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
11-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Simple
10-15
Moderate
30-40
Simple
25-35
1A
Identify liabilities.
2A
Journalize and post note transactions. Show balance sheet
presentation.
3A
Prepare current liability entries, adjusting entries, and current
liabilities section of balance sheet.
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
11-2
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objectives
1. Explain a current
liability and
distinguish
between the major
types of current
liabilities.
Knowledge
Comprehension
Q11-1
BE11-1
BE11-2
Application
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
*BE11-10
*Q11-16
*Q11-17
*Q11-15
*6.
Discuss the
objectives of
internal control for
payroll, and be
able to identify
weaknesses and
suggest
improvements in
their application
(Appendix 11A).
Analysis
E11-8
P11-1A
P11-1B
P11-2A
P11-3A
P11-1B
P11-2B
P11-3B
*E11-11
*P11-6A
*P11-6B
11-3
Synthesis
Evaluation
Study Objectives
*7. Calculate the
payroll for a pay
period (Appendix
11A).
Knowledge
*Q11-19
Comprehension
*Q11-18
Application
*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
Analysis
BYP11-1
BYP11-2
BYP11-3
BYP11-4
BYP11-6
Broadening Your
Perspective
11-4
Synthesis
Evaluation
BYP11-7
Cumulative
Coverage
BYP11-5
BYP11-8
*P11-9B
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 ................................................................
GST Payable....................................................
10,000
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 ................................
($90/5 games X 1,000 tickets)
18,000
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.
11-5
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.
11-6
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.
11-7
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.
11-8
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.
2.
3.
4.
5.
6.
Current liability
Current liability
Current liability
Current liability
Current liability
Current asset
7.
8.
9.
10.
11.
Current liability
Current asset
Contingent liability
Current liability
Current liability
BRIEF EXERCISE 11-3
July
1
Dec. 31
Cash ........................................................................ 60,000
Notes Payable .................................................
Interest Expense ....................................................
Interest Payable ..............................................
($60,000 X 10% X 6/12 = $3,000)
11-9
60,000
3,000
3,000
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 ....................................................................
Sales ............................................................
GST Payable................................................
PST Payable ................................................
6,900
6,000
420
480
BRIEF EXERCISE 11-5
Cash ...................................................................................... 180,000
Unearned Basketball Ticket Revenue .........................
(2,000 tickets X $90 per ticket)
Unearned Basketball Ticket Revenue .................................
Basketball Ticket Revenue ...........................................
($180,000/12 games or $90/12 X 2,000)
11-10
180,000
15,000
15,000
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 ............................................
Property Tax Payable .....................................
Apr. 30
2,000
2,000
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
June 30
July 15
Property Tax Expense ............................................
Prepaid Property Tax .....................................
2,100
Property Tax Expense ............................................
Prepaid Property Tax .....................................
2,100
2,100
2,100
Property Tax Payable ($6,000 + $19,200) .............. 25,200
Cash ................................................................
25,200
11-11
BRIEF EXERCISE 11-7
Dec. 31
Warranty Expense ..............................................
Warranty Liability.......................................
[(1,000 X 5%) X $75]
3,750
3,750
BRIEF EXERCISE 11-8
Loss due to Environmental Lawsuit ...................................
Liability for Clean up ....................................................
50,000
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.
11-12
*BRIEF EXERCISE 11-10
1.
2.
Timekeeping
Hiring
3.
4.
Preparing the payroll
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
Net pay ..................................................................................
161.03
$506.47
*BRIEF EXERCISE 11-12
Jan. 15
Jan. 15
Wages Expense ..................................................
Income Tax Payable ...................................
Wages Payable ...........................................
