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
More
Less
