Test bank accounting 9th canadian edition volume 2 solution by yandex4441

For Order This And Any Other Test Banks And Solutions Manuals, Course, Assignments, Discussions, Quizzes, Exams, Contact us At: johnmate1122@gmail.com Test Bank Accounting 9th Canadian Edition Volume 2 Solution Chapter 11 Current Liabilities and Payroll Questions 1.

2. 3.

4. 5.

A current liability is one that is payable within the coming year or within the companyâ&#x20AC;&#x2122;s normal operating cycle if longer than a year. All other liabilities are long-term. A contingent liability is a potential liability that depends on a future event arising out of past events. The future event will determine the amount and existence of the liability. A contingent liability may or may not become an actual obligation. The company reports current liabilities for the short-term note payable of $50,000 and for interest payable of $1,000 ($50,000 Ă&#x2014; 0.04 Ă&#x2014; 6/12). Retailers act as collecting agents for the federal government. Stores charge their customers GST, but the GST belongs to the federal government. The store has a liability to pay the federal government (Receiver General) the amount of tax collected less applicable input tax credits. Current portion of long-term debt is the amount of the principal of longterm debt due within one year. Because this amount is due within one year, it is reported as a current liability on the balance sheet. An accrued expense is an expense that has been incurred, but has not been paid. Because the expense has been incurred but not paid, it must be accrued, thus it is a liability.

Accounts payable and short-term notes payable are both current liabilities, that is, both are due and payable within one year or within the companyâ&#x20AC;&#x2122;s operating cycle. Differences: Accounts payable are amounts owed for products or services that are purchased on open account. Short-term notes payable are a form of financing. Accounts payable have no interest obligation (however, if paid late, interest or late payment charges could be incurred); short-term notes payable have a defined rate of interest due over the term of the note. At the beginning of the school term, tuition collected in advance is a liability of the school because it is an unearned revenue. At the end of the term, the tuition is a revenue because the tuition has been earned.

9. 10.

11.

12. 13.

14. 15. 16.

A customer deposit is a liability because the company has not provided service for the deposit and must refund that cash to its customers under certain conditions. The security deposit collected by telephone and other utility companies is an example. The company’s warranty expense for the year is $50,000, the estimate based on the current year’s sales. The matching objective demands that this expense be matched against the period’s revenues. A contingent liability of a definite amount arises from guaranteeing the note payable or loan of another business. A contingent liability of indefinite amount arises from pending lawsuits in which the business is the defendant and for which a loss is either unlikely or not estimable. The two basic categories of current liabilities are: – current liabilities of known amount Accounts payable Accrued expenses Sales tax payable Payroll liabilities GST payable Salary, commission and bonus Short-term notes payable payable Current portion of long-term Unearned revenues debt – current liabilities that must be estimated Estimated warranty payable Estimated vacation pay liability Income tax payable Service businesses sell their employees’ services, so employment compensation is their major expense of doing business, just as cost of goods sold is the largest expense in merchandising. The compensation of the factory supervisor is the company’s payroll expense. The company would debit the salary to Salary Expense. The compensation of the outside consultant would be debited to Consulting Expense. Two elements of an employer’s payroll expense in addition to salaries, wages, commissions, and overtime pay are employee government benefits expense and fringe benefits. The amount of income tax withheld from employee paycheques depends on the employee’s gross pay, the amount of nonrefundable tax credits claimed on the Personal Tax Credit Form (TD1) and the tax rate set by CRA. Canada Pension Plan is a pension plan administered by the federal government. The Quebec Pension Plan is administered by the Quebec government. The governments collect contributions from employees and employers to fund the plan. The funds are used to pay retirement pensions, disability pensions, and death benefits to eligible Canadians and Quebec residents.