CPP Payable................................................
EI Payable ...................................................
667.50
Wages Payable ...................................................
Cash ............................................................
506.47
11-13
120.00
506.47
25.81
15.02
506.47
*BRIEF EXERCISE 11-13
Jan. 31
31
Salaries and Wages Expense ............................
CPP Payable................................................
EI Payable ...................................................
Income Taxes Payable ...............................
Salaries and Wages Payable......................
70,000
Employee Benefits Expense..............................
CPP Payable................................................
EI Payable ($1,575 x 1.4) ............................
4,935
2,730
1,575
15,300
50,395
2,730
2,205
*BRIEF EXERCISE 11-14
Jan. 31
Vacation Benefits Expense (50 X $150) ............
Vacation Benefits Payable .........................
11-14
7,500
7,500
SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) May 31
(b) June 30
(c) Nov. 30
Cash .............................................................
Notes Payable .....................................
50,000
Interest Expense .........................................
Interest Payable ..................................
($50,000 X 9% X 1/12)
375
Notes Payable .............................................
Interest Payable ($50,000 x 9% x 1/12) ......
Interest Expense ($50,000 x 9% x 5/12) .....
Cash ....................................................
50,000
375
1,875
50,000
375
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 .....................................
Nov. 1
Interest Expense..........................................
Cash ....................................................
($250,000 X 10% X 1/12)
2,083
2,083
(b) TD Bank
Oct. 1
Notes Receivable......................................... 250,000
Cash ....................................................
Nov. 1
Cash .............................................................
Interest Revenue ................................
($250,000 X 10% X 1/12)
11-15
250,000
250,000
2,083
2,083
EXERCISE 11-3
1.
Sainsbury Company
Apr. 10
2.
Cash ....................................................................
Sales ............................................................
PST Payable ...............................................
GST Payable................................................
28,756
25,000
2,006
1,750
Hockenstein Company
Apr. 15
Cash ....................................................................
Sales ($18,240 ÷ 1.14) .................................
GST Payable ($16,000 x 7%) ......................
PST Payable ($16,000 x 7%) .......................
18,240
16,000
1,120
1,120
EXERCISE 11-4
(a) Nov. 30
(b) Dec. 31
(c) Mar. 31
Cash ............................................................ 216,000
Unearned Subscription Revenue .......
(6,000 X $36)
Unearned Subscription Revenue ..............
Subscription Revenue ........................
($216,000 X 1/12)
18,000
Unearned Subscription Revenue ..............
Subscription Revenue ........................
($216,000 X 3/12)
54,000
11-16
216,000
18,000
54,000
EXERCISE 11-5
(a) Estimated warranties outstanding:
Month
November
December
Total
Estimate of Defective
Units
Units Defective
Outstanding
at Dec. 31
0,700
0,500
1,200
500
780
1,280
30,000 X 4% = 1,200
32,000 X 4% = 1,280
2,480
Dec. 31 estimated warranty liability—1,280 X $10 = $12,800
(b) Dec. 31
31
(c) Jan.
Warranty Expense (2,480 X $10) ................
Warranty Liability ................................
24,800
Warranty Liability........................................
Repair Parts Inventory,
Wages Payable, Cash, Etc. .................
12,000
Warranty Liability (550 X $10) ....................
Repair Parts Inventory,
Wages Payable, Cash, Etc. .................
5,500
11-17
24,800
12,000
5,500
EXERCISE 11-6
(a) Last calendar year
Oct. 31
- Dec. 31
Property Tax Expense ($24,000 X 1/12).........
Prepaid Property Tax ..............................
2,000
2,000
This entry would be made monthly Oct. to Dec. ($2,000 X 3 mos. =
$6,000).
Current calendar year
Jan. 31
- Apr. 30
Property Tax Expense ($24,000 X 1/12).........
Property Tax Payable ..............................
2,000
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).........
- June 30
Prepaid Property Tax ..............................
2,200
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 .........................................................
(d) July 31 Property Tax Expense ($26,400 X 1/12).........
- Sept. 30
Prepaid Property Tax ..............................
2,200
This entry would be made monthly July, August, and September.
11-18
26,400
2,200
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
