mandatory payroll deductions (Appendix 10A). Broadening Your Perspective

*Q10-28 *Q10-29

BE10-11 P10-3A BE10-12 P10-8A BE10-13 P10-9A *BE10-18 P10-1B E10-11 P10-3B E10-12 P10-8B E10-13 P10-9B *E10-15 P10-1A BE10-15 P10-1B E10-5 P10-2B E10-14 P10-3B P10-1A P10-6B P10-2A P10-7B P10-3A P10-10B P10-6A P10-7A P10-10A *BE10-16 *P10-11A *BE10-17 *P10-11B *BE10-18 *E10-15 *E10-16 Continuing Cookie Chronicle Cumulative Coverage Chapters 3 10 BYP10-3 BYP10-4

BYP10-1

BYP10-2 BYP10-5 BYP10-6

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ANSWERS TO QUESTIONS
1. 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. (a) Notes payable differ from accounts payable in that notes have written legal documentation that make collection easier if legal action is necessary. In addition, most notes are interest bearing. Notes also can extend for longer periods of time than accounts payable. Accounts payable and notes payable are similar in that they are both promises to pay an amount in the future. Accounts payable and notes payable that result from purchase transactions are also known as trade payables. (b) A note is different than an operating line of credit in that a note is for a fixed amount and is repayable on a specific date. An operating line of credit is a pre-authorized loan from the bank that can be drawn down and repaid as required. Both lines of credit and notes payable may require collateral. Both are obligations to pay an amount in the future. 3. 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. 4. Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as revenue; it reports sales taxes as a current liability because it must forward the amount paid by the customer to the government.

2.

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QUESTIONS (Continued)
5. The property tax bill for the calendar year is usually not known until the spring. If a company has a year-end prior to receiving the property tax bill, it would have to accrue an expense and estimated liability (for the months in the current calendar year) based on last years property tax bill. Otherwise, most companies would wait until they receive the property tax bill, and record property tax expense and property tax payable (a current liability) for the number of months in the year to date. When the property tax bill is paid, the liability will disappear and the company will record property tax expense for any intervening period of time and prepaid property tax (a current asset) for the remaining months in the year. As time passes, the company would record the property tax expense and credit the prepaid property tax account. 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. I dont agree. Although you dont 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. Estimated warranty liability is the estimated cost of servicing a products warranty. Actual warranty costs incurred are costs for the repair or replacement of defective units. In most cases the estimated liability will not be the same amount as the actual expenditure incurred. The warranty liability is carried forward from year to year; each year it is increased by the amount of estimated expense and decreased by the amount of actual costs. Each year end the liability will have to be reviewed and the estimated expense will have to be increased if the actual costs have exceeded the previous estimated expense and decreased if the previous estimated expense has exceeded the actual costs. Companies will not make an adjustment to previous years estimates.

6.

7.

8.

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QUESTIONS (Continued)
9. The company should estimate the number of vouchers that will likely be used. It should record this estimate as a reduction to revenue (Dr. Sales Discount for Redemption Rewards Issued) in the period of the sale and as an estimated liability (Cr. Redemption Rewards Liability), to recognize the obligation the company has with respect to these coupons. The cost of product warranties represents future costs for the repair or replacement of defective units sold and therefore should be recorded as an expense of the period. Rewards are incurred in order to promote sales. When rewards result in a reduced selling price, it should be recorded as a reduction in sales or a decrease in revenues. 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. This is similar to an operating line of credit in that the obligation can be satisfied in the current or long-term. 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.

10.

11.

12. 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 GAAP for Private Enterprises, 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 companys 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 it is not probable that the company will have to settle, or obligations for which the amount cannot be reliably measured.

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QUESTIONS (Continued)
13. Under GAAP for Private Enterprises, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or nonoccurrence of an uncertain future event. A contingent liability may be recognized as a liability if it is likely that a present obligation exists and the amount can be reliably estimated. If these criteria are not satisfied, then note disclosure is appropriate (unless it is unlikely that an obligation exists). 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. This includes a possible obligation that it is not probable that the company will have to settle, or a present obligation for which the amount cannot be reliably measured. 14. Under GAAP for Private Enterprises, 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 companys financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed. 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 likely a present obligation exists and that the amount can be reliably estimated. 15. A debt guarantee or loan guarantee is a guarantee that a loan will be repaid. A loan guarantee is provided by an individual or a company other than the company who has obtained a loan from a lending institution. A loan guarantee is provided as collateral or protection to the lender in case the company who borrowed is unable to repay the loan. A debt guarantee is an example of a contingent liability because the liability is dependent on a future event, the lender honouring or not honouring their commitment to repay the loan.

