10 exercises be solutions-1

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition

Solutions Manual 10-1 Chapter 10

© 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.

CHAPTER 10

Current Liabilities and Payroll

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Account for determinable or certain current liabilities.

1, 2, 3, 4, 5, 6, 12

1, 2, 3, 4, 14

1, 2, 3, 4, 5, 9, 13

1, 2, 3 1, 2, 3

2. Account for estimated liabilities.

7, 8, 9, 10, 11, 12

5, 6, 7, 8, 14

6, 7, 8, 9, 13

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

3. Account for contingencies.

12, 13, 14, 15, 16, 17

9, 10, 14 9, 10, 13 1, 6, 7 1, 6, 7

4. Prepare payroll costs and record payroll transactions.

18, 19, 20, 21, 22, 23

11, 12, 13, 14, *18

11, 12, 13, *15

1, 3, 8, 9 1, 3, 8, 9

5. Prepare the current liabilities section of the balance sheet.

24, 25, 26, 27

14, 15 5, 14 1, 2, 3, 6, 7, 10

1, 2, 3, 6, 7, 10

*6. Calculate mandatory payroll deductions (Appendix 10A).

*28, *29 *16, *17, *18

*15, *16 *11 *11




ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Identify liabilities.

Simple 10-15

2A Record note transactions; show financial statement presentation.

Moderate 30-40

3A Record current liability transactions; prepare current liabilities section.

Moderate 30-40

4A Record warranty transactions.

Moderate 15-25

5A Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate 15-25

6A Discuss reporting of contingent liabilities and assets.

Moderate 15-25

7A Discuss reporting of contingent liability and asset.

Simple 10-15

8A Prepare payroll register and record payroll.

Moderate 25-35

9A Record and post payroll transactions.

Moderate 25-35

10A Prepare current liabilities section; calculate and comment on ratios.

Moderate 15-25

*11A Calculate payroll deductions.

Moderate 25-35

1B Identify liabilities.

Simple 10-15

2B Record note transactions; show financial statement presentation.

Moderate 30-40

3B Record current liability transactions; prepare current liabilities section.

Moderate 30-40

4B Record warranty transactions.

Moderate 15-25

5B Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate 15-25

6B Discuss reporting of contingent liabilities and assets.

Moderate 15-25

7B Discuss reporting of contingent asset.

Simple 10-15

8B Prepare payroll register and record payroll.

Moderate 25-35




ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description

Difficulty Level

Time Allotted (min.)

9B Record and post payroll transactions.

Moderate 25-35

10B Prepare current liabilities section; calculate and comment on ratios.

Moderate 15-25

*11B Calculate payroll deductions.

Moderate 25-35




BLOOM’S TAXONOMY TABLE

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

Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Account for determinable or certain current liabilities.

Q10-1 Q10-2 Q10-3 Q10-12 BE10-14

Q10-4 Q10-5 Q10-6 E10-9

BE10-1 BE10-2 BE10-3 BE10-4 E10-1 E10-2 E10-3 E10-4

E10-5 E10-13 P10-1A P10-2A P10-3A P10-1B P10-2B P10-3B

2. Account for estimated liabilities.

Q10-12 BE10-14

Q10-7 Q10-8 Q10-9 Q10-10 Q10-11 E10-9

BE10-5 BE10-6 BE10-7 BE10-8 E10-6 E10-7 E10-8 E10-13

P10-1A P10-3A P10-4A P10-5A P10-1B P10-3B P10-4B P10-5B

3. Account for contingencies.

Q10-12 BE10-14

Q10-13 Q10-14 Q10-15 Q10-16 Q10-17 BE10-9 E10-9

BE10-10 E10-10 E10-13 P10-1A P10-6A P10-7A

P10-1B P10-6B P10-7B

4. Determine payroll costs and record payroll transactions.

Q10-21 Q10-23 BE10-14

Q10-18 Q10-19 Q10-20 Q10-22

BE10-11 BE10-12 BE10-13 *BE10-18 E10-11 E10-12 E10-13 *E10-15 P10-1A

P10-3A P10-8A P10-9A P10-1B P10-3B P10-8B P10-9B

5. Prepare the current liabilities section of the balance sheet.

Q10-24 Q10-25 Q10-26 Q10-27 BE10-14

BE10-15 E10-5 E10-14 P10-1A P10-2A P10-3A P10-6A P10-7A P10-10A

P10-1B P10-2B P10-3B P10-6B P10-7B P10-10B

*6. Calculate mandatory payroll deductions (Appendix 10A).