Accounts payable
Classification
Current liability
Reason
Due within one year
Accrued benefit liability
Current liability
Due within one year
Accrued liabilities
Current liability
Due within one year
Advances on long-term
contracts
Long-term liability Advance (funds) provided
by company, long-term
related to contracts
Current liability
Due within one year
Current portion of long
term debt
Deferred income taxes
Other
Income taxes payable
Current liability
Long-term debt
Long-term liability Not due within one year
Payroll related liabilities
Current liability
Due within one year
Short-term borrowings
Current liability
Due within one year
Unused operating line of
credit
NA
Not a balance sheet item
as unused – may be
disclosed in notes
11-19
Income taxes payable in
the future
Due within one year
EXERCISE 11-8 (Continued)
(b)
BOMBARDIER
(Partial) Balance Sheet
January 31, 2001
(in millions)
Current liabilities
Short-term borrowings......................................................
Accounts payable ..............................................................
Accrued liabilities ..............................................................
Current portion of long-term debt ....................................
Accrued benefit liability ....................................................
Payroll related liabilities ...................................................
Income taxes payable........................................................
Total current liabilities ...............................................
$2,531.2
2,142.3
1,534.9
974.6
494.4
359.4
91.3
$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 ..................................
(b) Current ratio = $300,000 ÷ $144,000 = 2.1:1
11-20
$ 66,000
24,000
18,000
10,000
10,000
8,000
8,000
$144,000
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 .................................................
(b) 1.
$739,665
88,059
22,423
$850,147
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
11-21
*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 ................................................
Income Tax Payable ...............................
CPP Payable ...........................................
EI Payable ...............................................
Cash ........................................................
11-22
516.00
79.70
19.29
11.61
405.40
*EXERCISE 11-13
(a)
AHMAD COMPANY
Payroll Register
For the Week Ending January 31
Earnings
Employee
A. Hope
B. Innes
C. Stone
Totals
Total
Hours
43
42
44
Regular
$0,400.00
00,480.00
520.00
$1,400.00
Overtime
$045.00
0036.00
78.00
$159.00
Deductions
Gross
Pay
$0,445.00
00,516.00
00,598.00
$1,559.00
CPP
EI
$16.24 $10.01
0019.29 0011.61
022.82 013.46
$58.35 $35.08
11-23
Income
Tax
$074.00
0087.00
0118.00
$279.00
Health
Insurance
$10.00
015.00
015.00
$40.00
Total
$110.25
0132.90
0169.28
$412.43
Net
Pay
$0,334.75
00,383.10
428.72
$1,146.57
*EXERCISE 11-13 (Continued)
(b) Jan. 31
31
Wages Expense......................................
CPP Payable ...................................
EI Payable .......................................
Income Tax Payable .......................
Health Insurance Payable ..............
Wages Payable ...............................
1,559.00
Employee Benefits Expense .................
CPP Payable ($58.35 x 1) ...............
EI Payable ($35.08 X 1.4) ................
Workers’ Compensation Payable
($1,559 X 2%) ...............................
Health Insurance Payable ..............
178.64
58.35
35.08
279.00
40.00
1,146.57
58.35
49.11
31.18
40.00
*EXERCISE 11-14
(a) (1)
(2)
(3)
(4)
(5)
(6)
$12,016.67
$13,066.67
$507.40
$4,502.40
$8,564.27
$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
11-24
*EXERCISE 11-14 (Continued)
(b) CPP = $507.40 X 1.0 = $507.40
EI = $294.00 X 1.4 = $411.60
(c) Feb. 28
28
28
Warehouse Wages Expense............
Store Wages Expense......................
CPP Payable .............................
EI Payable .................................
Income Tax Payable .................
Union Dues Payable .................
United Way Payable..................
Wages Payable .........................
4,900.00
8,166.67
Employee Benefits Expense ...........
CPP Payable .............................
EI Payable .................................
919.00
Wages Payable .................................
Cash ..........................................
8,564.27
507.40
294.00
3,262.00
139.00
300.00
8,564.27
507.40
411.60
8,564.27
*EXERCISE 11-15
Mar. 31
31
Vacation Benefits Expense .....................
(8 X 2 X $100)
Vacation Benefits Payable...............
1,600
Medical Insurance Expense ($50 X 8) ....
Medical Insurance Payable .............
400
11-25
1,600
400
SOLUTIONS TO PROBLEMS
PROBLEM 11-1A
(a) 1. Current liabilities section
2. Current liabilities section
3. Current liabilities section