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QUESTIONS (Continued)
16. A contingent liability is an existing situation involving uncertainty as to a possible obligation, which will be resolved when one or more future events occur or fail to occur. An example of a contingent liability is a lawsuit that a company expects to lose but cannot estimate the amount of the judgement. Under IFRS, a contingent liability 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. A contingent asset is an existing situation involving uncertainly that will only be resolved when one or more future events occur or fail to occur. This event will confirm the existence of an asset. An example of a contingent asset is a lawsuit that could favour the company. 17. Under GAAP for Private Enterprises, the accounting treatment for a contingent liability when it is likely and can be reasonably estimated is to accrue for the liability. The accounting treatment for a contingent asset when it is likely and reasonably estimable is to disclose the asset and the related gain. The asset and related gain will be recorded only when the asset and gain have been fully realized. The rationale behind this inconsistency is conservatism, where the goal is to be sure that any negative effect on investors and creditors is fully disclosed. Under IFRS, a contingent liability 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. IFRS also allows for the recognition of a contingent asset if it is virtually certain that a gain will occur. 18. Salaries are specific amounts paid to employees per week, per month or per year. Wages are amounts paid to employees on an hourly basis or on a piece work basis. However, the terms salaries and wages are often used interchangeably. 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. The deductions are recorded as a liability and paid to the appropriate party rather than to the employee.

19.

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QUESTIONS (Continued)
20. Employee payroll deductions are the amount of payroll deductions deducted from an employees gross 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. Employer payroll deductions are amounts the employer is expected to pay that are charged on certain payroll deductions. 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. 21. 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. 22. Income tax, CPP and EI deductions are remitted to the CRA, 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.

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QUESTIONS (Continued)
23. Paid absences refer to compensation paid by employers to employees for vacations, sickness, and holidays. When the payment of such compensation is probable and the amount can be reasonably estimated, a liability should be accrued for paid future absences, which employees have earned. When this amount cannot be reasonably estimated, the potential liability should be disclosed. Other employee benefits include workplace health, safety and compensation, as well as health and dental insurance which are expensed on a monthly basis. Employers also occasionally pay for post-employment benefits such as pensions and supplemental health and dental care and life insurance. These postemployment benefits are accounted for using the accrual basis. Current liabilities are usually listed in order of their liquidity, by maturity date. They are also often listed in order of magnitude with the largest items listed first. 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. Employee payroll deductions should be reported as a current liability. Employer payroll costs should be reported on the income statement as an operating expense. 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 companys short term ability to pay debt.

24.

25.

26.

27.

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QUESTIONS (Continued)
*28. Contribution rates for CPP are set by the federal government and are adjusted every January if there are increases in the cost of living. 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 (currently $46,300). The exemption and ceiling are prorated to the relevant pay period (e.g. weekly, biweekly, semimonthly, monthly). Contribution rates for EI are currently based upon a percentage (currently 1.73%) of insurable earnings, to a maximum earnings ceiling (currently $42,300). In most cases, insured earnings are gross earnings plus any taxable benefits. *29. The amount deducted from an employees wages for income tax is determined by using payroll accounting programs, CRA payroll deduction tables, tables on diskette, or payroll deductions online calculator. The income tax that should be withheld from gross wages is based on the number of personal tax credits claimed by an employee.

