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Department
Business Administration - Accounting & Financial Planning
Course
Business Administration - Accounting & Financial Planning ACC220
Professor
Ramonagirdauskas
Semester
Winter

Description
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition CHAPTER 10 Current Liabilities and Payroll ANSWERS TO QUESTIONS 1. A determinable liability is also referred to as certain liabilities or known liabilities. Examples include accounts payable, salaries payable, HST payable, and CPP and EI payable. 2. The transaction does not meet the definition of a liability. A liability is defined as a present obligation, arising from past events, to make future payments of assets or services. A commitment to purchase is usually not an obligation and no past event (a purchase) has occurred since goods have not been delivered or services received. 4. An operating line of credit is a pre-authorized bank loan that allows a company to borrow up to a pre-set limit, and repay the loan, as needed. When the company borrows against its line of credit, the cash account balance is increased and notes payable are increased. A bank overdraft occurs when a bank account is overdrawn due to withdrawals and cheques in excess of deposit amounts. In this case, the cash account will show a credit balance. There is no separate liability shown, as the overdraft is itself, a liability. 5. If the sales tax is included in the selling price, this means that the selling price represents 113% of the retail price. By dividing the selling price (including sales tax) by 113% (100% + the sales tax percentage), you obtain the retail price. The sales tax can then be calculated by multiplying the retail price by 13% or by calculating the difference between the selling price and the retail price. For example, a product sells for $226 including HST. The retail price is calculated as $226 ÷ 113% = $200. The HST is calculated as $200 × 13% = $26. 7. Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date. 9. Future savings provided to customers through customer loyalty programs reduce future periods’ revenues. Giving customers these rewards creates an obligation in the current period to provide reductions on future selling prices and reduced cash in the future. 10. The company should estimate the number of vouchers that will likely be used. It should record this estimate as a reduction to revenue (Dr. Sales Solutions Manual 10-1 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition Discount for Redemption Rewards Issued) in the period of the sale and as an estimated liability (Cr. Redemption Rewards Liability), to recognize the obligation the company has with respect to these coupons. 11. Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. This is similar to an operating line of credit in that the obligation can be satisfied in the current or long-term. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote. 12. A determinable liability has a known amount, payee and due date. An estimated liability is an obligation that exists but whose amount and timing are uncertain. There is no uncertainty about the existence of a determinable liability and an estimated liability. Under ASPE, a contingent liability is an obligation that is uncertain with respect to existence, timing and amount. The existence of a contingent liability depends on the resolution of a future event outside of the company’s control. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. Contingent liabilities are possible obligations that the company probably will not have to settle, or obligations for which the amount cannot be reliably measured. 13. Under ASPE, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. An estimated liability is an obligation that exists but whose amount and timing are uncertain. A contingent liability may be recognized as an estimated liability if it is likely that a present obligation exists and the amount can be reliably estimated. Under IFRS, a contingent liability is a possible obligation that does not meet the criteria for recognition and does not meet the definition of a liability. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. 14. Under ASPE, if a contingent liability is both likely to occur and reasonably estimable, it is recorded in the accounts. If its likelihood is not determinable, or if it is not reasonably estimable, it is not recorded in the accounts but disclosed in a note. If it is unlikely to occur, but could have a substantial negative effect on the company’s financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed. Sol© 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition 15. Under IFRS, a contingent liability is never recorded because it is a possible liability that does not meet the criteria for recognition, either because it is not probable or the amount cannot be reliably measured. The criteria for recognition of an estimated liability are that it is probable a present obligation exists and that the amount can be reliably estimated. Under IFRS, the threshold for recognizing liabilities is “probable” rather than “likely” as used under ASPE. This threshold is generally considered lower. 