4. No current liability
—relates to next period
5. Contingent liability
6. Current liabilities section
Accounts payable
Bonus payable
Salaries payable
CPP Payable
EI payable
Income tax payable
Property tax payable
Not on balance sheet
Interest payable
Current maturity
Long-term liabilities section Note payable
$150,000
$35,000
$1,7231
2582
1623
1,0804
0
0
$4,1675
$100,000
$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.
11-26
PROBLEM 11-2A
(a) Jan. 12
Feb.
1
Mar. 31
Apr.
July
1
1
Sept. 30
Oct.
Dec.
1
1
Dec. 31
Merchandise Inventory ................................... 18,000
Accounts Payable ....................................
18,000
Accounts Payable ........................................... 18,000
Notes Payable ..........................................
18,000
Interest Expense .............................................
($18,000 X 10% X 2/12)
Interest Payable .......................................
300
300
Notes Payable ................................................. 18,000
Interest Payable ..............................................
300
Cash .........................................................
18,300
Equipment ....................................................... 36,000
Cash .........................................................
Notes Payable ..........................................
11,000
25,000
Interest Expense .............................................
($25,000 X 10% X 3/12)
Interest Payable .......................................
625
625
Notes Payable ................................................. 25,000
Interest Payable ..............................................
625
Cash .........................................................
25,625
Cash ................................................................. 20,000
Notes Payable ..........................................
20,000
Interest Expense ($20,000 X 9% X 1/12) ........
Interest Payable .......................................
11-27
150
150
PROBLEM 11-2A (Continued)
(b)
Notes Payable
4/1
10/1
18,000
25,000
2/1
7/1
12/1
18,000
25,000
20,000
12/31 Bal.
20,000
Interest Payable
4/1
10/1
300
625
3/31
9/30
12/31
300
625
150
12/31 Bal.
150
Interest Expense
3/31
9/30
12/31
12/31 Bal.
(c)
300
625
150
1,075
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).
11-28
PROBLEM 11-3A
(a) Jan. 1
5
5
12
14
20
20
25
25
Cash ........................................................... 15,000
Notes Payable ....................................
Cash ...........................................................
Sales ($7,752 ÷ 1.14) ..........................
PST Payable ($6,800 x 7%) ................
GST Payable ($6,800 x 7%) ................
7,752
Cost of Goods Sold ...................................
Merchandise Inventory ......................
4,600
Unearned Service Revenue ......................
Service Revenue ................................
8,000
PST Payable ...............................................
GST Payable ..............................................
Cash ....................................................
5,800
5,800
15,000
6,800
476
476
4,600
8,000
11,600
Accounts Receivable ................................ 29,640
Sales (500 X $52)................................
PST Payable ($26,000 x 7%) ..............
GST Payable ($26,000 x 7%) ..............
26,000
1,820
1,820
Cost of Goods Sold (500 x $20) ................ 10,000
Merchandise Inventory ......................
10,000
Cash ........................................................... 14,820
Sales ($14,820 ÷ 1.14) ........................
PST Payable ($13,000 x 7%) ..............
GST Payable .......................................
13,000
910
910
Cost of Goods Sold ...................................
Merchandise Inventory ......................
11-29
9,000
9,000
PROBLEM 11-3A (Continued)
(b)
(1) Jan. 31
(2) Jan. 31
Interest Expense .......................................
Interest Payable ................................
($15,000 X 10% X 1/12)
125
Warranty Expense ($26,000 X 8%) ...........
Warranty Liability ..............................
2,080
125
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
11-30
PROBLEM 11-4A
2002
Warranty Expense ..................................... 19,800
Warranty Liability ...............................
($660,000 X 3%)
Warranty Liability ...................................... 16,000
Cash ....................................................
2003
Warranty Expense ..................................... 42,000
Warranty Liability ...............................
($840,000 X 5%)
Warranty Liability ...................................... 35,000
Cash ....................................................
11-31
19,800
16,000
42,000
35,000
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.
11-32
*PROBLEM 11-6A
(a) Weaknesses
(b) Recommended Procedures
1.