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SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 10-1
(a) 2010 July 1 Cash ............................................... Notes Payable ........................... (b) Aug. 1 Interest Expense ($60,000 6% 1/12) ..................... Cash ........................................... (c) Dec. 31 Interest Expense ($60,000 6% 1/12) ..................... Interest Payable ........................ (d) 2011 Apr. 1 Interest Expense ($60,000 6% 1/12) ..................... Notes Payable ................................ Cash ........................................... 60,000 60,000

300 300

300 300

300 60,000 60,300

BRIEF EXERCISE 10-2


(a) Mar. 16 Cash .................................................... 13,024 Sales ............................................... HST Payable ($11,526 13%) ........ (b) Calculation of sales: Sales = $11,526 1.13 = $10,200 Calculation of sales tax payable: HST payable = $10,200 13% = $1,326 11,526 1,498

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BRIEF EXERCISE 10-2 (Continued) (b) (Continued) Mar. 16 Cash .................................................... 11,526 Sales ............................................... HST Payable ...................................

10,200 1,326

BRIEF EXERCISE 10-3


(a) Calculation of sales tax collected: GST: $8,200 5% = PST: ($8,200 + ($8,200 5%)) 10% = Total taxes collected $410 861 $1,271

(b) Total amount collected = $8,200 + $1,271 = $9,471 (c) Combined sales tax rate = 5% + [10% (1 + 5%)] = 15.5%

BRIEF EXERCISE 10-4


Feb. 28 Property Tax Expense ($7,620 2/12) Property Tax Payable..................... 1,270 1,270 1,270 1,905 4,445 7,620 4,445 4,445

May 31 Property Tax Payable ......................... Property Tax Expense ($7,620 3/12) Prepaid Property Tax ($7,620 7/12) Cash ................................................ Dec. 31 Property Tax Expense ........................ Prepaid Property Tax .....................

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BRIEF EXERCISE 10-5


(a) Dec. 31 Warranty Expense ..................... 4,200 Warranty Liability.................. [(1,000 units 6%) $70/unit] 4,200

(b) Following year: Warranty Liability ...................... Repair Parts Inventory..........

3,800 3,800

BRIEF EXERCISE 10-6


July 3 One-Stop Money Liability................... Cash ($150 - $20) ................................ Sales ............................................... July 3 Sales Discounts for One-Stop Money Issued ($150 2%) .................. One-Stop Money Liability .............. 20 130 150

3 3

Note: Each time One-Stop has a cash sale it debits Sales Discounts for One-Stop Money Issued and credits One-Stop Money Liability. This would have happened when Judy collected the $20 of One-Stop money used in this transaction.

BRIEF EXERCISE 10-7


Sep. 30 Sales Discount for Rebate Rewards Issued .................................. 60,000 Rebate Liability .............................. [(100,000 15%) $4] As redeemed in October: Rebate Liability ................................... Cash (2,000 $4) ...........................

60,000

8,000 8,000

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BRIEF EXERCISE 10-8


Dec. 2010 Cash .................................................. Unearned Gift Card Revenue ..... Jan. 2011 Unearned Gift Card Revenue .......... Sales ............................................ Cost of Goods Sold.......................... Merchandise Inventory ............... 4,200 4,200 2,950 2,950 1,325 1,325

BRIEF EXERCISE 10-9


(a) 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 Canadian GAAP for Private Enterprises. Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and Canadian GAAP for Private Enterprises. Disclosed: This asset/gain is likely and should be disclosed. The treatment would be the same under both IFRS and Canadian GAAP for Private Enterprises. Disclosed: Even though this contingent liability is unlikelythe chance of occurrence is smallit should still be disclosed. The treatment would be the same under both IFRS and Canadian GAAP for Private Enterprises.

(b)

(c)

(d)

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BRIEF EXERCISE 10-10


Loss due to Environmental Lawsuit ................. 50,000 Liability for Clean Up ..................................... 50,000

The arguments for recording this liability are that the outcome is likely 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. The argument against recording it is that it is not known for sure yet if a liability exists and the amount is uncertain. Management may be reluctant to disclose this information on the financial statements for fear it will be taken as an admission of guilt.

BRIEF EXERCISE 10-11


(a) Gross earnings: Regular pay (40 $16) ....................................... $640.00 Overtime pay (3 $24) ....................................... 72.00 Less: CPP contributions................................... $31.91 EI premiums ............................................ 12.32 Income tax withheld ............................... 104.65 Net pay .............................................................................

