Current Liabilities ASSIGNMENT CLASSIFICATION · PDF file11-1 CHAPTER 11 Current Liabilities ... Questions Chapter 11 (Continued) 6. Mandatory payroll ... to assure the accuracy and

11-1

CHAPTER 11

Current Liabilities

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Explain a current liability and distinguish between the major types of current liabilities.

1 1, 2 8 1 1

2. Explain the accounting, and prepare the journal entries, for definitely determinable liabilities.

2, 3, 4, 5, 6, 7

3, 4, 5 1, 2, 3, 4 2, 3 2, 3

3. Explain the accounting, and prepare the journal entries, for estimated liabilities.

8, 9, 10 6, 7 5, 6 1, 3, 4 1, 4

4. Describe the accounting and disclosure requirements for contingent liabilities and prepare the necessary journal entries.

10, 11, 12 8 7 1, 5 1, 5

5. Explain and illustrate the financial statement presentation of current liabilities.

13, 14 9 8, 9, 10 1, 2, 3 1, 2, 3

*6. Discuss the objectives of internal control for payroll, and be able to identify weaknesses and suggest improvements in their application (Appendix 11A).

*15, *16, *17 *10 *11 *6 *6

*7. Calculate the payroll for a pay period (Appendix 11A).

*18, *19 *11, *12, *13, *14

*12, *13, *14, *15

*7, *8, *9 *7, *8, *9

11-2

ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Identify liabilities.

Simple 10-15

2A Journalize and post note transactions. Show balance sheet presentation.

Moderate 30-40

3A Prepare current liability entries, adjusting entries, and current liabilities section of balance sheet.

Simple 25-35

4A Record warranty.

Moderate 15-25

5A Discuss contingency reporting.

Moderate 15-25

*6A Identify internal control weaknesses and recommend improvements.

Moderate 20-30

*7A Calculate payroll. Prepare payroll entries.

Moderate 40-50

*8A Journalize payroll transactions.

Simple 25-35

*9A Prepare entries for payroll, including employee benefit costs.

Moderate 20-30

1B Identify liabilities.

Simple 10-15

2B Journalize and post note transactions. Show balance sheet presentation.

Moderate 30-40

3B Prepare current liability entries, adjusting entries, and current liabilities section of balance sheet.

Simple 25-35

4B Record warranty.

Moderate 15-25

5B Discuss contingency reporting.

Moderate 15=25

*6B Identify internal control weaknesses and recommend improvements.

Moderate 20-30

*7B Prepare payroll entries.

Moderate 30-40

*8B Journalize and post payroll transactions. Calculate liability balances.

Simple 25-35

*9B Calculate missing payroll amounts. Prepare all related journal entries.

Complex 25-35

Cumulative coverage—Chapters 9 to 11 Moderate 50-60

11-3

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

Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Explain a current liability and distinguish between the major types of current liabilities.

Q11-1 BE11-1 BE11-2

E11-8 P11-1A P11-1B

2. Explain the accounting, and prepare the journal entries, for definitely determinable liabilities.

Q11-6 Q11-2 Q11-4 Q11-5 Q11-7

Q11-3 BE11-3 BE11-4 BE11-5 E11-1 E11-2

E11-3 E11-4 P11-2A P11-3A P11-2B P11-3B

3. Explain the accounting, and prepare the journal entries, for estimated liabilities.

Q11-10 Q11-8 Q11-9

BE11-6 BE11-7 E11-5 E11-6 P11-1A

P11-3A P11-4A P11-1B P11-4B

4. Describe the accounting and disclosure requirements for contingent liabilities and prepare the necessary journal entries.

Q11-10 Q11-11 Q11-12 P11-5A P11-5B

BE11-8 E11-7 P11-1A P11-1B

5. Explain and illustrate the financial statement presentation of current liabilities.

Q11-14 Q11-13 BE11-9 E11-8 E11-9 E11-10 P11-1A

P11-2A P11-3A P11-1B P11-2B P11-3B

*6. Discuss the objectives of internal control for payroll, and be able to identify weaknesses and suggest improvements in their application (Appendix 11A).

*BE11-10 *Q11-16 *Q11-17

*Q11-15

*E11-11 *P11-6A *P11-6B

11-4

Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation *7. Calculate the

payroll for a pay period (Appendix 11A).

*Q11-19 *Q11-18 *BE11-11 *BE11-12 *BE11-13 *BE11-14 *E11-12 *E11-13 *E11-14

*E11-15 *P11-7A *P11-8A *P11-9A *P11-7B *P11-8B

*P11-9B

Broadening Your Perspective

BYP11-1 BYP11-2 BYP11-3 BYP11-4 BYP11-6

BYP11-7 Cumulative Coverage

BYP11-5 BYP11-8

11-5

ANSWERS TO QUESTIONS 01. Li Feng is not totally correct. A current liability is a debt that can

reasonably be expected to be paid (a) from existing current assets or through the creation of other current liabilities and (b) within one year or the operating cycle, whichever is longer.

02. (a) Disagree. The company only serves as a collection agent for the

taxing authority. It does not report sales taxes as an expense; it reports sales taxes as a currently liability. It merely forwards the amount paid by the customer to the government.

(b) The entry to record the proceeds is:

Cash........................................................................ 10,700 Sales ................................................................. 10,000 GST Payable..................................................... 700

03. (a) The entry when the tickets are sold is:

Cash (1,000 x $90) ................................................. 90,000 Unearned Football Ticket Revenue................ 90,000

(b) The entry after each game is: Unearned Football Ticket Revenue..................... 18,000

Football Ticket Revenue ................................. 18,000 ($90/5 games X 1,000 tickets)

4. No. When an employer withholds income tax 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.

5. Payroll deductions can be classified as either mandatory (required by

the government) or voluntary (not required by the government). Mandatory deductions include income tax, Canada Pension Plan contributions, and employment insurance. Examples of voluntary deductions are health and life insurance premiums, union dues, pension contributions, and charitable contributions.

11-6

Questions Chapter 11 (Continued) 6. Mandatory payroll (employee benefit) costs include Canada Pension

Plan, Employment Insurance and Workplace Health, Safety and Compensation.

7. $75,000 of the liability should be classified as long-term. $25,000 should

be deducted from the long-term portion and shown as current. 08. 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 warranties. This can be estimated based on past experience or industry information. If repairs 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.

09. This situation can arise because the property tax bill for the year is

usually not known until the spring. In the interim, a company must accrue an expense and estimated liability (usually based on last year’s property tax bill) for property tax payable. Later in the year, when the company receives its property tax bill, it would record prepaid property tax (a current asset) and a property tax payable (a current liability). Once the property tax bill is paid, the liability will disappear. As time passes, the company would record the property tax expense and credit the prepaid property tax account. Therefore, the company can have both a prepaid asset and a current liability related to property taxes in the same period—at least until the property tax bill is paid.