Department managers

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.
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.

Hours worked are
marked on the time card
by the employee.

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.

Employees give the
approved cards to
payroll.

The manager should
deliver the cards to
payroll, in order to prevent
possible alterations by
employees during delivery.
2.
11-33
*PROBLEM 11-6A (Continued)
(a) Weaknesses
(b)
Recommended Procedures
3.

Department manager
indicates the rates of
pay.

Rates of pay should be
authorized in writing by
the human resources
department, and
communicated to the
payroll department.

The department
manager pays the
employees.

The controller's
department should pay the
employees.

Payment is in cash.

Payment should be made
by cheque.
11-34
*PROBLEM 11-7A
(a)
SURE VALUE HARDWARE
Payroll Register
For the Week Ending March 15, 2003
Earnings
Employee
A. Pima
C. Zuni
E. Hopi
G. Mohav
Totals
Hours Regular
40
42
44
46
0,520.00
0,520.00
0,520.00
0,520.00
2,080.00
Overtime
000.00
039.00
078.00
117.00
234.00
Deductions
Gross
Pay
0,520.00
0,559.00
0,598.00
0,637.00
2,314.00
Income
Tax
089.65
99.65
110.50
123.65
423.45
CPP
019.47
21.14
22.82
24.50
87.93
11-35
EI
11.70
12.58
13.46
14.33
52.07
United
Way
05.00
05.00
08.00
05.00
23.00
Total
125.82
138.37
154.78
167.48
586.45
Net Pay
394.18
420.63
443.22
469.52
1,727.55
Store
Office
Wages
Wages
Expense Expense
0,520.00
0,559.00
0,598.00
000
1,677.00
637.00
637.00
*PROBLEM 11-7A (Continued)
(b) Mar. 15
15
(c) Mar. 16
(d) Mar. 31
Store Wages Expense............................
Office Wages Expense...........................
CPP Payable ...................................
Income Tax Payable .......................
EI Payable .......................................
United Way Contributions Payable
Wages Payable ...............................
1,677.00
637.00
Employee Benefits Expense .................
CPP Payable ($87.93 x 1) ...............
EI Payable ($52.07 X 1.4) ................
160.83
Wages Payable .......................................
Cash ................................................
1,727.55
CPP Payable ($87.93 + $87.93) ..............
EI Payable ($52.07 + $72.90) ..................
Income Tax Payable ...............................
United Way Contributions Payable .......
Cash ................................................
175.86
124.97
423.45
23.00
11-36
87.93
423.45
52.07
23.00
1,727.55
87.93
72.90
1,727.55
747.28
*PROBLEM 11-8A
Jan. 10
12
15
20
31
31
31
Union Dues Payable.........................................
Cash ...........................................................
1,250
CPP Payable .....................................................
EI Payable .........................................................
Income Tax Payable .........................................
Cash ...........................................................
2,978
1,811
16,400
Canada Savings Bonds Payable .....................
Cash ...........................................................
2,500
Workers’ Compensation Payable ...................
Cash ...........................................................
5,634
Office Salaries Expense ..................................
Store Wages Expense .....................................
CPP Payable ..............................................
EI Payable ..................................................
Income Tax Payable ..................................
Union Dues Payable ..................................
United Way Payable ..................................
Wages Payable ..........................................
24,600
37,400
Wages Payable .................................................
Cash ...........................................................
44,811
Employee Benefits Expense ...........................
CPP Payable ..............................................
EI Payable ($1,395 X 1.4) ..........................
Workers’ Compensation Payable
($62,000 X 7%) ........................................
Vacation Benefits Payable ($62,000 X 4%)
11,067
11-37
1,250
21,189
2,500
5,634
2,294
1,395
12,400
800
300
44,811
44,811
2,294
1,953
4,340
2,480
*PROBLEM 11-9A
(a) Dec. 31
(b) Dec. 31
Administrative Salaries Expense ................. 180,000
Electricians' Wages Expense ....................... 370,000
CPP Payable............................................
Income Taxes Payable ...........................
EI Payable ...............................................
United Way Payable ................................
Dental Insurance Premiums Payable ....
Long-term Disability Insurance Payable
Salaries and Wages Payable .................
21,450
123,000
12,375
5,000
2,400
1,500
384,275
Employee Benefits Expense ........................ 75,675
CPP Payable............................................
EI Payable ($12,375 X 1.4) ......................
Workers’ Compensation Payable ..........
Long-term Disability Insurance Payable
Medical Insurance Plan Payable............
21,450
17,325
11,000
1,500
24,400
(c) Administrative Salaries Expense...................................
Electricians' Wages Expense.........................................