*Q10-28 *Q10-29

*BE10-16 *BE10-17 *BE10-18 *E10-15 *E10-16

*P10-11A *P10-11B

Broadening Your Perspective

Continuing Cookie Chronicle Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4

BYP10-1

BYP10-2 BYP10-5 BYP10-6




ANSWERS TO QUESTIONS

1. 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.

2. (a) Notes payable differ from accounts payable in that notes have written

legal documentation that make collection easier if legal action is necessary. In addition, most notes are interest bearing. Notes also can extend for longer periods of time than accounts payable.

Accounts payable and notes payable are similar in that they are both promises to pay an amount in the future. Accounts payable and notes payable that result from purchase transactions are also known as trade payables.

(b) A note is different than an operating line of credit in that a note is for a

fixed amount and is repayable on a specific date. An operating line of credit is a pre-authorized loan from the bank that can be drawn down and repaid as required. Both lines of credit and notes payable may require collateral. Both are obligations to pay an amount in the future.

3. 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.

4. Disagree. The company only serves as a collection agent for the taxing

authority. It does not report sales taxes as revenue; it reports sales taxes as a current liability because it must forward the amount paid by the customer to the government.




QUESTIONS (Continued)

5. The property tax bill for the calendar year is usually not known until the

spring. If a company has a year-end prior to receiving the property tax bill, it would have to accrue an expense and estimated liability (for the months in the current calendar year) based on last year’s property tax bill. Otherwise, most companies would wait until they receive the property tax bill, and record property tax expense and property tax payable (a current liability) for the number of months in the year to date. When the property tax bill is paid, the liability will disappear and the company will record property tax expense for any intervening period of time and prepaid property tax (a current asset) for the remaining months in the year. As time passes, the company would record the property tax expense and credit the prepaid property tax account.

6. 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.

7. 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 warranty based on past experience or industry information. If repair 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.

8. Estimated warranty liability is the estimated cost of servicing a product’s

warranty. Actual warranty costs incurred are costs for the repair or replacement of defective units. In most cases the estimated liability will not be the same amount as the actual expenditure incurred. The warranty liability is carried forward from year to year; each year it is increased by the amount of estimated expense and decreased by the amount of actual costs. Each year end the liability will have to be reviewed and the estimated expense will have to be increased if the actual costs have exceeded the previous estimated expense and decreased if the previous estimated expense has exceeded the actual costs. Companies will not make an adjustment to previous years’ estimates.




QUESTIONS (Continued) 9. 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 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.

10. The cost of product warranties represents future costs for the repair or

replacement of defective units sold and therefore should be recorded as an expense of the period. Rewards are incurred in order to promote sales. When rewards result in a reduced selling price, it should be recorded as a reduction in sales or a decrease in revenues.

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 GAAP for Private Enterprises, 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 it is not probable that the company will have to settle, or obligations for which the amount cannot be reliably measured.





13. Under GAAP for Private Enterprises, a contingent liability is defined as a

possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. A contingent liability may be recognized as a liability if it is likely that a present obligation exists and the amount can be reliably estimated. If these criteria are not satisfied, then note disclosure is appropriate (unless it is unlikely that an obligation exists). 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. This includes a possible obligation that it is not probable that the company will have to settle, or a present obligation for which the amount cannot be reliably measured.

14. Under GAAP for Private Enterprises, 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.

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 likely a present obligation exists and that the amount can be reliably estimated.

15. A debt guarantee or loan guarantee is a guarantee that a loan will be

repaid. A loan guarantee is provided by an individual or a company other than the company who has obtained a loan from a lending institution. A loan guarantee is provided as collateral or protection to the lender in case the company who borrowed is unable to repay the loan.

A debt guarantee is an example of a contingent liability because the

liability is dependent on a future event, the lender honouring or not honouring their commitment to repay the loan.




QUESTIONS (Continued) 16. 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. An example of a contingent liability is a lawsuit that a company expects to lose but cannot estimate the amount of the judgement. Under IFRS, a contingent liability 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.