10. Estimated and contingent liabilities are alike in that the amount of the

claim is not known with certainty and must therefore be estimated. They are different in that an estimated liability is owed by the company –the liability does exist. The existence of a contingent liability depends on events outside the company’s control.

11-7

Questions Chapter 11 (Continued) 11. 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. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. An example of a contingency that is likely but not estimable is a lawsuit that the company expects to lose but cannot estimate the amount of the judgment. An example of a contingency that is not determinable—neither likely nor unlikely—is a loan guarantee.

12. 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 (if confirmed) could have a significant adverse effect, disclosure is desirable but not required.

13. In the balance sheet, Notes Payable of $25,000 and Interest Payable of

$562.50 ($25,000 x 9% x 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $562.50 should be reported under other expenses and losses. Further details of the note (interest rate, due date, etc.) can be reported in the notes to the financial statements.

14. Current liabilities are usually listed in order of their liquidity (due date).

They are also often listed in order of magnitude with the largest items listed first.

*15. The main internal control objectives associated with payrolls are (1) to

safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls.

*16. 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, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year.

11-8

Questions Chapter 11 (Continued) *17. Examples of employee benefits include:

(1) Paid absences—vacation pay, sick pay, and paid holidays. (2) Health care and life insurance benefits. (3) Pension plan benefits.

*18. 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.

*19. 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.

11-9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 (a) A note payable due in two years is a long-term liability, not a current

liability. (b) $30,000 of the mortgage payable is a current maturity of long-term debt.

This amount should be reported as a current liability. (c) Interest payable of $24,000 is a current liability because it will be paid

out of current assets in the near future. (d) Accounts payable of $60,000 is a current liability because it will be paid

out of current assets in the near future. BRIEF EXERCISE 11-2 1. Current liability 2. Current liability 3. Current liability 4. Current liability 5. Current liability 6. Current asset

7. Current liability 8. Current asset 9. Contingent liability

10. Current liability 11. Current liability

BRIEF EXERCISE 11-3 July 1 Cash ......................................................................... 60,000

Notes Payable .................................................. 60,000 Dec. 31 Interest Expense ..................................................... 3,000

Interest Payable ............................................... 3,000 ($60,000 X 10% X 6/12 = $3,000)

11-10

BRIEF EXERCISE 11-4 Calculation of sales:

Sales = $6,900 ÷ 1.15 = $6,000 Calculation of sales tax payable:

GST payable = $6,000 X 7% = $420 PST payable = $6,000 X 8% = $480

Mar. 16 Cash .................................................................... 6,900

Sales ............................................................ 6,000 GST Payable................................................ 420 PST Payable ................................................ 480

BRIEF EXERCISE 11-5 Cash....................................................................................... 180,000

Unearned Basketball Ticket Revenue ......................... 180,000 (2,000 tickets X $90 per ticket)

Unearned Basketball Ticket Revenue................................. 15,000

Basketball Ticket Revenue........................................... 15,000 ($180,000/12 games or $90/12 X 2,000)

11-11

BRIEF EXERCISE 11-6 Property tax expense June 30 income statement $25,200 X 6/12 months = $12,600 Prepaid property tax June 30 balance sheet $2,100 x 6 months = $12,600 Property tax payable June 30 balance sheet $2,100 x 12 months = $25,200 Journal entries (not required): Jan. 1 to Mar. 31 (each month for 3 months; $6,000) Property Tax Expense............................................. 2,000

Property Tax Payable ...................................... 2,000 Apr. 30 Prepaid Property Tax ($2,100 x 8 mos. May–Dec.) 16,800 Property Tax Expense............................................. 2,400*

Property Tax Payable ($25,200 - $6,000) ....... 19,200 *Property tax expense Jan. 1-March 31 $24,000 X 3/12 months = $6,000; Should have been $25,200 X 3/12 months = $6,300 $6,300 - $6,000 or $300 under-expensed from July 1 to March 31 + $2,100 for April = $2,400

May 31 Property Tax Expense............................................. 2,100 Prepaid Property Tax ...................................... 2,100 June 30 Property Tax Expense............................................. 2,100 Prepaid Property Tax ...................................... 2,100 July 15 Property Tax Payable ($6,000 + $19,200) .............. 25,200 Cash ................................................................. 25,200

11-12

BRIEF EXERCISE 11-7 Dec. 31 Warranty Expense.............................................. 3,750

Warranty Liability ...................................... 3,750 [(1,000 X 5%) X $75]

BRIEF EXERCISE 11-8 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 (according to their lawyer) and the amount can be estimated. 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 be taken as an admission of guilt. BRIEF EXERCISE 11-9 MGI SOFTWARE (Partial) Balance Sheet January 31, 2000 Liabilities Current liabilities Accounts payable and accrued liabilities................... $10,632 Unearned revenue......................................................... 1,013 Current portion of long term debt ............................... 167 Total current liabilities....................................... $11,812 Note: this presentation lists the accounts in order of size–an alternative would be to estimate due dates and list them in order of maturity.

11-13

*BRIEF EXERCISE 11-10 1. Timekeeping 3. Preparing the payroll 2. Hiring 4. Paying the payroll *BRIEF EXERCISE 11-11 Gross earnings:

Regular pay (40 X $15).................................................. $600.00 Overtime pay (3 X $22.50) ............................................ 67.50 $667.50

Less: Income tax payable .................................................... $120.20 CPP contributions ...................................................... 00 025.81 EI premiums................................................................ 0 15.02 161.03 Net pay................................................................................... $506.47 *BRIEF EXERCISE 11-12 Jan. 15 Wages Expense.................................................. 667.50

Income Tax Payable ................................... 120.00 Wages Payable ........................................... 506.47 CPP Payable................................................ 25.81 EI Payable.................................................... 15.02

Jan. 15 Wages Payable ................................................... 506.47 Cash............................................................. 506.47

11-14

*BRIEF EXERCISE 11-13 Jan. 31 Salaries and Wages Expense............................ 70,000

CPP Payable................................................ 2,730 EI Payable.................................................... 1,575

Income Taxes Payable ............................... 15,300 Salaries and Wages Payable ..................... 50,395

31 Employee Benefits Expense ............................. 4,935

CPP Payable................................................ 2,730 EI Payable ($1,575 x 1.4) ............................ 2,205 *BRIEF EXERCISE 11-14 Jan. 31 Vacation Benefits Expense (50 X $150)............ 7,500

Vacation Benefits Payable......................... 7,500

11-15

SOLUTIONS TO EXERCISES EXERCISE 11-1 (a) May 31 Cash ............................................................. 50,000

Notes Payable..................................... 50,000 (b) June 30 Interest Expense ......................................... 375

Interest Payable.................................. 375 ($50,000 X 9% X 1/12)

(c) Nov. 30 Notes Payable ............................................. 50,000

Interest Payable ($50,000 x 9% x 1/12) ...... 375 Interest Expense ($50,000 x 9% x 5/12)..... 1,875

Cash .................................................... 52,250 (d) $2,250 ($50,000 x 9% x 6/12) EXERCISE 11-2 (a) Briffet Construction Oct. 1 Cash ............................................................. 250,000