17. Required deductions: Income tax, Canada (or Quebec) Pension, and Employment Insurance Optional deductions: Charitable donations, Canada Savings Bonds, Employee savings plans, and Employee Benefits premiums 18. Three employee benefit expenses are Canada (or Quebec) Pension, Employment Insurance, Workers’ Compensation and, where applicable, Provincial Payroll taxes regarding health and education. 19. The employee and employer both pay Employment Insurance premiums; the employer’s share is 1.4 times the employee’s share. The purpose of the Employment Insurance Fund is to provide assistance to the contributors (employees) to the fund who cannot work for a variety of reasons. 20. The payroll register, a special journal resembling the cash payments journal or cheque register, lists the employees and the amounts needed to record salary or wage expense for the pay period. It also serves as a cheque register for payroll by listing each payroll cheque number. The earnings record for each employee provides the business with the information needed for filing employee withholdings and benefits returns with the federal and provincial governments. The earnings record also holds the information needed to prepare the statement of remuneration paid, Form T4, given to each employee at the end of the year. A special payroll bank account is sometimes used to disburse paycheques to employees. Payroll cheques are used to pay employees. A paycheque is like any other cheque except that its attachment lists the employee’s gross pay, payroll deductions, and net pay. Note that many employers pay their employees through EFT (electronic funds transfer) and instead supply employees with a pay statement that provides the same information as the payroll cheque stub would have. 21. Employment insurance premiums are determined annually by the federal government. Assuming a rate of 1.83% on earnings up to $45,900, the maximum employment insurance premium this employee can pay is $839.97. The employer will contribute 1.4 times this amount or $1,175.96. 22. The two principal types of internal controls over payroll are controls for efficiency and controls for safeguarding payroll disbursements. Good internal controls for efficiency save time and money in reconciling the bank account. These controls include following established policies for hiring and terminating employees and complying with government regulations. Controls that safeguard cash minimize fraud and ensure that the correct amount of cash is paid to the appropriate employees. 23. Some companies use a special payroll bank account to keep the payroll cheques separate from the day-to-day business cheques. It may be easier to complete two bank reconciliations that are less complicated than one complicated bank reconciliation. Any payroll issues may also be highlighted in a separate payroll bank-account reconciliation.

24. Three internal controls designed to safeguard payroll cash are (1) the separation of the responsibility for hiring and terminating employees from the responsibility for distributing paycheques; (2) ensuring paycheques are issued to the actual employee payee on the cheque; 3) establishing a formal time-keeping system to ensure that employees actually worked the number of hours claimed. The requirement that each employee wear an identification badge that bears his or her picture and the designation of an employee from the home office as the occasional distributor of paycheques are controls that help ensure that cash is paid only to bona fide employees.

Starters

(10 min.)

S 11-1

Req. 1

General Journal DATE 2013 a .

Dec.

ACCOUNT TITLES AND EXPLANATIONS 31

Interest Expense ($32,0000.056/12)

POS T. REF.

DEBIT

CREDIT

800

Interest Payable

800

Accrued interest expense at year end. 2014 b .

June

Note Payable, Short-Term Interest Payable

800

Interest Expense ($32,000 × 0.05 × 6/12)

800

Cash Paid note and interest at maturity.

32,000

33,600

(5-10 min.)

S 11-2

Mission Corp. Balance Sheet (partial) December 31, 2013 ASSETS

LIABILITIES Current liabilities: Note payable, short-term Interest payable

$32,000 800

Mission Corp. Income Sheet (partial) For the Year Ended December 31, 2013 Revenues: Expenses: Interest expense

$800

(10 min.)

S 11-3

Req. 1

General Journal DATE 2014 Jan.

ACCOUNT TITLES AND EXPLANATIONS 31

POST. REF.

DEBIT

Cash ($600,0000.30)

180,000

Notes Receivable ($600,000 – $180,000)

420,000

Sales Revenue

CREDIT

600,000

To record sales. Warranty Expense ($600,0000.03)

18,000

Estimated Warranty Payable Estimated Warranty Payable

18,000 9,000

Cash

9,000

To pay warranty claims.

Req. 2 Estimated Warranty Payable 9,000 Bal.

The estimated warranty balance at the end of 2014 is $9,000.