A contingent asset is an existing situation involving uncertainly that will

only be resolved when one or more future events occur or fail to occur. This event will confirm the existence of an asset. An example of a contingent asset is a lawsuit that could favour the company.

17. Under GAAP for Private Enterprises, the accounting treatment for a

contingent liability when it is likely and can be reasonably estimated is to accrue for the liability. The accounting treatment for a contingent asset when it is likely and reasonably estimable is to disclose the asset and the related gain. The asset and related gain will be recorded only when the asset and gain have been fully realized. The rationale behind this inconsistency is conservatism, where the goal is to be sure that any negative effect on investors and creditors is fully disclosed.

Under IFRS, a contingent liability 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. IFRS also allows for the recognition of a contingent asset if it is virtually certain that a gain will occur.

18. Salaries are specific amounts paid to employees per week, per month or

per year. Wages are amounts paid to employees on an hourly basis or on a piece work basis. However, the terms salaries and wages are often used interchangeably.

19. 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. The deductions are recorded as a liability and paid to the appropriate party rather than to the employee.





20. Employee payroll deductions are the amount of payroll deductions

deducted from an employee’s gross pay. Mandatory employee payroll deductions include federal and provincial income taxes, Canada Pension Plan and Employment Insurance. When an employer withholds these amounts 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. Employee payroll deductions also include voluntary deductions for things such as insurance, pensions, union dues and donations to charities.

Employer payroll deductions are amounts the employer is expected to pay

that are charged on certain payroll deductions. These include CPP where the employer is expected to pay the same amount as the employee and EI where the employer is expected to pay 1.4 times the amount the employee has paid. These are expenses for the employer over and above gross pay.

21. 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 with the CRA, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year on the T4 form.

The payroll register accumulates gross earnings, deductions, and net pay

for all employees for each pay period. It provides the documentation to support the preparation of the paycheque for each employee.

22. Income tax, CPP and EI deductions are remitted to the CRA, usually on a

monthly basis. Workplace, Health, Safety, and Compensation is remitted quarterly (or monthly depending on the province) to the Workplace, Health, Safety and Compensation Commission (or similar body depending on the province). Other deductions are paid to different organizations, such as the United Way, and would normally be made on a monthly basis.





23. 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. Other employee benefits include workplace health, safety and compensation, as well as health and dental insurance which are expensed on a monthly basis. Employers also occasionally pay for post-employment benefits such as pensions and supplemental health and dental care and life insurance. These post-employment benefits are accounted for using the accrual basis.

24. Current liabilities are usually listed in order of their liquidity, by maturity

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

25. 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.

26. Employee payroll deductions should be reported as a current liability.

Employer payroll costs should be reported on the income statement as an operating expense.

27. 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.




QUESTIONS (Continued) *28. Contribution rates for CPP are set by the federal government and are

adjusted every January if there are increases in the cost of living. Employee contributions under the Canada Pension Plan Act are set at a percentage of pensionable earnings (currently 4.95%). Pensionable earnings are gross earnings less a basic yearly exemption (currently $3,500). A maximum ceiling or limit is imposed on pensionable earnings (currently $46,300). The exemption and ceiling are prorated to the relevant pay period (e.g. weekly, biweekly, semimonthly, monthly).

Contribution rates for EI are currently based upon a percentage (currently

1.73%) of insurable earnings, to a maximum earnings ceiling (currently $42,300). In most cases, insured earnings are gross earnings plus any taxable benefits.

*29. The amount deducted from an employee’s wages for income tax is

determined by using payroll accounting programs, CRA payroll deduction tables, tables on diskette, or payroll deductions online calculator. The income tax that should be withheld from gross wages is based on the number of personal tax credits claimed by an employee.




SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1 (a)

2010

July 1 Cash ............................................... 60,000

Notes Payable ........................... 60,000

(b)

Aug. 1 Interest Expense

($60,000 × 6% × 1/12) ..................... 300

Cash ........................................... 300

(c)

Dec. 31 Interest Expense

($60,000 × 6% × 1/12) ..................... 300

Interest Payable ........................ 300

(d)

2011

Apr. 1 Interest Expense

($60,000 × 6% × 1/12) ..................... 300

Notes Payable ................................ 60,000

Cash ........................................... 60,300


Mar. 16 Cash .................................................... 13,024

Sales ............................................... 11,526

HST Payable ($11,526 × 13%) ........ 1,498

(b)

Calculation of sales:

Sales = $11,526 ÷ 1.13 = $10,200

Calculation of sales tax payable:

HST payable = $10,200 × 13% = $1,326




BRIEF EXERCISE 10-2 (Continued)

(b) (Continued)

Mar. 16 Cash .................................................... 11,526

Sales ............................................... 10,200

HST Payable ................................... 1,326

BRIEF EXERCISE 10-3

(a) Calculation of sales tax collected:

GST: $8,200 × 5% = $410

PST: ($8,200 + ($8,200 × 5%)) × 10% = 861

Total taxes collected $1,271

(b) Total amount collected = $8,200 + $1,271 = $9,471

(c) Combined sales tax rate = 5% + [10% × (1 + 5%)] = 15.5%

BRIEF EXERCISE 10-4

Feb. 28 Property Tax Expense ($7,620 × 2/12) 1,270

Property Tax Payable..................... 1,270

May 31 Property Tax Payable ......................... 1,270

Property Tax Expense ($7,620 × 3/12) 1,905

Prepaid Property Tax ($7,620 × 7/12) 4,445

Cash ................................................ 7,620

Dec. 31 Property Tax Expense ........................ 4,445

Prepaid Property Tax ..................... 4,445




BRIEF EXERCISE 10-5

(a) Dec. 31 Warranty Expense ..................... 4,200

Warranty Liability .................. 4,200

[(1,000 units × 6%) × $70/unit]

(b) Following year:

Warranty Liability ...................... 3,800

Repair Parts Inventory .......... 3,800

BRIEF EXERCISE 10-6

July 3 One-Stop Money Liability ................... 20

Cash ($150 - $20) ................................ 130

Sales ............................................... 150

July 3 Sales Discounts for One-Stop Money

Issued ($150 × 2%) .................. 3

One-Stop Money Liability .............. 3

Note: Each time One-Stop has a cash sale it debits Sales

Discounts for One-Stop Money Issued and credits One-Stop

Money Liability. This would have happened when Judy

collected the $20 of One-Stop money used in this transaction.

BRIEF EXERCISE 10-7

Sep. 30 Sales Discount for Rebate

Rewards Issued .................................. 60,000

Rebate Liability .............................. 60,000

[(100,000 × 15%) × $4]

As redeemed in October:

Rebate Liability ................................... 8,000

Cash (2,000 × $4) ........................... 8,000




BRIEF EXERCISE 10-8

Dec. 2010 Cash .................................................. 4,200

Unearned Gift Card Revenue ..... 4,200

Jan. 2011 Unearned Gift Card Revenue .......... 2,950

Sales ............................................ 2,950

Cost of Goods Sold .......................... 1,325

Merchandise Inventory ............... 1,325

BRIEF EXERCISE 10-9

(a) 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

Canadian GAAP for Private Enterprises.

(b) Recorded: This liability is likely and can be reasonably

estimated. The treatment would be the same under both

IFRS and Canadian GAAP for Private Enterprises.

(c) Disclosed: This asset/gain is likely and should be

disclosed. The treatment would be the same under both

IFRS and Canadian GAAP for Private Enterprises.

(d) Disclosed: Even though this contingent liability is

unlikely—the chance of occurrence is small—it should

still be disclosed. The treatment would be the same under

both IFRS and Canadian GAAP for Private Enterprises.




BRIEF EXERCISE 10-10

Loss due to Environmental Lawsuit ................. 50,000

Liability for Clean Up ..................................... 50,000

The arguments for recording this liability are that the outcome

is likely 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. 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 will be taken

as an admission of guilt.


(a)

Gross earnings:

Regular pay (40 × $16) ....................................... $640.00

Overtime pay (3 × $24) ....................................... 72.00 $712.00

Less: CPP contributions ................................... $31.91

EI premiums ............................................ 12.32

Income tax withheld ............................... 104.65 148.88

Net pay ............................................................................. $563.12

(b) Employer costs:

CPP contributions .............................................. $31.91

EI premiums ($12.32 × 1.4) ................................ 17.25 $49.16

The employer does not bear any costs for employee income

taxes.