16. If the chance of a contingency occurring is considered small, it should still be disclosed if the occurrence could have a substantial effect on the company’s financial position. 22. Current liabilities are usually listed in order of their liquidity, by maturity date. It may not be possible to list current liabilities in order of liquidity because of the varying maturity dates that may exist for certain specific obligations. They are also often listed in order of magnitude with the largest items listed first. 23. If companies have used their line of credit and are overdrawn or show a negative cash balance, the amount is included in current liabilities and called bank indebtedness, bank overdraft or bank advances. Note disclosure will include security or collateral that was required by the bank, the maximum amount that can be withdrawn, as well as the interest rate charged on the bank overdraft. Terms associated with notes payable are also disclosed. 24. A company can determine if its current liabilities are too high by monitoring the relationship of current assets to current liabilities and calculating the current ratio (current assets ÷ current liabilities). This relationship is critical in evaluating a company’s short term ability to pay debt. Sol© 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-3 (a) May 10, 2014: Calculation of sales tax collected: HST: $1,500 × 13% × 10 = $1,950 May 17, 2014: Calculation of sales: Sales = ($1,500 × 20) ÷ 1.13 = $26,549 Calculation of sales tax payable: HST payable = $26,549 × 13% = $3,451 (b) Mar. 10 Cash..................................................... 16,950 Sales ($1,500 × 10).......................... 15,000 HST Payable.................................... 1,950 Mar. 17 Cash ($1,500 × 20)............................... 30,000 Sales..............................................26,549 HST Payable.................................... 3,451 BRIEF EXERCISE 10-4 Mar. 31 Property Tax Expense ($7,860 × 3/12) 1,965 Property Tax Payable..................... 1,965 June 30 Property Tax Payable..........................1,965 Property Tax Expense ($7,860 × 3/12) 1,965 Prepaid Property Tax ($7,860 × 6/12). 3,930 Cash................................................7,860 Dec. 31 Property Tax Expense......................... 3,930 Prepaid Property Tax........................ 3,930 BRIEF EXERCISE 10-5 Solutions Manual 10-4 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition (a) Dec. 31 Warranty Expense...................... 10,625 Warranty Liability....................... 10,625 [(2,500 units × 5%) × $85/unit] (b) Dec. 31 Warranty Liability....................... 2,125 Repair Parts Inventory............... 2,125 (c) Sales (2,500 units × $400).......................... $1,000,000 Less: Cost of goods sold (2,500 units × $175) 437,500 Warranty expense........................... 10,625 Profit.......................................................$551,875 Solutions Manual 10-5 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition BRIEF EXERCISE 10-6 July 3 Redemption Rewards Liability........... 20 Cash ($150 – $20)..........................130... Sales..............................................150 July 3 Sales Discounts for Redemption Rewards Issued ($150 × 2%).............. 3 Redemption Rewards Liability......... 3 Note: Each time One-Stop has a cash sale it debits Sales Discounts for Redemption Rewards Issued and credits Redemption Rewards Liability. This would have happened when Judy collected the $20 of One-Stop money used in this transaction. BRIEF EXERCISE 10-7 (a) Sales (50,000 novels × $8)........................$400,000 Less: Sales Discount for Redemption Rewards Issued (50,000 novels × 10% × $2)............... (10,000) Net Sales........................................$390,000....... (b) July 31 Sales Discount for Redemption Rewards Issued................................... 10,000 Redemption RewardsLiability....... 10,000 As redeemed in August: Redemption Rewards Liability........... 2,000 Cash (1,000 × $2)............................ 2,000 Solutions Manual 10-6 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition BRIEF EXERCISE 10-8 Dec. 2014 Cash........................................4,750...... Unearned Revenue...................... 4,750 Jan. 2015 Unearned Revenue........................... 2,425 Sales................................................2,425 Cost of Goods Sold........................1,070 Merchandise Inventory................ 