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CHAPTER 10 review

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Department
Administration
Course
ADM1340
Professor
Breid Mc Ilkenny
Semester
Fall

Description
Posted with permission from John Wiley & Sons Canada, Ltd Kimmel, Weygandt, Kieso, Trenholm, Irvine FinancialAccounting, Fifth Canadian Edition 2012 CHAPTER 10 BRIEF EXERCISE 10-1 (a) Oct. 1 Cash ($6,000 + $780).................................. 6,780..... Sales........................................................ 6,000. Sales Tax Payable ($6,000 × 13%)................ 780 (b) Oct. 1 Cash ($6,000 + $838).................................. 6,836..... Sales........................................................ 6,000. Sales Tax Payable [$6,000 × 5% + ($6,000 + $300) × 8.5%]............................. 836 EXERCISE 10-14 ($ in thousands) (a) Current ratio $3,798 2011: = 1.5:1 $2,619 $6,244 2012: = 1.4:1 $4,503 (1) Based only on the current ratio, the Fruition’s liquidity appears to be relatively stable and strong as there are enough current assets to pay the current liabilities. (2) In order to make proper assessment, information concerning the due dates for the liabilities and the type of current assets that make up the remaining assets would need to be scrutinized. (b) Current ratio for 2012: Before $6,244 = 1.4:1 Solutions Manual 5-1 Copyright © 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. $4,503 After $6,244 - $1,000 = 1.5:1 $4,503 - $1,000 Paying off the $1,000,000 improves Fruition’s current ratio from 1.4:1 to 1.5:1. (c) Having access to an operating line of credit means that cash is available on a short- term basis and therefore the assessment of the company’s short-term liquidity is better than it first appeared. Although the ability to access cash improves the liquidity position, it does not necessarily mean that drawing down the operating line of credit will improve the current ratio. If the unused line of credit were to be fully drawn down, Fruition’s current assets would increase by the addition of $4 million of cash. At the same time, the current liabilities would increase by the addition of a $4 million bank loan payable. As is demonstrated in the calculation below, the current ratio would deteriorate to 1.2:1. $6,244 + $4,000 = 1.2:1    $4,503 + $4,000 EXERCISE 10-15 ($ in thousands) (a) 2009 $1,868,414 Debt to total assets= = 61.1% $3,057,464 $52,147 + $27,296 + $81,234 Times interest earned = = 2.0 times $81,234 2010 Posted with permission from John Wiley & Sons Canada, Ltd Kimmel, Weygandt, Kieso, Trenholm, Irvine FinancialAccounting, Fifth Canadian Edition 2012 $1,779,418 Debt to total assets= = 59.4% $2,996,795 $25,822 + $17,766 + $66,386 Times interest earned = = 1.7 times $66,386 Maple Leaf Foods debt to total assets ratio improved slightly in 2010, with a decline from 61.1% to 59.4%. Still, nearly 60% of all the company’s assets are financed by debt. Perhaps more importantly, the company’s weaker profits in 2010 indicate that the company is in a worse position to meet its interest payments. The company’s times interest earned ratio decreased from 2 times in 2009 to 1.7 times in 2010. Considering both of these factors, Maple Leaf Foods’ solvency has deteriorated. (b) Since operating leases are accounted for as rent expense, Maple Leaf Foods can avoid reporting the lease obligations on its statement of financial position. By not reporting the lease obligations as liabilities, Maple Leaf’s solvency ratios appear to be better than they really are. For example, the company’s interest expense would be lower (better) by using an operating lease rather than a finance lease, which means its times interest earned ratio would appear higher. Its debt to total assets ratio would appear lower (better) because of the off-balance sheet financing (keeping assets and liabilities off the statement of financial position). PROBLEM 10-1A (a) Mar. 2 Accounts Payable...................................10,000 Notes Payable.................................... 10,000 5 Cash...............................................45,200..... Sales................................................... 40,000 Copyright © 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. Sales Tax Payable ($40,000 × 13%). . 5,200 Cost of Goods Sold............................24,000. Merchandise Inventory....................... 24,000 9 Property Tax Expense ($18,000 × 3/12).... 4,500 Property Tax Payable......................... 4,500 12 Unearned Revenue...............................7,500 Service Revenue................................ 7,500 13 Sales Tax Payable..............................5,800.. Cash.................................................5,800 16 CPP Payable ($1,340 + $1,340)................ 2,680 EI Payable ($468 + $655).......................1,123 Income Tax Payable.............................5,515 Cash.................................................9,318 27 Accounts Payable...............................30,000. Cash...............................................30,000 31 Salaries Expense...............................16,000.. CPP Payable...................................... 792 EI Payable.......................................... 285 Income Tax Payable........................... 5,870 Cash.................................................9,053 Posted with permission from John Wiley & Sons Canada, Ltd Kimmel, Weygandt, Kieso, Trenholm, Irvine FinancialAccounting, Fifth Canadian Edition 2012 PROBLEM 10-1A (Continued) (a) (Continued) Mar. 31 Employee Benefits Expense............... 1,191 CPP Payable............................... 792 EI Payable................................... 399 (b) Mar. 31 Interest Expense................................50 Interest Payable.......................... 50 ($10,000 × 6% × 1/12) (c) MOLEGA LTD. Statement of Financial Position (partial) March 31, 2012 Current liabilities Accounts payable ($42,500 – $10,000 – $30,000) $ 2,500 Notes payable.......................................................10,000 Unearned revenue ($15,000 – $7,500)...................7,500 Income tax payable ($5,515 – $5,515 + $5,870). ...5,870 Property tax payable...............................................4,500 Sales tax payable ($5,800 + $5,200 - $5,800)...... 5,200 CPP payable ($2,680 – $2,680 + $792 + $792)......1,584 EI payable ($1,123 – $1,123 + $285 + $399).............684 Solutions Manual 5-5 Copyright © 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. Interest payable.....................................50............. Total current liabilities.....................................$37,888 PROBLEM 10-10A (a) (in USD millions) 2010 2009 1. Current ratio $7,814 $6,303 = 1.5:1 = 1.5:1 $5,200 $4,299 2. Receivables $24,102 $17,367 = 7.2 times = 5.9 times turnover $3,645 + $3,062 $3,062 + $2,821 2 2 3. Inventory $20,924 $15,697 = 11.6 times = 9.3 times turnover $1,896 + $1,721 $1,721 + $1,647 2 2 4. Debt to $5,833 $4,943 = 42.0% = 40.2% total assets $13,896 $12,303 Posted with permission from John Wiley & Sons Canada, Ltd Kimmel, Weygandt, Kieso, Trenholm, Irvine FinancialAccounting, Fifth Canadian Edition 2012 5. Times Interest earned $973+$236+$12 = 102 times $(493)+$(18)+$27 = NA $12 $27 Solutions Manual 5-7 Copyright © 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution,
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