18,000 9,000

(5-10 min.)

S 11-4

Warranty expense = $18,000 The warranty expense for the year does not necessarily equal the year’s cash payments for warranties. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for the warranty claims. The matching objective addresses this situation.

(5-10 min.)

S 11-5

These are contingent liabilities because at the time of the note Harley-Davidson, Inc. was not liable for any of these product losses because they had not yet occurred.

The contingency can become a real liability if the user of a Harley-Davidson product suffers a loss for which the company is responsible. Harley-Davidson must pay for all losses up to $3 million and all losses above $25 million per claim. The company is insured against losses for individual claims between $3 million and $25 million—for these losses, the company would pay the deductible amount specified in its insurance policy.

(10 min.)

S 11-6

Straight-time pay for 40 hours....................................................

$840.00

Overtime pay for 10 hours: [10($840/401.5)]....................

315.00

Total pay.....................................................................................

$1,155.00

Total pay.....................................................................................

$1,155.00

Less: Withheld income tax ($1,1550.20)............... $231.00 Withheld CPP ($1,1550.0495)........................ 57.17 Withheld EI ($1,1550.0183)........................... 21.14

309.31

Net pay........................................................................................

$845.69

(10 min.)

Straight-time pay for 40 hours........................................................... Overtime pay for 10 hours: [10(840/40 1.5)]............................ Total pay to employee........................................................................

S 11-7

840.00 315.00 1,155.00

Employer payroll expenses: CPP expense ($57.17 from S11-6).................................. 57.17 EI expense (1.4 $from S11-6)............................. 29.60 Pension ($1,1550.05).......................................................... 57.75 Provincial health insurance ($60 / 4)...................................... 15.00 Disability insurance ($8 / 4)....................................................

2.00

Total expense of employer.................................................................

161.52 $ 1,316.52

(10-20 min.)

S 11-8

Journal DATE

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

Salary Expense (see S 11-6)

DEBIT

CREDIT

1,155.00

Employee Income Tax Payable (S 11-6)

231.00

Canada Pension Plan Payable (S 11-6)

57.17

Employment Insurance Payable (S 11-6)

21.14

Salary Payable

845.69

To record salary expense and employee withholdings.

Journal DATE

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

Pension Expense (S 11-7)

57.75

Provincial Health Insurance Expense (S 11-7)

15.00

Disability Insurance Expense (S 11-7)

CREDIT

2.00

Employee Benefits Payable

74.75

To record employee benefits payable.

Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Employee Benefits Expense

POST. REF.

DEBIT

CREDIT

86.77

Canada Pension Plan Payable (S 11-7)

57.17

Employment Insurance Payable (S 11-7)

29.60

To record employerâ&#x20AC;&#x2122;s payroll expenses. EI Payable is calculated as $21.14 x 1.4 = $29.60.

(5-10 min.)

S 11-9

Journal DATE Mar.

ACCOUNT TITLES AND EXPLANATIONS 15

POST. REF.

DEBIT

CREDIT

Employment Insurance Payable

50.74

Canada Pension Plan Payable

114.34

Employee Income Tax Payable

231.00

Cash

396.08

To record remittance to CRA. EI Payable = $21.14 + $29.60 = $50.74 CPP Payable = $57.17 + $57.17 = $114.34 (10 min.)

S 11-9Mar5937

(10-15 min.)

Gross pay ........................................................................................

S 11-10 $4,000

Less: Withheld income tax deductions ($4,0000.20)..... $(800) Pension contribution ($4,0000.04)......................... (160) Net pay

Health insurance premium.......................................... (60)

(1,020)

..............................................................................................

$2,980

(10 min.)

Total salary expense ($1,155.00 + $74.75 + $86.77)..................

Net (take-home) pay.........................................................................

Employee paid: a.

Income tax...........................................................................

CPP........................................................................... $57.17 EI................................................................................ 21.14

S 11-11 $1,316.52

$845.69 $231.00 $78.31

Employer’s expense for: a.

CPP and EI ($57.17 + $29.60).............................................