1,070 BRIEF EXERCISE 10-9 (a) (2) Disclosed: This liability should be disclosed. The outcome is neither likely nor unlikely (not determinable). The treatment would be the same under both IFRS and ASPE. (b) (1) Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and ASPE. (c) (1) Recorded under IFRS: This liability is “probable” and can be reasonably estimated. (2) Disclosed under ASPE: The outcome is not “likely”; the chance of occurrence is not considered sufficiently high. (d) (3) Neither recorded or disclosed: This contingency is considered unlikely. The treatment would be the same under both IFRS and ASPE. Solutions Manual 10-7 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition BRIEF EXERCISE 10-10 The arguments for recording this liability are that the outcome is probable and the amount can be estimated. Since the company is public, IFRS applies. In this case, the lawsuit is considered an estimated liability and is recorded since the loss is considered probable. Management may be reluctant to disclose this information separately on the financial statements for fear it will be taken as an admission of guilt. BRIEF EXERCISE 10-13 (a) Current liability (b) Current liability (c) Current liability (d) Current liability (e) Current liability (f) Current asset (g) Disclosed in the notes to the financial statements as a contingent liability (h) Current liability (i) Current asset (j) Current liability ($5,000) and long-term liability ($70,000) Solutions Manual 10-8 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition BRIEF EXERCISE 10-14 (a) Current liability: $12,000 Non-current liability: $48,000 Only the portion of principal to be repaid in 2015 would be shown as a current liability. (b) Current liability: $24,000 ($2,000 per month × 12 months) Non-current liability: $66,000 ($96,000 – [$2,000 × 3] – $24,000) The principal repayments of $2,000 per month to be repaid in 2015 would be shown as a current liability. SOLUTIONS TO EXERCISES EXERCISE 10-1 (a) Novack Company 2014 June 1 Equipment.................................. 50,000 Accounts Payable.................. 50,000 July 1 Accounts Payable...................... 50,000 Notes Payable........................ 50,000 Aug. 1 Interest Expense........................292 Cash....................................... 292 ($50,000 × 7% × 1/12) Aug. 31 Interest Expense........................ 292 Interest Payable..................... 292 Sep. 1 Interest Payable........................292 Cash....................................... 292 Oct. 1 Interest Expense........................292 Notes Payable............................ 50,000 Cash.......................................50,292 (b) Moleski Manufacturers 2014 Solutions Manual 10-9 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition June 1Accounts Receivable...................... 50,000 Sales....................................... 50,000 1Cost of Goods Sold........................ 30,000 Merchandise Inventory......... 30,000 July 1Notes Receivable............................ 50,000 Accounts Receivable............ 50,000 Solutions Manual 10-10 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-1 (Continued) (b) (Continued) Aug. 1 Cash.......................................292.. Interest Revenue................... 292 ($50,000 × 7% × 1/12) Sep. 1 Cash.......................................292.. Interest Revenue................... 292 Oct. 1 Cash............................................ 50,292 Interest Revenue................... 292 Notes Receivable................... 50,000 Solutions Manual 10-11 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-3 1. Sainsbury Company April 10 Cash............................................ 14,916 Sales....................................... 13,200 HST Payable ($13,200 × 13%) 1,716 2. Hockenstein Company April 15 Cash .....................................35,595 Sales ($35,595 ÷ 1.13)............ 31,500 HST Payable ($31,500 × 13%) 4,095 3. Montgomery Company April 21 Cash............................................ 31,500 Sales....................................... 30,000 GST Payable ($30,000 × 5%). 1,500 4. Winslow Co. April 27 Cash............................................ 28,112 Sales....................................... 25,100 GST Payable ($25,100 × 5%). 1,255 PST Payable ($25,100 × 7%). 1,757 Solutions Manual 10-12 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10- 4 2014 (a) Oct. 31 Cash..................................................... 31,500 Unearned Revenue........................ 31,500 (150 × $210) (b) 1. Nov. 30 Unearned Revenue..........................5,250 Admission Revenue...................... 5,250 ($31,500 × 1/6) 2015 2. Mar. 31 Unearned Revenue..........................5,250 Admission Revenue...................... 5,250 ($31,500 × 1/6)* 3. Apr. 30 Unearned Revenue..........................5,250 Admission Revenue...................... 5,250 ($31,500 × 1/6)* * Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2014, January 31, 2015 and February 28, 2015. (c) Parts 1, 2 and 3. Unearned Revenue Date Explanation Ref. Debit Credit Balance 2014 Oct. 31 31,500 31,500 Nov. 30 Adjusting entry 5,250 26,250 Dec. 31 Adjusting entry 5,250 21,000 2015 Jan. 31 Adjusting entry 5,250 15,750 Feb. 28 Adjusting entry 5,250 10,500 Mar. 31 Adjusting entry 5,250 5,250 Apr. 30 Adjusting entry 5,250 0 Solutions Manual 10-13 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-5 (a) May 31 Property Tax Expense ($18,660 × 1/12)......................1,555 Property Tax Payable................ 