Notes Payable..................................... 250,000 Nov. 1 Interest Expense.......................................... 2,083

Cash .................................................... 2,083 ($250,000 X 10% X 1/12)

(b) TD Bank Oct. 1 Notes Receivable......................................... 250,000

Cash .................................................... 250,000 Nov. 1 Cash ............................................................. 2,083

Interest Revenue ................................ 2,083 ($250,000 X 10% X 1/12)

11-16

EXERCISE 11-3 1. Sainsbury Company Apr. 10 Cash .................................................................... 28,756

Sales ............................................................ 25,000 PST Payable ............................................... 2,006 GST Payable................................................ 1,750

2. Hockenstein Company Apr. 15 Cash .................................................................... 18,240

Sales ($18,240 ÷ 1.14)................................. 16,000 GST Payable ($16,000 x 7%) ...................... 1,120 PST Payable ($16,000 x 7%)....................... 1,120

EXERCISE 11-4 (a) Nov. 30 Cash............................................................. 216,000

Unearned Subscription Revenue ...... 216,000 (6,000 X $36)

(b) Dec. 31 Unearned Subscription Revenue .............. 18,000

Subscription Revenue........................ 18,000 ($216,000 X 1/12)

(c) Mar. 31 Unearned Subscription Revenue .............. 54,000

Subscription Revenue........................ 54,000 ($216,000 X 3/12)

11-17

EXERCISE 11-5 (a) Estimated warranties outstanding:

Month

Estimate of Defective

Units

Units Defective

Outstanding

at Dec. 31 November December Total

30,000 X 4% = 1,200 32,000 X 4% = 1,280

2,480

0,700 0,500 1,200

500 780 1,280

Dec. 31 estimated warranty liability—1,280 X $10 = $12,800

(b) Dec. 31 Warranty Expense (2,480 X $10) ............... 24,800 Warranty Liability................................ 24,800

31 Warranty Liability ....................................... 12,000

Repair Parts Inventory, Wages Payable, Cash, Etc. ................ 12,000

(c) Jan. Warranty Liability (550 X $10).................... 5,500

Repair Parts Inventory, Wages Payable, Cash, Etc. ................ 5,500

11-18

EXERCISE 11-6 (a) Last calendar year Oct. 31 Property Tax Expense ($24,000 X 1/12) ......... 2,000

- Dec. 31 Prepaid Property Tax............................... 2,000 This entry would be made monthly Oct. to Dec. ($2,000 X 3 mos. = $6,000). Current calendar year

Jan. 31 Property Tax Expense ($24,000 X 1/12) ......... 2,000 - Apr. 30 Property Tax Payable .............................. 2,000 This entry would be made monthly Jan. to April ($2,000 X 4 mos. = $8,000).

(b) May 1 Prepaid Property Tax ($26,400 x 8/12 mos. May-Dec.) ...................... 17,600 Property Tax Expense..................................... 800*

Property Tax Payable ($26,400 - $8,000) 18,400 *[($2,200 - $2,000) x 4 mos. (Jan. to April) under-expensed]

May 31 Property Tax Expense ($26,400 X 1/12) ......... 2,200 - June 30 Prepaid Property Tax............................... 2,200

This entry would be made monthly May and June ($2,200 X 2 mos. = $4,400).

(c) July 1 Property Tax Payable ($8,000 + $18,400)....... 26,400 Cash .......................................................... 26,400

(d) July 31 Property Tax Expense ($26,400 X 1/12) ......... 2,200

- Sept. 30 Prepaid Property Tax............................... 2,200 This entry would be made monthly July, August, and September.

11-19

EXERCISE 11-7 The company should record an estimate of the cost of replacing the cribs in its financial statements. If it is unlikely that the lawsuit will be successful they do not have to report or disclose anything else. If it is either likely 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 $500,000 is a reasonable estimate it should be accrued. EXERCISE 11-8 (a) Account Classification Reason Accounts payable

Current liability Due within one year

Accrued benefit liability


Accrued liabilities


Advances on long-term contracts

Long-term liability Advance (funds) provided by company, long-term related to contracts

Current portion of long term debt


Deferred income taxes Other Income taxes payable in the future

Income taxes payable


Long-term debt

Long-term liability Not due within one year

Payroll related liabilities


Short-term borrowings


Unused operating line of credit

NA Not a balance sheet item as unused – may be disclosed in notes

11-20

EXERCISE 11-8 (Continued) (b) BOMBARDIER (Partial) Balance Sheet January 31, 2001 (in millions) Current liabilities Short-term borrowings....................................................... $2,531.2 Accounts payable ............................................................... 2,142.3 Accrued liabilities ............................................................... 1,534.9 Current portion of long-term debt ..................................... 974.6 Accrued benefit liability ..................................................... 494.4 Payroll related liabilities..................................................... 359.4 Income taxes payable......................................................... 91.3 Total current liabilities ................................................ $8,128.1 EXERCISE 11-9 (a)

ATKINSON ON-LINE (Partial) Balance Sheet

August 31, 2003

Current liabilities Accounts payable...................................................Unearned revenue ..................................................Warranty liability ....................................................Provincial sales taxes payable..............................Long-term debt due within one year.....................Interest payable ......................................................Property tax payable ..............................................

Total current liabilities ...................................

$ 66,000 24,000 18,000 10,000 10,000 8,000 8,000 $144,000

(b) Current ratio = $300,000 ÷ $144,000 = 2.1:1

11-21

EXERCISE 11-10 (a)

LOEW’S CINEPLEX ENTERTAINMENT CORPORATION (Partial) Balance Sheet

February 28, 2001 (U.S. thousands)

Current liabilities

Current maturities of long-term debt and other obligations............................................Accounts payable and accrued expenses..................Unearned revenue.........................................................Total current liabilities..................................................

$739,665

88,059 22,423 $850,147

(b) 1. Current assets Cash and cash equivalents................................... $47,200 Accounts receivable.............................................. 11,453 Prepaid expenses and other current assets ....... 7,340 Inventories ............................................................. 4,056 Total current assets .............................................. $70,049

2. Working capital $70,049 - $850,147 = $780,098 deficit 3. Current ratio $70,049 ÷ $850,147 = 0.08:1

11-22

*EXERCISE 11-11 (a) Internal controls:

• Contracts are issued to full-time employees (documentation) and their pay must be approved by Board of Directors (authorization)

• Time tracked in log books for hourly employees (documentation) • Payroll service bureau (documentation and segregation of

duties) • Direct deposit (segregation of duties) • Detailed and summary reports (independent verification)

(b) Weaknesses in internal control:

• Verbal agreement for casual employees should be replaced by written, authorized agreement

• No mention is made of controls used to ensure the accurate recording of this log. Signatures should be supervised/authorized

*EXERCISE 11-12

Sept. 13 Wages Expense ................................................. 516.00

Income Tax Payable................................ 79.70 CPP Payable ............................................ 19.29 EI Payable................................................ 11.61 Cash ......................................................... 405.40