$86.77

Benefits ($57.75 + $15.00 + $2.00).....................................

$74.75

(5-10 min.)

S 11-12

Internal controls to safeguard payroll disbursements: 

Separate the duties of hiring and firing employees from payroll accounting and from distributing paycheques.



Issue paycheques only to employees with a photo ID or use a secure electronic deposit system.



Have a formal time-keeping system.



Use a separate payroll bank account and reconcile the payroll bank account every month.



Hire and retain trustworthy employees

(5-10 min.)

S 11-13

a. C b. C c. C d. C and, in some cases, L for any portion of the warranty liability due in more than one year e. C and, in some cases, L for unearned revenue to be earned more than one year from the balance-sheet date f. C g. L h. C

i. Exercises

(5-10 min.)

E 11-1

General Journal DATE 2013 June

ACCOUNT TITLES AND EXPLANATIONS 1

Delivery Truck

POST. REF.

DEBIT 86,000

Note Payable, Short-term Dec.

Interest Expense ($86,000 × 0.06 × 7/12)

CREDIT 86,000

3,010

Interest Payable

3,010

2014 June

Note Payable, Short-term Interest Payable

3,010

Interest Expense ($86,000 × 0.06 × 5/12)

2,150

Cash [$86,000 + ($86,000 × 0.06)]

86,000

91,160

(5-15 min.)

E 11-2

General Journal DATE June

ACCOUNT TITLES AND EXPLANATIONS 30

Cash

POST. REF.

DEBIT 128,800

Sales Revenue

July

CREDIT 115,000

Sales Tax Payable ($115,000 × 0.07)

8,050

GST Payable ($115,000 × 0.05)

5,750

Sales Tax Payable

8,050

GST Payable

5,750

Cash

13,800

(5-15 min.)

December 31 2012 2013

2011 Current liabilities: Current portion of long-term debt Interest payable Long-term liabilities: Long-term debt

E 11-3 2014

$500,000 80,000

$500,000 60,000

$500,000 40,000

$500,000 20,000

1,500,000

1,000,000

500,000

—

Interest computations: $2,000,000 × 0.04 1,500,000 × 0.04 1,000,000 × 0.04 500,000 × 0.04

= = = =

$80,000 60,000 40,000 20,000

(15-20 min.)

E 11-4

Salem Electronics Balance Sheet (partial) December 31, 2012 Current liabilities (partial): 1. Unearned sales revenue 2. Employee income tax payable ($600,000 × 0.16)

$ 105,000 96,000

Canada Pension Plan payable ($600,000 × 0.099)

59,400

Employment Insurance payable ($600,000 × 0.0183) × (1 + 1.4)

26,352

3. Estimated warranty payable ($30,000,000 × 0.01) 4. Current portion of long-term note payable Interest payable ($50,000 × 0.05 × 29/365) Total current liabilities

300,000 10,000 199 $ 596,951

Long-term liabilities (partial): Note payable ($50,000 – $10,000)

$ 40,000

(10-15 min.)

Current ratio

Total current assets Total current liabilities

$325,000 $192,500

E 11-5

1.69

Epsot Marketing Services should pay off $60,000 of current liabilities; then the current ratio will be: $325,000 – $60,000 $192,500 – $60,000

$265,000 $132,500

2.25

Equation: $325,000 – x $192,500 – x 325,000 – x 325, 000 –x x

2.00

= = = =

2.00(192,500 – x) x + 385,000 – 2.00 x –60,000 60,000

Req. 1

(5-10 min.)

E 11-6

General Journal DATE 2014 Jan.

ACCOUNT TITLES AND EXPLANATIONS 2

POST. REF.

Cash

DEBIT

CREDIT

60,000

Retainer Fees

60,000

Received retainer fees in advance. Jan.

Retainer Fees

5,000

Service Revenue

5,000

Earned revenue that was collected in advance.

Req. 2 Jan. 31, 2014

Retainer Fees 5,000 Jan. 2, 2014 Bal.