1,555 The company would have accrued property tax expense on a monthly basis using the 2013 monthly expense of $1,475 per month. An adjustment would be required when the property tax bill is received: May 31 Property Tax Expense............... 320 Property Tax Payable................ 320 [($18,660 × 1/12) – $1,475] × 4 months The company accrues property tax expense on June 30, 2014 for one month. July 31Property Tax Payable ($18,660 × 6/12)......................9,330 Property Tax Expense ($18,660 × 1/12) .........................1,555.. Prepaid Property Tax ($18,660 × 5/12)..........................7,775.. Cash............................................18,660 The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense............... 1,555 Prepaid Property Tax................. 1,555 (b) Since the company’s fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable. Income Statement, Year Ended December 31, 2014 (Partial) Operating expenses Property tax expense.....................................$18,660.... Solutions Manual 10-14 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-5 (Continued) (b) (Continued) Prepaid Property Tax Date Explanation Ref. Debit Credit Balance Jul. 31 7,775 7,775 Aug. 31 1,555 6,220 Sep. 30 1,555 4,665 Oct. 31 1,555 3,110 Nov. 30 1,555 1,555 Dec. 31 1,555 0 Property Tax Expense Date Explanation Ref. Debit Credit Balance Jan. 31 1,475 1,475 Feb. 28 1,475 2,950 Mar. 31 1,475 4,425 Apr. 30 1,475 5,900 May 31 320 6,220 May 31 1,555 7,775 June 30 1,555 9,330 July 31 1,555 10,885 Aug. 31 1,555 12,440 Sep. 30 1,555 13,995 Oct. 31 1,555 15,550 Nov. 30 1,555 17,105 Dec. 31 1,555 18,660 Solutions Manual 10-15 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-6 (a) Estimated warranty costs for November and December sales: Number of units sold (30,000 + 32,000) 62,000 Estimated rate of defective units × 2.5% Total estimated defective units 1,550 Average warranty repair cost × $20 Estimated warranty costs for Nov. and Dec. $31,000 Dec. 31 Warranty Expense............................ 31,000 Warranty Liability.................... 31,000 (b) Dec. 31 Warranty Liability.............................. 21,600 Repair Parts Inventory, Salaries Payable, Cash, etc.... 21,600 ([450 + 630] × $20) (c) Income Statement, Year Ended December 31, 2014 (Partial) Operating expenses Warranty expense..........................................$31,000.... Balance Sheet, at December 31, 2014 (Partial) Current Liabilities Warranty liability ($31,000 – $21,600).....................$9,400 Solutions Manual 10-16 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-7 (a) Warranty expense: 2012: ($2,000 × 500 units sold × 5%) = $50,000 2013: ($2,000 × 600 units sold × 5%) = $60,000 2014: ($2,000 × 525 units sold × 5%) = $52,500 (b) Warranty liability at the end of the year: Estimated warranty expense for 2012: $50,000 Less: Cost incurred in 2012 (30,000) Warranty liability at end of 2012: 20,000 Add: Estimated warranty expense for 2013: 60,000 Less: Cost incurred 2013 (46,000) Warranty liability at end of 2013: 34,000 Add: Estimated warranty expense for 2014: 52,500 Less: Cost incurred 2014 (53,500) Warranty liability at end of 2014: $33,000 Solutions Manual 10-17 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-8 (a) 2014: 900,000 × 35% × $0.01 = $3,150 2015: 1,200,000 × 35% × $0.01 = $4,200 (b) 2014: 225,000 × $0.01 = $2,250 2015: 336,000 × $0.01 = $3,360 (c) 2014: $3,150 – $2,250 = $900 2015: $900 + $4,200 – $3,360 = $1,740 (d) When the points are redeemed, the following entry would be done: Redemption Rewards Liability XXX Cash XXX Sales XXX Cost of Goods Sold XXX Inventory XXX The points reduce the amount of cash required to complete the sales transaction. The sale also triggers the issuance of new points: Sales Discount for Redemptions Rewards Issued XXX Redemption Rewards Liability XXX Points redemption reduces the amount of outstanding redemption rewards liability. The reduction of profit occurs when the original sale that triggered the points took place. However, since points are redeemed as part of a new sale transaction, there is a reduction of profit for the new points issued. Solutions Manual 10-18 Chapter 10 © 2013 John Wiley & Sons Canada,Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited. Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition EXERCISE 10-9 (1) (a) Estimable. The amount and timing with respect to brake replacement is uncertain. The existence of the liability to replace the brakes is certain and the amount can be reasonably estimated. The liability should be recorded in the financial statements. (b) Not required. (2) (a) Estimable. The amount and timing with respect to “money back, no questions asked” guarantee is uncertain. The existence of the money back guarantee is certain. (b) Not required. (3) Same as (2) above. (4) (a) Determinable. The timing with respect to the prizes to be distributed is uncertain. The existence of the liability and the cost of the trip are certain. The liability should be recorded
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