$712.00

148.88 $563.12

(b)
Employer costs: CPP contributions .............................................. $31.91 EI premiums ($12.32 1.4) ................................ 17.25 $49.16

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

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BRIEF EXERCISE 10-12


Jan. 5 Wages Expense ......................... 712.00 CPP Payable .......................... EI Payable.............................. Income Tax Payable ............. Wages Payable...................... 5 Wages Payable .......................... 563.12 Cash....................................... 5 Employee Benefits Expense ..... CPP Payable .......................... EI Payable ($12.32 1.4) ...... 49.16 31.91 17.25 31.91 12.32 104.65 563.12

Jan.

563.12

Jan.

BRIEF EXERCISE 10-13


Aug. 22 Salaries and Wages Expense ............ 70,000 CPP Payable ................................... EI Payable ....................................... Income Tax Payable....................... Salaries and Wages Payable ......... ($70,000 - $3,330 - $1,211 - $19,360 = $46,099) 22 Salaries and Wages Payable ............. 46,099 Cash ................................................ 22 Employee Benefits Expense .............. CPP Payable ................................... EI Payable ($1,211 1.4) ............... 5,025 3,330 1,695 3,330 1,211 19,360 46,099

46,099

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Accounting Principles, Fifth Canadian Edition

BRIEF EXERCISE 10-14


Current liability Current liability Current liability Current liability Current liability Current asset Disclosed in the notes to the financial statements as a contingent liability 8. Current liability 9. Current asset 10. Current liability ($5,000) and long-term liability ($70,000) 1. 2. 3. 4. 5. 6. 7.

BRIEF EXERCISE 10-15


(a) SUNCOR ENERGY INC. (Partial) Balance Sheet December 31, 2008 (in thousands)

Liabilities Current liabilities Accounts payable and accrued liabilities ................. Income taxes payable ................................................. Sales taxes payable .................................................... Short term debt ........................................................... Total current liabilities ...........................................

$ 3,229 192 97 11 $3,529

Note: This presentation lists the accounts in order of 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.

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BRIEF EXERCISE 10-15 (Continued) (b) Current Ratio = Current Assets Current Liabilities $3,237* $3,529 = 0.92 to 1 * $660 + $1,580 + $88 + $909 = $3,237 Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) Current Liabilities ($660 + $1,580 + $88) $3,529 = 0.66 to 1

*BRIEF EXERCISE 10-16


Monthly Pay = ($55,200/year 12 months) = $4,600 (a) January 2009: CPP deduction = ($4,600 - [$3,500 12]) 4.95% = $213.26 EI deduction = $4,600 1.73% = $79.58

(b) December 2009: No deductions for CPP or EI. The cumulative salary up to November 2009 is $50,600 ($4,600 12). The cumulative salary exceeds the annual maximum pensionable earnings of $46,300 and maximum insurable earnings of $42,300.

*BRIEF EXERCISE 10-17


Gross salary for the week = $1,090 CPP [($1,090.00 $67.30) 4.95%] EI ($1,090 1.73%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions $50.62 18.86 143.20 75.10 $287.78

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*BRIEF EXERCISE 10-18


(a) Gross earnings: Regular pay......................................................... $720.00 Overtime pay ([$720 40] 1.5 10 hours) ..... 270.00 (b) CPP ($990 - [$3,500 52]) 4.95% ............. $45.67 EI (1.73% $990) ......................................... 17.13 (c) Federal income tax (claim code 3) ............ 112.20 Ontario income tax (claim code 3) ............ 63.15 Total deductions ..................................... (d) Net pay........................................................................

$990.00

$238.15 $751.85

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SOLUTIONS TO EXERCISES
EXERCISE 10-1
(a) Briffet Construction 2010 Oct. 1 Cash ........................................... 200,000 Notes Payable ....................... Nov. 1 Interest Expense ....................... Cash....................................... ($200,000 6% 1/12) 1,000 1,000

200,000

2011 Aug.

1 Notes Payable ............................ 200,000 Interest Expense ....................... 1,000 Cash.......................................

201,000

(b) TD Bank 2010 Oct. 1 Notes Receivable ...................... 200,000 Cash....................................... Nov. 1 Cash ........................................... Interest Revenue ................... ($200,000 6% 1/12) 1,000

200,000

1,000

2011 Aug.

1 Cash ........................................... 201,000 Interest Revenue ................... Notes Receivable ..................