11-23

*EXERCISE 11-13 (a)

AHMAD COMPANY Payroll Register

For the Week Ending January 31

Earnings

Deductions

Employee

Total Hours

Regular

Overtime

Gross Pay

CPP

EI

Income

Tax

Health Insurance

Total

Net Pay

A. Hope B. Innes C. Stone

Totals

43 42 44

$0,400.00 00,480.00 520.00 $1,400.00

$045.00 0036.00 78.00 $159.00

$0,445.00 00,516.00 00,598.00 $1,559.00

$16.24

0019.29 022.82 $58.35

$10.01

0011.61 013.46 $35.08

$074.00 0087.00 0118.00 $279.00

$10.00 015.00 015.00 $40.00

$110.25 0132.90 0169.28 $412.43

$0,334.75 00,383.10 428.72 $1,146.57

11-24

*EXERCISE 11-13 (Continued)

(b) Jan. 31 Wages Expense ...................................... 1,559.00

CPP Payable .................................... 58.35 EI Payable ........................................ 35.08 Income Tax Payable........................ 279.00 Health Insurance Payable............... 40.00 Wages Payable ................................ 1,146.57

31 Employee Benefits Expense .................. 178.64 CPP Payable ($58.35 x 1)................ 58.35 EI Payable ($35.08 X 1.4) ................ 49.11 Workers’ Compensation Payable ($1,559 X 2%) ................................ 31.18 Health Insurance Payable............... 40.00

*EXERCISE 11-14

(a) (1) $12,016.67

(2) $13,066.67 (3) $507.40 (4) $4,502.40 (5) $8,564.27 (6) $8,166.67

Calculations:

(1) Total = EI deductions $294 ÷ 2.25% = $13,066.67 Regular = Total $13,066.67 – Overtime $1,050 = $12,016.67 (2) Total = $12,016.67 + $1,050 = $13,066.67 (3) CPP = Pensionable earnings $11,800 X 4.3% = $507.40 (4) Total deductions = $507.40 + $294.00 + $3,262 + $139 + $300

= $4,502.40 (5) Net pay = Total $13,066.67 – Total deductions $4,502.40 =

$8,564.27 (6) Store wages = Total $13,066.67 – Warehouse wages

$4,900.00 = $8,166.67

11-25

*EXERCISE 11-14 (Continued) (b) CPP = $507.40 X 1.0 = $507.40 EI = $294.00 X 1.4 = $411.60 (c) Feb. 28 Warehouse Wages Expense ............ 4,900.00

Store Wages Expense ...................... 8,166.67 CPP Payable .............................. 507.40 EI Payable .................................. 294.00 Income Tax Payable.................. 3,262.00 Union Dues Payable.................. 139.00 United Way Payable .................. 300.00 Wages Payable .......................... 8,564.27

28 Employee Benefits Expense ............ 919.00 CPP Payable .............................. 507.40 EI Payable .................................. 411.60 28 Wages Payable.................................. 8,564.27 Cash ........................................... 8,564.27

*EXERCISE 11-15 Mar. 31 Vacation Benefits Expense...................... 1,600

(8 X 2 X $100) Vacation Benefits Payable ............... 1,600

31 Medical Insurance Expense ($50 X 8)..... 400 Medical Insurance Payable .............. 400

11-26

SOLUTIONS TO PROBLEMS

PROBLEM 11-1A

(a) 1. Current liabilities section Accounts payable $150,000

2. Current liabilities section Bonus payable $35,000 3. Current liabilities section Salaries payable $1,7231 CPP Payable 2582 EI payable 1623 Income tax payable 1,0804 4. No current liability —relates to next period Property tax payable 0 5. Contingent liability Not on balance sheet 0 6. Current liabilities section Interest payable $4,1675 Current maturity $100,000 Long-term liabilities section Note payable $400,000 Calculations:

1 ($5,000 X 3/5) – (4.3% X $3,000) – (2.25% X $3,000) – ($1,800 x 3/5) = $1,723

2 (4.3% X $3,000) X 2 = $258 3 (2.25% X $3,000) X 2.4 = $162 4 $1,800 x 3/5 = $1,080 5 $500,000 X 10% X 1/12 = $4,167

(b) The notes should disclose information on the contingent

liability– the lawsuit, including the estimated loss and the fact that the likelihood of the loss cannot be determined. Information on the Note Payable should also be disclosed–including the interest rate and repayment terms and payments required in each of the next five years.

11-27

PROBLEM 11-2A

(a) Jan. 12 Merchandise Inventory.................................... 18,000

Accounts Payable .................................... 18,000

Feb. 1 Accounts Payable ............................................ 18,000 Notes Payable........................................... 18,000

Mar. 31 Interest Expense .............................................. 300

($18,000 X 10% X 2/12) Interest Payable........................................ 300

Apr. 1 Notes Payable .................................................. 18,000 Interest Payable ............................................... 300 Cash .......................................................... 18,300

July 1 Equipment ........................................................ 36,000 Cash .......................................................... 11,000 Notes Payable........................................... 25,000

Sept. 30 Interest Expense .............................................. 625

($25,000 X 10% X 3/12) Interest Payable........................................ 625

Oct. 1 Notes Payable .................................................. 25,000 Interest Payable ............................................... 625 Cash .......................................................... 25,625

Dec. 1 Cash .................................................................. 20,000 Notes Payable........................................... 20,000

Dec. 31 Interest Expense ($20,000 X 9% X 1/12) ......... 150 Interest Payable........................................ 150

11-28

PROBLEM 11-2A (Continued)

(b)

Notes Payable

4/1 18,000 10/1 25,000

2/1 18,000 7/1 25,000 12/1 20,000

12/31 Bal. 20,000

Interest Payable 4/1 300 10/1 625

3/31 300 9/30 625 12/31 150

12/31 Bal. 150

Interest Expense 3/31 300 9/30 625 12/31 150

12/31 Bal. 1,075

(c) LEARNSTREAM COMPANY (Partial) Balance Sheet December 31, 2003 Current liabilities

Notes payable .................................................... $20,000 Interest payable ................................................. 00 150 $20,150

(d) Total interest is $1,075 (as per the balance in the Interest Expense

account).