60,000 55,000

The value of services to be provided in the remaining 11 months is $55,000.00.

(5-10 min.)

E 11-7

Req. 1

General Journal DATE 2014 Oct.

ACCOUNT TITLES AND EXPLANATIONS 1

POST. REF.

DEBIT

Cash [$100 + ($100 × 0.07) + ($100 × 0.05)]

112.00

Unearned Subscription Revenue

Nov.

100.00

GST Payable

7.00

PST Payable

5.00

PST Payable

5.00

GST Payable

7.00

Cash Dec.

CREDIT

12.00

Unearned Subscription Revenue ($100 ÷ 63)

50.00

Subscription Revenue

50.00

Req. 2 Unearned Subscriptions Revenue 50.00 Bal.

100.00 50.00

The National Post owes the subscriber $50.00 at December 31, 2014.

Req. 3

General Journal DATE 2014 Oct.

Nov.

ACCOUNT TITLES AND EXPLANATIONS 1

Cash($100 + ($100 × 0.12)

POST. REF.

DEBIT 112.00

Unearned Subscription Revenue

100.00

HST Payable

12. 00

HST Payable

12.00

Cash Dec.

Unearned Subscription Revenue ($100 ÷ 63) Subscription Revenue

CREDIT

12.00 50.00 50.00

Req. 1 (warranty entries)

(5-15 min.)

E 11-8

General Journal DATE 2014 Dec.

ACCOUNT TITLES AND EXPLANATIONS 31

POST. REF.

Warranty Expense ($1,038,000 Ã&#x2014; 0.03)

DEBIT

CREDIT

31,140

Estimated Warranty Payable

31,140

Estimated Warranty Payable

27,900

Cash

27,900

Req. 2 (ending balance of Estimated Warranty Payable)

Payments during period

Estimated Warranty Payable Jan. 1, 2014 27,900

Exp. for period End. bal.

The balance of Estimated Warranty Payable is $28,040.

24,800 31,140 28,040

(5-10 min.)

E 11-9

The contingent liability is material (25%) relative to Ludeman Security Systemsâ&#x20AC;&#x2122; total liabilities of $4.0 million. The lawsuit should be disclosed in a note to the financial statements. The note disclosure would be: Note Xâ&#x20AC;&#x201D; The company is a defendant in lawsuits brought against the monitoring service of its installed systems. Damages of $1,000,000 are claimed against the company, but management denies the charges and is vigorously defending itself. Although management cannot predict the lawsuit outcomes at this time, management does not believe that any liabilities resulting from them will significantly affect the companyâ&#x20AC;&#x2122;s financial position. Instructional Note: Any note that captures the essence of the situation is acceptable.

(5-10 min.)

E 11-10

Since the court has awarded a judgment against Ludeman Security Systems, what was previously a contingent liability is now a current liability for a known amount of the $300,000 loss assessed against the company. The financial statement disclosure and entry follow: Ludeman Security Systems would report:

Income statement: Loss from damage claim (Note X)

$300,000

Balance sheet: Liability for damage claim (Note X)

$300,000

The note disclosure would be: Note Xâ&#x20AC;&#x201D; The company is a defendant in lawsuits brought against the monitoring service of its installed systems. Damages of $300,000 have been rendered against the company, but management plans to seek leave to appeal the charges. Instructional Note: Any note that captures the essence of the situation is acceptable.

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Loss from Damage Claim Liability for Damage Claim

POST. REF.

DEBIT 300,000

CREDIT 300,000

(10â&#x20AC;&#x201C;15 min.)

E 11-11

General Journal DATE Dec.

ACCOUNT TITLES AND EXPLANATIONS 31

Income Tax Expense

POST. REF.

DEBIT

CREDIT

16,000

Income Tax Payable

16,000

To record the monthly estimate or installment 2014 Jan.