Employee Benefits Expense ..........................................
Total Compensation Costs ............................................
11-38
$180,000
370,000
75,675
$625,675
PROBLEM 11-1B
(a) 1.Not on balance sheet
2. Current liabilities section
3. Current liabilities section
4. Current liabilities section
5. Current liabilities section
6. Current liabilities section
FOB destination and arrived after
year-end
Bonus payable
$36,000
Salaries payable
$5,0761
CPP payable
6882
EI payable
4323
Income tax payable
2,4004
Unearned revenue
$25,000
Environmental liability $250,0005
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.
11-39
PROBLEM 11-2B
(a) Mar.
2
31
Apr.
1
30
May
1
2
31
June 1
1
30
Bicycle Equipment ..................................
Notes Payable—Mongoose .............
8,000
Interest Expense ($8,000 X 9% X 1/12) ...
Interest Payable ...............................
60
8,000
60
Land .........................................................
20,000
Notes Payable—Mountain Real Estate
Interest Expense......................................
[($20,000 X 12% X 1/12) + $60]
Interest Payable ...............................
260
Interest Payable .......................................
Cash ..................................................
200
Cash .........................................................
Notes Payable—Western Bank .......
15,000
Interest Expense......................................
[($15,000 X 6% X 1/12) + $60 + $200]
Interest Payable ...............................
335
Interest Payable .......................................
Cash ..................................................
200
Notes Payable—Mongoose.....................
Interest Payable ($8,000 x 9% x 3/12) .....
Cash ..................................................
8,000
180
Interest Expense ($200 + $75) ................
Interest Payable ...............................
275
11-40
20,000
260
200
15,000
335
200
8,180
275
PROBLEM 11-2B (Continued)
(b)
6/1
Notes Payable
8,000 3/2
4/1
5/2
8,000
20,000
15,000
6/30 Bal. 35,000
5/1
6/1
6/1
Interest Payable
200 3/31
200 4/30
180 5/31
6/30
6/30 Bal.
60
260
335
275
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 .....................................................................
Interest payable ..................................................................
Total current liabilities ...............................................
(d)
Total interest expense is $930.
11-41
$35,000
350
$35,350
PROBLEM 11-3B
(a) Jan. 5
12
14
20
21
25
(b) Jan. 31
Cash ...........................................................
Sales ($16,632 ÷ 1.15)........................
GST Payable ($14,463 X 7%) .............
PST Payable ($14,463 X 8%) .............
16,632
Unearned Service Revenue ......................
Service Revenue................................
9,000
GST Payable ..............................................
PST Payable ..............................................
Cash ...................................................
7,500
8,570
Accounts Receivable ................................
Sales (500 X $50) ...............................
GST Payable ($25,000 X 7%) .............
PST Payable ($25,000 X 8%) .............
28,750
Cash ...........................................................
Notes Payable—HSBC Bank.............
18,000
Cash ...........................................................
Sales ($11,340 ÷ 1.15)........................
GST Payable ($9,861 X 7%) ...............
PST Payable ($9,861 X 8%) ...............
11,340
Interest Expense .......................................
Interest Payable .................................
($18,000 X 10% X 1/3/12 = $50)
50
11-42
14,463
1,012
1,157
9,000
16,070
25,000
1,750
2,000
18,000
9,861
690
789
50
PROBLEM 11-3B (Continued)
(c)
BURLINGTON COMPANY
(Partial) Balance Sheet
January 31, 2003
Liabilities
Current liabilities
Accounts payable .............................................................
Notes payable ...................................................................
Unearned service revenue ($16,000 – $9,000) ................
GST payable ($7,500 + $1,012 - $7,500 + $1,750 + $690)
PST payable ($8,570 + $1,157 - $8,570 + $2,000 + $789)
Interest payable ................................................................
Total current liabilities .............................................
11-43
$52,000
18,000
7,000
3,452
3,946
50
$84,448
PROBLEM 11-4B
2002
Dec. 31 Warranty Expense .....................................
Warranty Liability ...............................
($50,000 X 4%)
Warranty Liability ......................................
Repair Parts Inventory.......................
2003
Dec. 31 Warranty Expense .....................................
Warranty Liability ...............................
($85,000 X 4%) - ($2,000 - $1,600)
Warranty Liability ......................................
Warranty Expense .....................................
Repair Parts Inventory.......................
11-44
2,000
2,000
1,600
1,600
3,000
3,000
3,000
500
3,500
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.
11-45
*PROBLEM 11-6B
(a) Weaknesses
Procedures
(b) Recommended
1.