Jan. 5 Wages Expense ......................... 712.00

CPP Payable .......................... 31.91

EI Payable .............................. 12.32

Income Tax Payable ............. 104.65

Wages Payable ...................... 563.12

Jan. 5 Wages Payable .......................... 563.12

Cash ....................................... 563.12

Jan. 5 Employee Benefits Expense ..... 49.16

CPP Payable .......................... 31.91

EI Payable ($12.32 × 1.4) ...... 17.25


Aug. 22 Salaries and Wages Expense ............ 70,000

CPP Payable ................................... 3,330

EI Payable ....................................... 1,211

Income Tax Payable ....................... 19,360

Salaries and Wages Payable ......... 46,099

($70,000 - $3,330 - $1,211 - $19,360 = $46,099)

22 Salaries and Wages Payable ............. 46,099

Cash ................................................ 46,099

22 Employee Benefits Expense .............. 5,025

CPP Payable ................................... 3,330

EI Payable ($1,211 × 1.4) ............... 1,695





1. Current liability





6. Current asset

7. Disclosed in the notes to the financial statements as a

contingent liability


9. Current asset

10. Current liability ($5,000) and long-term liability ($70,000)


SUNCOR ENERGY INC.

(Partial) Balance Sheet

December 31, 2008

(in thousands)

Liabilities

Current liabilities

Accounts payable and accrued liabilities ................. $ 3,229

Income taxes payable ................................................. 192

Sales taxes payable .................................................... 97

Short term debt ........................................................... 11

Total current liabilities ........................................... $3,529

Note: This presentation lists the accounts in order of in order of

size, with the largest one (accounts payable and accrued

liabilities) listed first. Other alternatives are also possible, such

as listing the accounts in order of liquidity, by estimated

maturity date.




BRIEF EXERCISE 10-15 (Continued)

(b)

Current Ratio = Current Assets ÷ Current Liabilities

$3,237* ÷ $3,529 = 0.92 to 1

* $660 + $1,580 + $88 + $909 = $3,237

Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷

Current Liabilities

($660 + $1,580 + $88) ÷ $3,529 = 0.66 to 1

*BRIEF EXERCISE 10-16

Monthly Pay = ($55,200/year ÷ 12 months) = $4,600

(a) January 2009:

CPP deduction = ($4,600 - [$3,500 ÷ 12]) × 4.95% = $213.26

EI deduction = $4,600 × 1.73% = $79.58

(b) December 2009:

No deductions for CPP or EI. The cumulative salary up to

November 2009 is $50,600 ($4,600 × 12). The cumulative

salary exceeds the annual maximum pensionable earnings

of $46,300 and maximum insurable earnings of $42,300.


Gross salary for the week = $1,090

CPP [($1,090.00 − $67.30) ×4.95%] $50.62

EI ($1,090 × 1.73%) 18.86

Federal income tax (claim code 1) 143.20

Ontario income tax (claim code 1) 75.10

Total deductions $287.78





(a)

Gross earnings:

Regular pay ......................................................... $720.00

Overtime pay ([$720 ÷ 40] × 1.5 × 10 hours) ..... 270.00 $990.00

(b) CPP ($990 - [$3,500 ÷ 52]) × 4.95% ............. $45.67

EI (1.73% × $990) ......................................... 17.13

(c) Federal income tax (claim code 3) ............ 112.20

Ontario income tax (claim code 3) ............ 63.15

Total deductions ..................................... $238.15

(d) Net pay ........................................................................ $751.85




SOLUTIONS TO EXERCISES

EXERCISE 10-1

(a) Briffet Construction

2010

Oct. 1 Cash ........................................... 200,000

Notes Payable ....................... 200,000

Nov. 1 Interest Expense ....................... 1,000

Cash ....................................... 1,000

($200,000 × 6% × 1/12)

2011

Aug. 1 Notes Payable ............................ 200,000

Interest Expense ....................... 1,000

Cash ....................................... 201,000

(b) TD Bank

2010

Oct. 1 Notes Receivable ...................... 200,000

Cash ....................................... 200,000

Nov. 1 Cash ........................................... 1,000

Interest Revenue ................... 1,000

($200,000 × 6% × 1/12)