11-29

PROBLEM 11-3A

(a) Jan. 1 Cash ............................................................ 15,000

Notes Payable ..................................... 15,000

5 Cash ............................................................ 7,752 Sales ($7,752 ÷ 1.14)........................... 6,800 PST Payable ($6,800 x 7%)................. 476 GST Payable ($6,800 x 7%) ................ 476

5 Cost of Goods Sold.................................... 4,600 Merchandise Inventory ...................... 4,600

12 Unearned Service Revenue....................... 8,000 Service Revenue................................. 8,000

14 PST Payable................................................ 5,800 GST Payable ............................................... 5,800 Cash..................................................... 11,600

20 Accounts Receivable ................................. 29,640 Sales (500 X $52) ................................ 26,000 PST Payable ($26,000 x 7%)............... 1,820 GST Payable ($26,000 x 7%) .............. 1,820

20 Cost of Goods Sold (500 x $20) ................ 10,000 Merchandise Inventory ...................... 10,000

25 Cash ............................................................ 14,820 Sales ($14,820 ÷ 1.14)......................... 13,000 PST Payable ($13,000 x 7%)............... 910 GST Payable........................................ 910 25 Cost of Goods Sold.................................... 9,000 Merchandise Inventory ...................... 9,000

11-30

PROBLEM 11-3A (Continued) (b) (1) Jan. 31 Interest Expense........................................ 125

Interest Payable ................................. 125 ($15,000 X 10% X 1/12)

(2) Jan. 31 Warranty Expense ($26,000 X 8%) ........... 2,080

Warranty Liability............................... 2,080

(c)

MOLEGA SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2003 Current liabilities

Accounts payable .......................................................... $42,500 Notes payable ................................................................ 15,000 Unearned service revenue ($15,000 – $8,000) ........... 7,000 PST payable ($5,800 + $476 – $5,800 + $1,820 + $910) 3,206 GST payable ($5,800 + $476 - $5,800 + $1,820 + $910) 3,206 Warranty liability............................................................ 2,080 Interest payable ........................................................... 0 125

Total current liabilities ........................................... $73,117

11-31

PROBLEM 11-4A

2002 Warranty Expense...................................... 19,800

Warranty Liability ............................... 19,800 ($660,000 X 3%) Warranty Liability ....................................... 16,000 Cash..................................................... 16,000

2003 Warranty Expense...................................... 42,000 Warranty Liability ............................... 42,000 ($840,000 X 5%) Warranty Liability ....................................... 35,000 Cash..................................................... 35,000

11-32

PROBLEM 11-5A

The company should disclose the fact that it is uninsurable under a discussion of risks in the general note to its financial statements. This is information that would be of concern to investors.

11-33

*PROBLEM 11-6A

(a) Weaknesses (b) Recommended Procedures 1.

⇒ Department managers

have too much authority in hiring.

⇒ An interview should not

be the sole basis for hiring or rejecting an applicant.

⇒ The pay rate should not be manually written on the TD-1 form.

⇒ The human resources department should do the hiring.

⇒ The qualifications of

each applicant should be determined and letters of recommendation should be obtained.

⇒ The human resources

department should notify the payroll department of new hires, through a hiring authorization form.

2.

⇒ Hours worked are marked on the time card by the employee.

⇒ Employees give the approved cards to payroll.

⇒ Time cards should be punched by a time clock, and the punching of the clock by employees should be supervised so that one employee cannot punch more than one card.

⇒ The manager should

deliver the cards to payroll, in order to prevent possible alterations by employees during delivery.

11-34

*PROBLEM 11-6A (Continued)

(a) Weaknesses (b) Recommended Procedures 3.

⇒ Department manager indicates the rates of pay.

⇒ The department manager pays the employees.

⇒ Payment is in cash.

⇒ Rates of pay should be authorized in writing by the human resources department, and communicated to the payroll department.

⇒ The controller's

department should pay the employees.

⇒ Payment should be made by cheque.

11-35

*PROBLEM 11-7A

(a) SURE VALUE HARDWARE

Payroll Register For the Week Ending March 15, 2003

Earnings

Deductions

Employee

Hours

Regular

Over- time

Gross

Pay

Income

Tax

CPP

EI

United Way

Total

Net Pay

Store Wages

Expense

Office Wages

Expense A. Pima C. Zuni E. Hopi G. Mohav Totals

40 42 44 46

0,520.00 0,520.00 0,520.00 0,520.00 2,080.00

000.00 039.00 078.00 117.00 234.00

0,520.00 0,559.00 0,598.00 0,637.00 2,314.00

089.65

99.65 110.50 123.65 423.45

019.47 21.14 22.82 24.50 87.93

11.70 12.58 13.46 14.33 52.07

05.00 05.00 08.00 05.00 23.00

125.82 138.37 154.78 167.48 586.45

394.18 420.63 443.22

469.52 1,727.55

0,520.00 0,559.00 0,598.00 000 1,677.00

637.00 637.00

11-36

*PROBLEM 11-7A (Continued) (b) Mar. 15 Store Wages Expense ............................ 1,677.00

Office Wages Expense ........................... 637.00 CPP Payable .................................... 87.93 Income Tax Payable ........................ 423.45 EI Payable ........................................ 52.07 United Way Contributions Payable 23.00 Wages Payable ................................ 1,727.55

15 Employee Benefits Expense .................. 160.83 CPP Payable ($87.93 x 1) ................ 87.93 EI Payable ($52.07 X 1.4)................. 72.90

(c) Mar. 16 Wages Payable........................................ 1,727.55

Cash ................................................. 1,727.55 (d) Mar. 31 CPP Payable ($87.93 + $87.93)............... 175.86

EI Payable ($52.07 + $72.90)................... 124.97 Income Tax Payable................................ 423.45 United Way Contributions Payable ....... 23.00 Cash ................................................. 747.28

11-37

*PROBLEM 11-8A

Jan. 10 Union Dues Payable ........................................ 1,250

Cash ........................................................... 1,250

12 CPP Payable ..................................................... 2,978 EI Payable ......................................................... 1,811 Income Tax Payable......................................... 16,400 Cash ........................................................... 21,189

15 Canada Savings Bonds Payable..................... 2,500 Cash ........................................................... 2,500

20 Workers’ Compensation Payable ................... 5,634 Cash ........................................................... 5,634

31 Office Salaries Expense .................................. 24,600 Store Wages Expense ..................................... 37,400 CPP Payable .............................................. 2,294 EI Payable .................................................. 1,395 Income Tax Payable.................................. 12,400 Union Dues Payable.................................. 800 United Way Payable .................................. 300 Wages Payable.......................................... 44,811

31 Wages Payable................................................. 44,811 Cash ........................................................... 44,811

31 Employee Benefits Expense ........................... 11,067

CPP Payable .............................................. 2,294 EI Payable ($1,395 X 1.4) .......................... 1,953 Workers’ Compensation Payable ($62,000 X 7%) ........................................ 4,340 Vacation Benefits Payable ($62,000 X 4%) 2,480

11-38

*PROBLEM 11-9A

(a) Dec. 31 Administrative Salaries Expense ................. 180,000

Electricians' Wages Expense........................ 370,000 CPP Payable ............................................ 21,450 Income Taxes Payable ............................ 123,000 EI Payable ................................................ 12,375 United Way Payable ................................ 5,000 Dental Insurance Premiums Payable..... 2,400 Long-term Disability Insurance Payable 1,500 Salaries and Wages Payable .................. 384,275

(b) Dec. 31 Employee Benefits Expense ......................... 75,675

CPP Payable ............................................ 21,450 EI Payable ($12,375 X 1.4)....................... 17,325 Workers’ Compensation Payable........... 11,000 Long-term Disability Insurance Payable 1,500 Medical Insurance Plan Payable ............ 24,400