1,000 200,000

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EXERCISE 10-2
(a) Tundra Trees Mar. 1 Equipment.................................. 20,000 Accounts Payable ................. Mar. 31 Accounts Payable...................... 20,000 Notes Payable ....................... July 31 Interest Expense ....................... Interest Payable .................... ($20,000 8% 4/12) 533 533

20,000

20,000

Oct. 31 Interest Expense* ...................... 400 Interest Payable ......................... 533 Notes Payable ............................ 20,000 Cash....................................... * ($20,000 8% 3/12) (b) Edworthy Equipment Mar. 1 Accounts Receivable ................ 20,000 Sales ...................................... Cost of Goods Sold ................... 12,000 Inventory ............................... Mar. 31 Notes Receivable ...................... 20,000 Accounts Receivable ............ May 31 Interest Receivable ................... Interest Revenue ................... ($20,000 8% 2/12) 267

20,933

20,000

12,000

20,000

267

Oct. 31 Cash ........................................... 20,933 Interest Receivable ............... Interest Revenue* ................. Notes Receivable .................. * ($20,000 8% 5/12)

267 666 20,000

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EXERCISE 10-3
1. Sainsbury Company Apr. 10 Cash ........................................... 29,945 Sales ...................................... HST Payable ($26,500 13%) 2. Hockenstein Company Apr. 15 Cash ........................................... 33,674 Sales ($33,674 1.13) ........... HST Payable ($29,800 13%) 3. Montgomery Company Apr. 21 Cash ........................................... 34,650 Sales ...................................... GST Payable ($30,000 5%) PST Payable ($31,500 10%)

26,500 3,445

29,800 3,874

30,000 1,500 3,150

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EXERCISE 10-4
2010 (a) Oct. 31 Cash .................................................... 288,000 Unearned Subscription Revenue 288,000 (6,000 $48) (b) Dec. 31 Unearned Subscription Revenue ...... 48,000 Subscription Revenue ................. ($288,000 2/12) 2011 (c) Mar. 31 Unearned Subscription Revenue ...... 72,000 Subscription Revenue .............. ($288,000 3/12)

48,000

72,000

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EXERCISE 10-5
(a) May 31 Property Tax Expense ($18,660 1/12) .......................... Property Tax Payable ........... 1,555 1,555

The company would have accrued property tax expense on a monthly basis using the 2010 monthly expense of $1,475 per month. An adjustment would be required when the property tax bill is received: May 31 Property Tax Expense ............... 320 Property Tax Payable ........... 320 [($18,660 1/12) - $1,475] 4 months The company accrues property tax expense on June 30, 2011 for one month. July 31 Property Tax Payable ($18,660 6/12) .......................... Property Tax Expense ($18,660 1/12) ......................... Prepaid Property Tax ($18,660 5/12) .......................... Cash.......................................

9,330 1,555 7,775 18,660

The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense ............... 1,555 Prepaid Property Tax ............ 1,555 (b) Since the companys fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable. Income Statement, Year Ended December 31, 2011 (Partial) Operating expenses Property tax expense .............................................. $18,660

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EXERCISE 10-5 (Continued) (b) (Continued) Prepaid Property Taxes Date Explanation Ref. Debit Jul. 31 7,775 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31 Property Tax Expense Explanation Ref. Debit 1,475 1,475 1,475 1,475 320 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555

Credit Balance 7,775 1,555 6,220 1,555 4,665 1,555 3,110 1,555 1,555 1,555 0

Date Jan. 31 Feb. 28 Mar. 31 Apr. 30 May 31 May 31 June 30 July 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

Credit Balance 1,475 2,950 4,425 5,900 6,220 7,775 9,330 10,885 12,440 13,995 15,550 17,105 18,660

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EXERCISE 10-6
(a) Estimated warranties outstanding: Estimate of Defective Actual Units Units Defective 45,000 3% = 1,350 450 48,000 3% = 1,440 930 2,790 1,380

Month November December Total

Dec. 31 Estimated warranty liability: (2,790 1,380) $15 = $21,150 (b) Dec. 31 Warranty Expense (2,790 $15) ..... 41,850 Warranty Liability.................... 31 Warranty Liability ............................. 20,700 Repair Parts Inventory, Wages Payable, Cash, Etc .....