Manager prepares the
payroll register, which is
sent to the payroll
department.

The payroll department
should prepare the payroll
register, on the basis of the
time cards approved by
the manager.

A payroll supervisor pays
each employee by
cheque.

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.
11-46
*PROBLEM 11-6B (Continued)
(a) Weaknesses
Procedures
(b) Recommended
3.

The chief accountant
manually signs the
payroll cheques.

An electronic cheque writer
should be used.

The department
managers distribute the
payroll cheques.

A representative of the
controller’s department
should distribute the payroll
cheques.

The department
managers are
responsible for
unclaimed cheques.

A representative of the
controller's department should
have custody of unclaimed
cheques.
11-47
*PROBLEM 11-7B
(a) Feb. 15
15
(b) Feb. 15
(c) Mar. 14
Wages Expense........................................ 1,216.00
CPP Payable .....................................
EI Payable .........................................
Income Tax Payable .........................
United Way Contributions Payable .
Wages Payable .................................
Employee Benefits Expense ...................
CPP Payable .....................................
EI Payable ($27.37 X 1.4) ..................
79.02
40.70
38.32
Wages Payable ......................................... 1,002.23
Cash ..................................................
CPP Payable ($40.70 + $40.70) ................
EI Payable ($27.37 + $38.32) ....................
Income Tax Payable .................................
United Way Contributions Payable .........
Cash ..................................................
11-48
40.70
27.37
128.20
17.50
1,002.23
1,002.23
81.40
65.69
128.20
17.50
292.79
*PROBLEM 11-8B
(a) , (b) & (c)
1/12
1/12
1/10
CPP Payable
3,508 1/1
1/31
1/31
1/31
EI Payable
2,133 1/1
1/31
1/31
1/31
Union Dues Payable
1,200 1/1
1/31
1/31
Income Tax Withholdings Payable
3,508 1/12
28,400 1/1
28,400
3,441
1/31
27,900
3,441
6,882
1/31
27,900
2,133
2,092
2,929
5,021
Workers’ Compensation Payable
1/20
5,689 1/1
5,689
1/31
5,580
1/31
5,580
1,200
1,200
1,200
Canada Savings Bonds Payable
1/1
1,210
1/31
1,210
1/31
2,420
Vacation Pay Payable
1/1
3,793
1/31
3,720
1/31
7,513
United Way Donations Payable
1/17
750 1/1
750
1/31
750
1/31
750
Salaries and Wages Payable
1/31
56,407
1/31
56,407
1/31
0
11-49
*PROBLEM 11-8B (Continued)
(b) Jan. 10
12
17
20
31
31
31
Union Dues Payable ....................................
Cash .....................................................
1,200
CPP Payable ................................................
EI Payable ....................................................
Income Tax Payable ....................................
Cash .....................................................
3,508
2,133
28,400
United Way Donations Payable ..................
Cash .....................................................
750
Workers’ Compensation Payable...............
Cash .....................................................
5,689
Office Salaries Expense .............................
Store Wages Expense.................................
CPP Payable ........................................
EI Payable ............................................
Income Tax Payable ............................
Union Dues Payable ............................
United Way Payable.............................
Canada Savings Bonds Payable ........
Wages Payable ....................................
44,600
48,400
Wages Payable ............................................
Cash .....................................................
56,407
Employee Benefits Expense ......................
CPP Payable ($3,441 x 1) ....................
EI Payable ($2,092 X 1.4) .....................
Workers’ Compensation Payable
($93,000 X 6%) ..................................
Vacation Pay Payable ($93,000 X 4%)
15,670
11-50
1,200
34,041
750
5,689
3,441
2,092
27,900
1,200
750
1,210
56,407
56,407
3,441
2,929
5,580
3,720
*PROBLEM 11-9B
(a) 1.
2.
3.
4.
$13,600
$526.50
$9,473.50
$23,400