(c) Administrative Salaries Expense ................................... $180,000

Electricians' Wages Expense.......................................... 370,000 Employee Benefits Expense ........................................... 75,675 Total Compensation Costs.............................................. $625,675

11-39

PROBLEM 11-1B

(a) 1.Not on balance sheet FOB destination and arrived after year-end

2. Current liabilities section Bonus payable $36,000 3. Current liabilities section Salaries payable $5,0761 CPP payable 6882 EI payable 4323 Income tax payable 2,4004 4. Current liabilities section Unearned revenue $25,000 5. Current liabilities section Environmental liability $250,0005 6. Current liabilities section Interest payable $167 Note payable $25,000 Calculations: 1 ($10,000 X 4/5) – (4.3% X $8,000) – (2.25% X $8,000) – ($3,000 x

4/5) = $5,076 2 (4.3% X $8,000) X 2 = $688 3 (2.25% X $8,000) X 2.4 = $432 4 $3,000 x 4/5 = $2,400 5 Note: Because this contingent liability is likely and estimable, it

should be recorded in the accounts 6 $25,000 X 8% X 1/12 = $167

(b) The notes should disclose information on the lawsuit, including

the estimated loss and the fact that the likelihood of the loss cannot be determined. Information on the Note Payable should also be disclosed–including the interest rate and repayment term.

11-40

PROBLEM 11-2B

(a) Mar. 2 Bicycle Equipment .................................. 8,000 Notes Payable—Mongoose............. 8,000 31 Interest Expense ($8,000 X 9% X 1/12) .. 60 Interest Payable ............................... 60 Apr. 1 Land.......................................................... 20,000 Notes Payable—Mountain Real Estate 20,000 30 Interest Expense...................................... 260 [($20,000 X 12% X 1/12) + $60] Interest Payable ............................... 260 May 1 Interest Payable....................................... 200 Cash.................................................. 200 2 Cash ......................................................... 15,000 Notes Payable—Western Bank....... 15,000 31 Interest Expense...................................... 335 [($15,000 X 6% X 1/12) + $60 + $200] Interest Payable ............................... 335 June 1 Interest Payable....................................... 200 Cash.................................................. 200 1 Notes Payable—Mongoose .................... 8,000 Interest Payable ($8,000 x 9% x 3/12) .... 180 Cash.................................................. 8,180 30 Interest Expense ($200 + $75) ................ 275 Interest Payable ............................... 275

11-41

PROBLEM 11-2B (Continued) (b)

Notes Payable 6/1 8,000 3/2 8,000

4/1 20,000 5/2 15,000

6/30 Bal. 35,000

Interest Payable 5/1 200 6/1 200 6/1 180

3/31 60 4/30 260 5/31 335 6/30 275

6/30 Bal. 350

Interest Expense 3/31 60 4/30 260 5/31 335 6/30 275

6/30 Bal. 930 (c) MILEHI MOUNTAIN BIKES (Partial) Balance Sheet June 30, 2003 Current liabilities Notes payable ...................................................................... $35,000 Interest payable ................................................................... 350 Total current liabilities ................................................ $35,350 (d) Total interest expense is $930.

11-42

PROBLEM 11-3B

(a) Jan. 5 Cash ........................................................... 16,632 Sales ($16,632 ÷ 1.15) ....................... 14,463 GST Payable ($14,463 X 7%) ............ 1,012 PST Payable ($14,463 X 8%)............. 1,157 12 Unearned Service Revenue...................... 9,000 Service Revenue ............................... 9,000 14 GST Payable.............................................. 7,500 PST Payable .............................................. 8,570 Cash ................................................... 16,070 20 Accounts Receivable................................ 28,750 Sales (500 X $50) ............................... 25,000 GST Payable ($25,000 X 7%) ............ 1,750 PST Payable ($25,000 X 8%)............. 2,000 21 Cash ........................................................... 18,000 Notes Payable—HSBC Bank ............ 18,000 25 Cash ........................................................... 11,340 Sales ($11,340 ÷ 1.15) ....................... 9,861 GST Payable ($9,861 X 7%) .............. 690 PST Payable ($9,861 X 8%)............... 789 (b) Jan. 31 Interest Expense ....................................... 50 Interest Payable................................. 50 ($18,000 X 10% X 1/3/12 = $50)

11-43

PROBLEM 11-3B (Continued) (c) BURLINGTON COMPANY (Partial) Balance Sheet January 31, 2003 Liabilities Current liabilities Accounts payable.............................................................. $52,000

Notes payable .................................................................... 18,000 Unearned service revenue ($16,000 – $9,000)................. 7,000 GST payable ($7,500 + $1,012 - $7,500 + $1,750 + $690) 3,452 PST payable ($8,570 + $1,157 - $8,570 + $2,000 + $789) 3,946 Interest payable ................................................................. 50 Total current liabilities .............................................. $84,448

11-44

PROBLEM 11-4B

2002 Dec. 31 Warranty Expense...................................... 2,000

Warranty Liability ............................... 2,000 ($50,000 X 4%) Warranty Liability ....................................... 1,600 Repair Parts Inventory ....................... 1,600

2003 Dec. 31 Warranty Expense...................................... 3,000

Warranty Liability ............................... 3,000 ($85,000 X 4%) - ($2,000 - $1,600) Warranty Liability ....................................... 3,000 Warranty Expense...................................... 500 Repair Parts Inventory ....................... 3,500

11-45

PROBLEM 11-5B

The company should record an estimate of the liability for the replacement of the tires. The liability exists (based on past events) and the company should be able to estimate it. It should also disclose information on the replacement program.

11-46

*PROBLEM 11-6B

(a) Weaknesses (b) Recommended

Procedures 1.

⇒ Manager prepares the payroll register, which is sent to the payroll department.

⇒ A payroll supervisor pays each employee by cheque.

⇒ The payroll department should prepare the payroll register, on the basis of the time cards approved by the manager.

⇒ Payment to employees

should be made by the controller's department.

2.

⇒ The assignment of duties among the payroll clerks does not result in any independent verification.

⇒ The duties of the payroll clerks should be assigned so that one clerk calculates the earnings for all employees. Then the calculations made should be verified by the clerk that did not make the initial determination of the data. Each month the duties of the clerks should be reversed.

11-47

*PROBLEM 11-6B (Continued)

(a) Weaknesses (b) Recommended Procedures

3.

⇒ The chief accountant manually signs the payroll cheques.

⇒ The department

managers distribute the payroll cheques.

⇒ The department managers are responsible for unclaimed cheques.

⇒ An electronic cheque writer should be used.

⇒ A representative of the controller’s department should distribute the payroll cheques.

⇒ A representative of the controller's department should have custody of unclaimed cheques.