2011

Aug. 1 Cash ........................................... 201,000

Interest Revenue ................... 1,000

Notes Receivable .................. 200,000




EXERCISE 10-2

(a) Tundra Trees

Mar. 1 Equipment.................................. 20,000

Accounts Payable ................. 20,000

Mar. 31 Accounts Payable...................... 20,000

Notes Payable ....................... 20,000

July 31 Interest Expense ....................... 533

Interest Payable .................... 533

($20,000 × 8% × 4/12)

Oct. 31 Interest Expense* ...................... 400

Interest Payable ......................... 533

Notes Payable ............................ 20,000

Cash ....................................... 20,933

* ($20,000 × 8% × 3/12)

(b) Edworthy Equipment

Mar. 1 Accounts Receivable ................ 20,000

Sales ...................................... 20,000

Cost of Goods Sold ................... 12,000

Inventory ............................... 12,000

Mar. 31 Notes Receivable ...................... 20,000

Accounts Receivable ............ 20,000

May 31 Interest Receivable ................... 267

Interest Revenue ................... 267

($20,000 × 8% × 2/12)

Oct. 31 Cash ........................................... 20,933

Interest Receivable ............... 267

Interest Revenue* ................. 666

Notes Receivable .................. 20,000

* ($20,000 × 8% × 5/12)




EXERCISE 10-3

1. Sainsbury Company

Apr. 10 Cash ........................................... 29,945

Sales ...................................... 26,500

HST Payable ($26,500 × 13%) 3,445

2. Hockenstein Company

Apr. 15 Cash ........................................... 33,674

Sales ($33,674 ÷ 1.13) ........... 29,800

HST Payable ($29,800 × 13%) 3,874

3. Montgomery Company

Apr. 21 Cash ........................................... 34,650

Sales ...................................... 30,000

GST Payable ($30,000 × 5%) 1,500

PST Payable ($31,500 × 10%) 3,150




EXERCISE 10-4

2010

(a) Oct. 31 Cash .................................................... 288,000

Unearned Subscription Revenue 288,000

(6,000 × $48)

(b) Dec. 31 Unearned Subscription Revenue ...... 48,000

Subscription Revenue ................. 48,000

($288,000 × 2/12)

2011

(c) Mar. 31 Unearned Subscription Revenue ...... 72,000

Subscription Revenue .............. 72,000

($288,000 × 3/12)




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 2010 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,

2011 for one month.

July 31 Property 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, 2011 (Partial)

Operating expenses

Property tax expense .............................................. $18,660




EXERCISE 10-5 (Continued)

(b) (Continued)

Prepaid Property Taxes

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




EXERCISE 10-6

(a) Estimated warranties outstanding:

Estimate of Defective Actual

Month Units Units Defective

November 45,000 × 3% = 1,350 450

December 48,000 × 3% = 1,440 930

Total 2,790 1,380

Dec. 31 Estimated warranty liability:

(2,790 – 1,380) × $15 = $21,150

(b) Dec. 31 Warranty Expense (2,790 × $15) ..... 41,850

Warranty Liability .................... 41,850

31 Warranty Liability ............................. 20,700

Repair Parts Inventory,

Wages Payable, Cash, Etc ..... 20,700




EXERCISE 10-7

(a) Warranty expense:

2009: (2,000 × 10 × 2 × $60) = $2,400,000

2010: (2,200 × 10 × 2 × $60) = $2,640,000

2011: (2,400 × 10 × 2 × $60) = $2,880,000

(b) Warranty liability at the end of the year:

Estimated warranty expense for 2009: $2,400,000

Less: Cost incurred in 2009 (20,000 × $60): (1,200,000)

Warranty liability at end of 2009: 1,200,000

Add: Estimated warranty expense for 2010: 2,640,000

Less: Cost incurred 2010 (40,000 × $60): (2,400,000)

Warranty liability at end of 2010: 1,440,000

Add: Estimated warranty expense for 2011: 2,880,000

Less: Cost incurred 2011 (50,000 × $60) (3,000,000)

Warranty liability at end of 2011: $1,320,000




EXERCISE 10-8

(a) 2010: 600,000 × 15% × $0.01 = $900

2011: 800,000 × 15% × $0.01 = $1,200

(b) 2010: 50,000 × $0.01 = $500

2011: 80,000 × $0.01 = $800

(c) 2010: $900 - $500 = $400

2011: $400 + $1,200 - $800 = $800

(d) When the points are redeemed, the following entry

would be done:

Dr) Redemption Rewards Liability XXX

Dr) Cash XXX

Cr) Sales XXX

Dr) Cost of Goods Sold XXX

Cr) Inventory XXX

The points reduce the amount of cash required to

complete the sales transaction. The sale also triggers

the issuance of new points:

Dr) Sales Discount for Redemptions

Rewards Issued XXX

Cr) 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.