41,850

20,700

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EXERCISE 10-7
(a) Warranty expense: 2009: (2,000 10 2 $60) = $2,400,000 2010: (2,200 10 2 $60) = $2,640,000 2011: (2,400 10 2 $60) = $2,880,000 (b) Warranty liability at the end of the year: Estimated warranty expense for 2009: Less: Cost incurred in 2009 (20,000 $60): Warranty liability at end of 2009: Add: Estimated warranty expense for 2010: Less: Cost incurred 2010 (40,000 $60): Warranty liability at end of 2010: Add: Estimated warranty expense for 2011: Less: Cost incurred 2011 (50,000 $60) Warranty liability at end of 2011: $2,400,000 (1,200,000) 1,200,000 2,640,000 (2,400,000) 1,440,000 2,880,000 (3,000,000) $1,320,000

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EXERCISE 10-8
(a) 2010: 600,000 15% $0.01 = $900 2011: 800,000 15% $0.01 = $1,200

(b) 2010: 50,000 $0.01 = $500 2011: 80,000 $0.01 = $800 (c) 2010: $900 - $500 = $400 2011: $400 + $1,200 - $800 = $800

(d) When the points are redeemed, the following entry would be done: Dr) Redemption Rewards Liability Dr) Cash Cr) Sales Dr) Cost of Goods Sold Cr) Inventory XXX XXX XXX XXX XXX

The points reduce the amount of cash required to complete the sales transaction. The sale also triggers the issuance of new points: Dr) Sales Discount for Redemptions Rewards Issued XXX Cr) Redemption Rewards Liability

XXX

Points redemption reduces the amount of outstanding redemption rewards liability. The reduction of profit occurs when the original sale that triggered the points took place. However, since points are redeemed as part of a new sale transaction, there is a reduction of profit for the new points issued.

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EXERCISE 10-9
(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. Under IFRS, the liability is estimated because is it probable and the amount can be reasonably estimated and should be recorded in the financial statements. Under Canadian GAAP for Private Enterprises, the liability is contingent on a future event, the possible future problem with the brakes. However, the likelihood of loss is likely because of the recall and the amount can be reasonably estimated. The liability should be recorded in the financial statements. 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. Under both IFRS and Canadian GAAP for Private Enterprises, the liability is estimated because it is probable and the amount can be reasonably estimated. The liability should be recorded in the financial statements.

(b)

(2)

(a)

(b)

(3)

Same as (2) above.

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EXERCISE 10-9 (Continued) (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 is certain. Under both IFRS and Canadian GAAP for Private Enterprises, the liability is determinable because it is probable and the amount can be reasonably estimated. The liability should be recorded in the financial statements. Contingent Liability under both IFRS and Canadian GAAP for Private Enterprises. The contingent liability is neither likely nor unlikely and the amount cannot be reasonably estimated. Under both IFRS and Canadian GAAP for Private Enterprises, the contingent liability would be disclosed in the notes to the financial statements because the outcome and the amount are both unknown.

(b)

(5)

(a)

(b)

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EXERCISE 10-10
(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. If Sleep-a-Bye Baby Companys lawyers advise that it is very 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 (c)

(b)

100,000

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 probability 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.

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EXERCISE 10-11
(a) Aug. 31 Salaries and Wages Expense ............ 41,500 CPP Payable ................................... EI Payable ....................................... Income Tax Payable....................... Cash ................................................ (b) Aug. 31 Employee Benefits Expense .............. 4,940 CPP Payable ................................... EI Payable ($718 1.4) .................. Workers Compensation Payable ($41,500 1%) .......................... Vacation Pay Payable ($41,500 4%) (c) Sept.15 CPP Payable ($1,860 + $1,860) .......... EI Payable ($718 + $1,005) ................. Income Tax Payable ........................... Cash ...............................................