11-48

*PROBLEM 11-7B

(a) Feb. 15 Wages Expense......................................... 1,216.00

CPP Payable ...................................... 40.70 EI Payable .......................................... 27.37 Income Tax Payable .......................... 128.20 United Way Contributions Payable.. 17.50 Wages Payable .................................. 1,002.23

15 Employee Benefits Expense .................... 79.02 CPP Payable ...................................... 40.70 EI Payable ($27.37 X 1.4)................... 38.32

(b) Feb. 15 Wages Payable.......................................... 1,002.23

Cash ................................................... 1,002.23 (c) Mar. 14 CPP Payable ($40.70 + $40.70)................. 81.40

EI Payable ($27.37 + $38.32)..................... 65.69 Income Tax Payable.................................. 128.20 United Way Contributions Payable ......... 17.50 Cash ................................................... 292.79

11-49

*PROBLEM 11-8B

(a) , (b) & (c)

CPP Payable Income Tax Withholdings Payable 1/12 3,508 1/1 3,508

1/31 3,441 1/31 3,441

1/12 28,400 1/1 28,400 1/31 27,900

1/31 6,882 1/31 27,900

EI Payable Workers’ Compensation Payable 1/12 2,133 1/1 2,133

1/31 2,092 1/31 2,929

1/20 5,689 1/1 5,689 1/31 5,580

1/31 5,021 1/31 5,580

Union Dues Payable Canada Savings Bonds Payable 1/10 1,200 1/1 1,200

1/31 1,200 1/1 1,210

1/31 1,210 1/31 1,200 1/31 2,420

Vacation Pay Payable United Way Donations Payable

1/1 3,793 1/31 3,720

1/17 750 1/1 750 1/31 750

1/31 7,513 1/31 750

Salaries and Wages Payable

1/31 56,407 1/31 56,407

1/31 0

11-50

*PROBLEM 11-8B (Continued) (b) Jan. 10 Union Dues Payable.................................... 1,200

Cash ..................................................... 1,200

12 CPP Payable ................................................ 3,508 EI Payable .................................................... 2,133 Income Tax Payable.................................... 28,400 Cash ..................................................... 34,041

17 United Way Donations Payable ................. 750 Cash ..................................................... 750

20 Workers’ Compensation Payable .............. 5,689 Cash ..................................................... 5,689

31 Office Salaries Expense ............................. 44,600 Store Wages Expense ................................ 48,400 CPP Payable ........................................ 3,441 EI Payable ............................................ 2,092 Income Tax Payable ............................ 27,900 Union Dues Payable............................ 1,200 United Way Payable ............................ 750 Canada Savings Bonds Payable........ 1,210 Wages Payable .................................... 56,407

31 Wages Payable............................................ 56,407 Cash ..................................................... 56,407

31 Employee Benefits Expense ...................... 15,670

CPP Payable ($3,441 x 1) .................... 3,441 EI Payable ($2,092 X 1.4)..................... 2,929 Workers’ Compensation Payable ($93,000 X 6%) .................................. 5,580

Vacation Pay Payable ($93,000 X 4%) 3,720

11-51

*PROBLEM 11-9B

(a) 1. $13,600

2. $526.50 3. $9,473.50 4. $23,400

Calculation of item (4):

Total Gross Earnings = Overtime earnings + Regular earnings = $1,500 + $21,900 = $23,400


2.25% x Gross Earnings = EI Deductions 2.25% x $23,400 = $526.50

Calculation of item (3): Gross Pay - Net Pay = Total Deductions $23,400 - $11,195 = $12,205

CPP + EI + Group Insurance + Income Taxes + Union Dues + United Way = Total Deductions $975 + $526.50 + $400 + X + $230 + $600 = $12,205 X = $9,473.50


Store Wages = Total Gross Earnings - Warehouse Wages = $23,400 - $9,800 = $13,600

11-52

*PROBLEM 11-9B (Continued) (b) June 30 Store Wages Expense ..................... 13,600.00

Warehouse Wages Expense ........... 9,800.00 CPP Payable .............................. 975.00 EI Payable .................................. 526.50 Group Insurance Plan Payable. 400.00 Income Tax Payable .................. 9,473.50 Union Dues Payable .................. 230.00 United Way Payable .................. 600.00 Salaries and Wages Payable .... 11,195.00

June 30 Employee Benefits Expense ........... 1,712.10

CPP Payable ($975 x 1) ............. 975.00 EI Payable ($526.50 X 1.4)......... 737.10

(c) July 15 Salaries and Wages Payable........... 11,195.00

Cash............................................ 11,195.00

15 CPP Payable ($975 + $975) .............. 1,950.00 EI Payable ($526.50 + $737.10)........ 1,263.60 Income Tax Payable ......................... 9,473.50

Cash............................................ 12,687.10

11-53

CUMULATIVE COVERAGE: CHAPTERS 9 TO 11

(a) Johan

Company Nordlund Company

Cash $ 50,300 $ 48,400 Accounts receivable 309,700 312,500 Allowance for doubtful accounts (13,600) (14,000) Merchandise inventory 500,000 520,200 Total current assets 846,400 867,100 Capital assets 245,300 257,300 Accumulated amortization (1) (180,996) (189,850) Net capital assets 64,304 67,450 Total assets $910,704 $934,550

Current liabilities $440,200 $466,500 Long-term liabilities 78,000 50,000 Total liabilities 518,200 516,500 Owner’s equity (2) 392,504 418,050 Total liabilities and owner’s equity $910,704 $934,550

11-54

CUMULATIVE COVERAGE (Continued) (a) (Continued) Calculations:

(1) Capital assets—Johan:

Year Net Book

Value

Declining-Balance

Rate (10% x 2)

Amortization Expense

Accumulated Amortization

1 $245,300 20% $49,060 $ 49,060 2 196,240 20% 39,248 88,308 3 156,992 20% 31,398 119,706 4 125,594 20% 25,119 144,825 5 100,475 20% 20,095 164,920 6 80,380 20% 16,076 180,996

(2) Owner’s equity: Johan: $429,750 + $36,100 change in inventory value – $73,346 change in accumulated amortization = $392,504

Nordlund: $432,050 – $14,000 allowance for doubtful accounts = $418,050

11-55

CUMULATIVE COVERAGE (Continued) (b) Originally, from the unrevised financial statements, it appeared that

Nordlund was the stronger company. After the revision of financial statements for purposes of comparability, this continues to be true. Nordlund Company is in a better financial position of the two companies. The difference between the net assets (assets minus liabilities) or owner’s equity of the two companies is $25,546 ($392,504 versus $418,050). Prior to the revision, this difference was a much closer $600 ($948,550 - $947,950).

While Nordlund may have more equity than Johan, Johan is in a

slightly stronger liquidity position. Johan has a current ratio of 1.93:1 ($846,400 ÷ $440,200) versus 1.86:1 ($867,100 ÷ $466,500) for Nordlund. Johan also has slightly more cash than Nordlund. Nordlund, though, has higher accounts receivable and inventory. Assuming that these receivables are collectible and the inventory saleable, the differences between the short-term liquidity are not significant between the two companies.