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.

(b) Under IFRS, the liability is estimated because is it

probable and the amount can be reasonably

estimated and should be recorded in the financial

statements. Under Canadian GAAP for Private

Enterprises, the liability is contingent on a future

event, the possible future problem with the brakes.

However, the likelihood of loss is likely because of

the recall and the amount can be reasonably

estimated. The liability should be recorded in the

financial statements.

(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) Under both IFRS and Canadian GAAP for Private

Enterprises, the liability is estimated because it is




(3) Same as (2) above.




EXERCISE 10-9 (Continued)

(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 is certain.


Enterprises, the liability is determinable because it is




(5) (a) Contingent Liability under both IFRS and Canadian

GAAP for Private Enterprises. The contingent liability

is neither likely nor unlikely and the amount cannot

be reasonably estimated.


Enterprises, the contingent liability would be

disclosed in the notes to the financial statements

because the outcome and the amount are both

unknown.




EXERCISE 10-10

(a) The company should record an estimate of the cost of

replacing the cribs in its financial statements. This

liability is probable and can be reasonably estimated.

The company also has a contingent liability with respect

to the lawsuit. If the probability of loss of the lawsuit is

remote, the company does not have to report or

disclose anything else. If it is either possible (and the

loss cannot be estimated) 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

probable the lawsuit will be successful and the

$1,500,000 is a reasonable estimate, it should be

accrued as an estimated liability.

(b) If Sleep-a-Bye Baby Company’s lawyers advise that it is

very likely that the company will have to pay damages

of $100,000 then a journal entry should be recorded.

The liability is likely and the amount can be reasonably

estimated. The journal entry would be as follows:

Loss due to Damages .................................... 100,000

Liability for Damages Due to Unsafe Cribs 100,000

(c) If Sleep-a-Bye Baby Company is a private company, the

answer to part (a) will be changed to assess the

likelihood of loss from the lawsuit as “likely” rather

than “probable”. If the probability of loss of the lawsuit

is remote, the company does not have to report or

disclose anything else. If it is either “likely” (and the

loss cannot be estimated) 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

$1,500,000 is a reasonable estimate, it should be

recorded. Part (b) stays the same, since the higher

threshold of “likely” was applied.




EXERCISE 10-11

(a)

Aug. 31 Salaries and Wages Expense ............ 41,500

CPP Payable ................................... 1,860

EI Payable ....................................... 718

Income Tax Payable ....................... 8,025

Cash ................................................ 30,897

(b)

Aug. 31 Employee Benefits Expense .............. 4,940

CPP Payable ................................... 1,860

EI Payable ($718 × 1.4) .................. 1,005

Workers’ Compensation Payable

($41,500 × 1%) .......................... 415

Vacation Pay Payable ($41,500 × 4%) 1,660

(c)

Sept.15 CPP Payable ($1,860 + $1,860) .......... 3,720

EI Payable ($718 + $1,005) ................. 1,723

Income Tax Payable ........................... 8,025

Cash ............................................... 13,468


Solutions Manual 10-35 Chapter 10 © 2010 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.

EXERCISE 10-12

(a) AHMAD COMPANY

Payroll Register

Week Ending May 31

Gross Earnings

Deductions

Employee

Total

Hours

Regular

Overtime

Gross

Pay

CPP

EI

Income

Tax

Health

Insurance

Total

Net

Pay A. Kassam

H. Faas

G. Labute

Totals

46

42

45

$ 440.00

520.00

560.00

$1,520.00

$ 99.00

39.00

105.00

$243.00

$ 539.00

559.00

665.00

$1,763.00

$23.35

24.34

29.59

$77.28

$ 9.32

9.67

11.50

$30.49

$ 81.00

87.00

107.00

$275.00

$10.00

15.00

15.00

$40.00

$123.67

136.01

163.09

$422.77

$ 415.33

422.99

501.91

$1,340.23

(b) May 31 Wages Expense ........................................................... 1,763.00