Calculation of item (4):
Total Gross Earnings = Overtime earnings + Regular earnings
= $1,500 + $21,900
= $23,400
Calculation of item (2):
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
Calculation of item (1):
Store Wages = Total Gross Earnings - Warehouse Wages =
$23,400 - $9,800 = $13,600
11-51
*PROBLEM 11-9B (Continued)
(b) June 30
June 30
(c) July 15
15
Store Wages Expense.....................
Warehouse Wages Expense...........
CPP Payable..............................
EI Payable .................................
Group Insurance Plan Payable
Income Tax Payable .................
Union Dues Payable .................
United Way Payable ..................
Salaries and Wages Payable ...
13,600.00
9,800.00
Employee Benefits Expense ..........
CPP Payable ($975 x 1) ............
EI Payable ($526.50 X 1.4) ........
1,712.10
Salaries and Wages Payable ..........
Cash ..........................................
11,195.00
CPP Payable ($975 + $975) .............
EI Payable ($526.50 + $737.10) .......
Income Tax Payable ........................
Cash ..........................................
1,950.00
1,263.60
9,473.50
11-52
975.00
526.50
400.00
9,473.50
230.00
600.00
11,195.00
975.00
737.10
11,195.00
12,687.10
CUMULATIVE COVERAGE: CHAPTERS 9 TO 11
(a)
Johan
Company
Nordlund
Company
Cash
Accounts receivable
Allowance for doubtful accounts
Merchandise inventory
Total current assets
$ 50,300
309,700
(13,600)
500,000
846,400
$ 48,400
312,500
(14,000)
520,200
867,100
Capital assets
Accumulated amortization (1)
Net capital assets
245,300
(180,996)
64,304
257,300
(189,850)
67,450
Total assets
$910,704
$934,550
Current liabilities
Long-term liabilities
Total liabilities
$440,200
78,000
518,200
$466,500
50,000
516,500
392,504
418,050
$910,704
$934,550
Owner’s equity (2)
Total liabilities and owner’s equity
11-53
CUMULATIVE COVERAGE (Continued)
(a) (Continued)
Calculations:
(1) Capital assets—Johan:
Year
1
2
3
4
5
6
Net Book
Value
$245,300
196,240
156,992
125,594
100,475
80,380
DecliningBalance
Rate
(10% x 2)
20%
20%
20%
20%
20%
20%
Amortization
Expense
$49,060
39,248
31,398
25,119
20,095
16,076
Accumulated
Amortization
$ 49,060
88,308
119,706
144,825
164,920
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
11-54
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.
11-55
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.
11-56
BYP 11-2 INTERPRETING FINANCIAL STATEMENTS
(a)
La Senza
Current assets
Cash and
short-term investments
Accounts receivable
Inventory
Marketable securities
Prepaid expenses
Total
Current liabilities
Accounts payable and
accrued liabilities
Current maturity
of long term debt
Income tax payable
Total
Reitmans
$ 33,018
4,728
41,418
20,746
2,607
$102,517
$20,008
2,556
38,481
$27,290
$35,187
14,892
2,043
$44,225
5,124
$40,311
$58,292
2.3:1
$29,550
1.7:1
8,816
$69,861
(b)
Working capital
Current ratio
(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.
11-57
BYP 11-3 INTERPRETING FINANCIAL STATEMENTS
(a) It is likely there will be some costs associated with the noncompliance. 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.
11-58
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>.
11-59
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.
11-60
*BYP 11-6 COLLABORATIVE LEARNING ACTIVITY
(a)
ATS
Temporary Employees
Month
January-March
April-May
June-October
November-December
Total Cost
Number
of
Workers
Days
Worked
Daily
Rate
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
Cost
$18,000
010,000
018,000
13,800
$59,800
DATIS PROCESSING COMPANY
Permanent Employees
Salaries (2 x $32,000) ........................................................
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
$64,000
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.
11-61
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.
11-62
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,
11-63
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 require 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.
11-64
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.
11-65