11-56

BYP 11-1 FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at June 24, 2000, were $6,405,000. There was a

$46,000 decrease from the previous year ($6,405,000 – $6,451,000), which was equivalent to a 0.71% decline ($46,000 ÷ $6,451,000).

(b) The components of total current liabilities on June 24, 2000 were

Accounts payable and accrued liabilities; current portion, long-tem debt; and deposits.

(c) The deposits must have been paid to The Second Cup by other

parties – perhaps as deposits on containers, for example. When the deposits were received, the Second Cup debited Cash and credited Deposits. They are a liability because they represent an obligation to repay the money when the containers are returned.

Alternatively, the deposits may represent unearned revenues, if, for example, they represent advance payments for franchise fees. These would be classified as liabilities until they have been earned by The Second Cup, when it has fulfilled its obligations under the franchise terms.

(d) The Second Cup reports its contingent liabilities in the notes to the

financial statements. Note 12 is titled “Minimum Lease Commitments and Contingent Liabilities.” The contingent liabilities relate to leases and subleases to franchisees. The Second Cup company is contingently liable for default of lease payments by franchisees.

11-57

BYP 11-2 INTERPRETING FINANCIAL STATEMENTS

(a) La Senza Reitmans Current assets Cash and short-term investments $ 33,018 $20,008 Accounts receivable 4,728 2,556 Inventory 41,418 38,481 Marketable securities 20,746 Prepaid expenses 2,607 8,816 Total $102,517 $69,861 Current liabilities Accounts payable and $27,290 $35,187 accrued liabilities Current maturity of long term debt 14,892 Income tax payable 2,043 5,124 Total $44,225 $40,311 (b) Working capital $58,292 $29,550 Current ratio 2.3:1 1.7:1 (c) La Senza’s ratio is better than that of the industry average, while

Reitmans’s is not as good as either La Senza’s or the industry.

11-58

BYP 11-3 INTERPRETING FINANCIAL STATEMENTS

(a) It is likely there will be some costs associated with the non-

compliance. It appears that the amount of the liability cannot be estimated and therefore it has not been accrued. Based on this, Cott’s treatment of not disclosing the contingency is acceptable.

(b) The contingent liability described in note (d) relate to lawsuits for

various items such as governmental regulations, income taxes and other actions. Based on the note, these contingent liabilities are not estimable or determinable. I agree with their reporting.

11-59

BYP 11-4 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page <www.wiley.com/canada/weygandt2>.

11-60

BYP 11-5 COLLABORATIVE LEARNING ACTIVITY

(a) The contingent loss is relevant to users of SAirGroup’s financial

statements. It is a risk factor that the company faces and potentially impacts income and cash flow.

(b) The estimate of the loss should be reasonably reliable–but it is an

estimate and subject to more error than other financial statements elements based on historic cost and past transactions. In estimating the amount of the loss, the company should use information obtained from its legal counsel and insurance agent on this, and similar cases

(c) The loss would be reported in the income statement as an

extraordinary item. It is abnormal in size, unusual, and was not the result of any management determination. The liability would be reported in the current liability section if it is anticipated that it will be settled within one year, otherwise it would be reported as a long-term liability. The notes would disclose the details of the loss and anticipated recovery from insurance as well as the amount of the lawsuit.

11-61

*BYP 11-6 COLLABORATIVE LEARNING ACTIVITY

(a)

ATS Temporary Employees

Month

Number

of Workers

Days

Worked

Daily Rate

Cost January-March April-May June-October November-December

Total Cost

3 2 2 3

180 (20 X 3 X 3) 100 (25 X 2 X 2) 180 (18 X 2 X 5) 138 (23 X 3 X 2)

$100 0100 0100 0100

$18,000 010,000 018,000 13,800 $59,800

DATIS PROCESSING COMPANY Permanent Employees

Salaries (2 x $32,000) ........................................................ $64,000 Additional payroll costs: CPP [2 x ($32,000 – $3,500) x 4.3%]............................. $2,451 EI [2.0 x $32,000 x 2.25% X 1.4].................................... 2,016 Worker’s Compensation (2 x $32,000 x 1.5%) ............ 960 Medical and dental insurance (2 x $40 x 12)............... 960 0 6,387 $70,387 As shown, Datis Processing Company would save $10,587 ($70,387 - $59,800) by discharging the two employees and accepting the Advanced Temp Services plan.

11-62

BYP 11-6 (Continued) (b) Denise should consider the following additional factors:

(1) The effect on the morale of the continuing employees if two employees are terminated.

(2) The anticipated efficiency of the Advanced Temp Services

workers compared to the efficiency of the two employees who would be terminated.

(3) The effect on management control and supervision of using

Advanced Temp Services personnel. (4) The time that may be required to indoctrinate the different

Advanced Temp Services personnel into the Datis Processing Company procedures.

11-63

BYP 11-7 COMMUNICATION ACTIVITY

Dear Sir: In response to your request, I wish to answer your questions regarding the accounting for gift certificates in your theatre. (a) A liability is recorded when these certificates are sold because there

is still a service to be provided by the theatre. They 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, generate additional revenues for the theatre.

(b) 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. These unredeemed certificates will eventually be recognized as revenue.

A reversing entry would be made to reduce the liability related to unearned revenue, and to record the estimated amount which will never be redeemed as earned (or perhaps as a gain).

Sincerely,

11-64

BYP 11-8 ETHICS CASE

(a) The stakeholders in this situation include: Shareholders Creditors Employees Government inspectors Customers flying in airplanes (b) The possible courses of action and their consequences include: 1. The CEO could inform the auditors. The auditors would then re-

quire that this information be disclosed in the annual report. When the lenders learn about this potential problem, they may decide to call their loans, and the company’s suppliers may decide to quit sending it goods. This could result in the bankruptcy of the company, even if the company was not at fault for the engine failures. However, this would be in compliance with his requirement to disclose all material facts. By not disclosing, the CEO is misinforming a large number of important stakeholders.

2. The CEO could conceal the information from the auditors. If the

company is not ultimately found at fault, then the company will not have sustained any financial hardship. However, if the company is found to be at fault for the engine failures, then not only is it likely the company will go bankrupt, but the CEO could face prosecution for failing to disclose the existence of this problem to auditors.

(c) Answer will vary according to student.

11-65

BYP 11-8 (Continued) (d) If the CEO conceals the information, and the company is

subsequently found to be at fault, a number of stakeholders will suffer. First, the company’s creditors will lose money because it is likely the company won’t be able to repay its loans in full. The shareholders will lose because the value of their shares will plummet. The employees may well lose their jobs because the company is likely to go bankrupt. Also, it is possible that other engines might fail in the interim, possibly resulting in a crash. Answers as to whether the CEO should be punished for concealing this information will vary by student.

Current Liabilities ASSIGNMENT CLASSIFICATION · PDF file11-1 CHAPTER 11 Current Liabilities ... Questions Chapter 11 (Continued) 6. Mandatory payroll ... to assure the accuracy and

Documents