1,860 718 8,025 30,897

1,860 1,005 415 1,660

3,720 1,723 8,025 13,468

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EXERCISE 10-12
(a) AHMAD COMPANY Payroll Register Week Ending May 31 Gross Earnings Total Employee Hours Regular Overtime A. Kassam H. Faas G. Labute Totals 46 42 45 $ 440.00 520.00 560.00 $1,520.00 Gross Pay CPP EI Deductions Income Health Tax Insurance Total Net Pay

$ 99.00 $ 539.00 39.00 559.00 105.00 665.00 $243.00 $1,763.00

$23.35 $ 9.32 $ 81.00 24.34 9.67 87.00 29.59 11.50 107.00 $77.28 $30.49 $275.00

$10.00 $123.67 $ 415.33 15.00 136.01 422.99 15.00 163.09 501.91 $40.00 $422.77 $1,340.23

(b) May 31 Wages Expense ........................................................... 1,763.00 CPP Payable ............................................................ EI Payable ................................................................ Income Tax Payable ............................................... Health Insurance Payable ...................................... Wages Payable........................................................ 31 Employee Benefits Expense ....................................... CPP Payable ($77.28 1) ....................................... EI Payable ($30.49 1.4) ........................................ Workers Compensation Payable ($1,763 2%) ... Vacation Pay Payable ($1,763 4%) ...................... Health Insurance Payable ......................................
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77.28 30.49 275.00 40.00 1,340.23

265.75 77.28 42.69 35.26 70.52 40.00

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EXERCISE 10-13
Assets 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. + NE NE + $9,040 $25,000 NE NE NE NE Liabilities + NE + + $1,040 + $10,000 + + NE + Owners Equity NE NE + $8,000 $35,000 NE NE Revenues Expenses NE NE NE + $8,000 NE NE NE NE NE NE NE NE + NE + $35,000 + + NE + NE Profit NE NE + $8,000 $35,000 NE NE

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EXERCISE 10-14
(a) LARKIN COMPANY (Partial) Balance Sheet August 31, 2011

Current liabilities Accounts payable ....................................................... $ 72,000 Bank indebtedness ..................................................... 50,000 Income tax payable ..................................................... 28,000 Unearned revenue ...................................................... 24,000 Warranty liability ......................................................... 18,000 HST payable ................................................................ 12,000 Mortgage payablecurrent portion .......................... 10,000 Interest payable .......................................................... 8,000 Property taxes payable ............................................... 8,000 CPP payable ................................................................ 6,000 Customer loyalty liability............................................ 4,000 EI payable .................................................................... 3,000 Workers compensation payable ............................... 1,000 Total current liabilities ........................................... $244,000 (b) Current ratio = ($145,000 + $220,000 + $10,000) $244,000 = 1.5:1 Acid-test ratio = $145,000 $244,000 = 0.6:1 (c) The company has a negative cash balance in the form of bank indebtedness.

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*EXERCISE 10-15
(a) Gross Pay = (40 hours $20.50) + (4 hours [$20.50 1.5]) = $820.00 + $123.00 = $943.00 Deductions ((Using Illustration 10A-3): CPP [$943 ($3,500 52) 4.95%] EI ($943 1.73%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions

$43.35 16.31 110.20 62.10 $231.96

(b) Sep. 16 Wages Expense ......................... 943.00 CPP Payable .......................... 43.35 EI Payable.............................. 16.31 Income Tax Payable ($110.20 + $62.10) 172.30 Cash....................................... 711.04 (c) Sep. 16 Employee Benefits Expense ..... CPP Payable .......................... EI Payable ($16.31 1.4) ...... 66.18 43.35 22.83

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*EXERCISE 10-16
Gross Salary $32,000.00 4,000.00 4,000.00 4,000.00 4,000.00 $48,000.00 Cumulative Salary CPP 4.95% EI 1.73% $553.60 5 69.20 4 69.20 6 39.79 0 $731.79

Month Jan. Aug. September October November December Totals

$32,000.00 $ 1,468.50 2 36,000.00 183.56 1 40,000.00 183.56 44,000.00 183.56 48,000.00 99.41 3 $2,118.59

1. CPP = ($4,000 [$3,500 12]) 4.95% = $183.56 2. CPP = $183.56/month 8 months = $1,468.50 3. CPP = ([$46,300 maximum pensionable earnings - $44,000] [$3,500 12]) 4.95% = $99.41 4. EI = $4,000 1.73% = $69.20 5. EI = $69.20/month 8 months = $553.60 6. EI = ($42,300 maximum insurable earnings - $40,000) 1.73% = $39.79

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