CPP Payable ............................................................ 77.28

EI Payable ................................................................ 30.49

Income Tax Payable ............................................... 275.00

Health Insurance Payable ...................................... 40.00

Wages Payable ........................................................ 1,340.23

31 Employee Benefits Expense ....................................... 265.75

CPP Payable ($77.28 × 1) ....................................... 77.28

EI Payable ($30.49 × 1.4) ........................................ 42.69

Workers’ Compensation Payable ($1,763 × 2%) ... 35.26

Vacation Pay Payable ($1,763 × 4%) ...................... 70.52

Health Insurance Payable ...................................... 40.00




EXERCISE 10-13

Assets Liabilities Owner’s

Equity Revenues Expenses Profit

1. + + NE NE NE NE

2. NE NE NE NE NE NE

3. NE + - NE + -

4. +

$9,040

+

$1,040

+

$8,000

+

$8,000 NE

+

$8,000

5. -

$25,000

+

$10,000

-

$35,000 NE

+

$35,000

-

$35,000

6. NE + - NE + -

7. NE + - NE + -

8. NE NE NE NE NE NE

9. NE + - NE + -

10. - - NE NE NE NE




EXERCISE 10-14

(a)

LARKIN COMPANY

(Partial) Balance Sheet

August 31, 2011

Current liabilities

Accounts payable ....................................................... $ 72,000

Bank indebtedness ..................................................... 50,000

Income tax payable ..................................................... 28,000

Unearned revenue ...................................................... 24,000

Warranty liability ......................................................... 18,000

HST payable ................................................................ 12,000

Mortgage payable—current portion .......................... 10,000

Interest payable .......................................................... 8,000

Property taxes payable ............................................... 8,000

CPP payable ................................................................ 6,000

Customer loyalty liability ............................................ 4,000

EI payable .................................................................... 3,000

Workers’ compensation payable ............................... 1,000

Total current liabilities ........................................... $244,000

(b) Current ratio = ($145,000 + $220,000 + $10,000) ÷ $244,000

= 1.5:1

Acid-test ratio = $145,000 ÷ $244,000 = 0.6:1

(c) The company has a negative cash balance in the form of

bank indebtedness.




*EXERCISE 10-15

(a) Gross Pay = (40 hours × $20.50) + (4 hours × [$20.50 × 1.5])

= $820.00 + $123.00 = $943.00

Deductions ((Using Illustration 10A-3):

CPP [$943 – ($3,500 ÷ 52) × 4.95%] $43.35

EI ($943 × 1.73%) 16.31

Federal income tax (claim code 1) 110.20

Ontario income tax (claim code 1) 62.10

Total deductions $231.96

(b) Sep. 16 Wages Expense ......................... 943.00

CPP Payable .......................... 43.35

EI Payable .............................. 16.31

Income Tax Payable ($110.20 + $62.10) 172.30

Cash ....................................... 711.04

(c) Sep. 16 Employee Benefits Expense ..... 66.18

CPP Payable .......................... 43.35

EI Payable ($16.31 × 1.4) ...... 22.83




*EXERCISE 10-16

Month

Gross

Salary

Cumulative

Salary

CPP

4.95%

EI

1.73%

Jan. – Aug.

September

October

November

December

Totals

$32,000.00

4,000.00

4,000.00

4,000.00

4,000.00

$48,000.00

$32,000.00

36,000.00

40,000.00

44,000.00

48,000.00

$ 1,468.50

183.56

183.56

183.56

99.41

$2,118.59

2 1

3

$553.60

69.20

69.20

39.79

0

$731.79

5

4

6

1. CPP = ($4,000 – [$3,500 ÷ 12]) × 4.95% = $183.56

2. CPP = $183.56/month × 8 months = $1,468.50

3. CPP = ([$46,300 maximum pensionable earnings - $44,000]

– [$3,500 ÷ 12]) × 4.95% = $99.41

4. EI = $4,000 × 1.73% = $69.20

5. EI = $69.20/month × 8 months = $553.60

6. EI = ($42,300 maximum insurable earnings - $40,000) × 1.73%

= $39.79




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