Income Tax Payable Cash ($10,000 x 11 = $110,000; $126,000 $110,000 = $16,000)

16,000 16,000

(10-15 min.) Gross pay: $1,875 + ($50,000 × 0.07)

E 11-12

$5,375.00

Deductions: Charitable contribution Dental insurance Income tax ($5,375.00 × 0.20) Employment Insurance premium ($5,375.00 × 0.0183) Canada Pension Plan [($5,375.00 – $291.67*) × 0.0495] Net Pay

* Basic exemption  12 = $3,500  12 = $291.67

50.00 49.15 1,075.00 98.36 251.62

1,524.13 $3,850.87

Req. a (gross pay and net pay)

(10-15 min.)

Straight-time earnings for 35 hours (35 × $10.50)

E 11-13

$367.50

Overtime pay for the next 5 hours: 5 hours × $10.50 × 1.5

78.75

Total gross pay for the week

$446.25

Deductions: Withheld income tax ($446.25 × 0.25)

111.56

CPP contributions [($446.25 – $67.31*) × 0.0495]

18.76

EI premiums ($446.25 × 0.0183)

8.17

RRSP contribution

10.00

Total deductions

148.49

Net pay

$297.76

* $3,500  52 = $67.31

Req. b (employers’ payroll entry)

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Wages Expense Canada Pension Plan Expense* Employment Insurance Expense* ($8.17 × 1.4) Employee Income Tax Payable CPP Payable ($18.76 + $18.76) EI Payable ($8.17 + $11.44) RRSP Contribution Payable Wages Payable

POST. REF.

* Could also debit Employee Benefits Expense

DEBIT $446.25 18.76 11.44

CREDIT

111.56 37.52 19.61 10.00 297.76

(10-15 min.)

E 11-14

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Entry for payroll expenses: Employee Benefits Expense CPP Payable ($95,000 × 0.0495) EI Payable ($95,000 × 0.0183 × 1.4) Entry for fringe benefits: Dental Insurance Expense for Employees Life Insurance Expense for Employees Pension Expense Employee Benefits Payable

POST. REF.

DEBIT

CREDIT

7,136.40 4,702.50 2,433.90

5,723.09 441.09 1,745.60 7,909.78

(10 min.)

Gross pay Employer payroll expenses: CPP contributions EI premium Pension ($38,710 × 0.05) Dental insurance (12 × $35) Parking (12 × $10) Total payroll expense *(708.39 × 1.4) = $991.75

E 11-15

$38,710.00 $1,732.00 991.75*

2,723.75 1,935.50 420.00 120.00 $43,909.25

Req. 1 (gross pay and net pay)

(10–15 min.)

E 11-16

Total gross pay for the month

$2,000.00

Deduction: Withheld federal income tax Withheld provincial income tax CPP contributions [($2,000–$291.67*) × 0.0495] EI premiums ($2,000 × 0.0183) Total deductions Net pay

$138.55 99.70 84.56 36.60 359.41 $1.640.59

*$3,500 ÷ 12 = $291.67

Req. 2 (employers’ payroll entry)

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Salary Expense Canada Pension Plan Expense* Employment Insurance Expense* ($36.60 × 1.4) Employee Income Taxes Payable ($138.55 + $99.70) CPP Payable ($84.56 + $84.56) EI Payable ($36.60 + $51.24) Wages Payable * Could also debit Employee Benefits Expense

POST. REF.

DEBIT 2,000.00 84.56 51.24

CREDIT

238.25 169.12 87.84 1,640.59

Req. 1

(15-30 min.)

E 11-17

Current ratio reported by the corporation = Billions 2014 Total current assets Total current liabilities

$24.50 $11.66

2013 =

2.10

$22.92 $15.12

1.52

The current ratio increased dramatically in 2014, which is an improvement.

Req. 2 2014 Current ratio without reclassification of current liabilities as long-term

$24.50 $11.66 + $7.00

1.31

It appears that the corporation needed to refinance and reclassify the current liabilities as longterm in order to keep the current ratio from going down in 2014 compared to 2013. This might have caused the company to appear to be (and perhaps really be) incapable of meeting its current obligations.

Req. 1

(10-20 min.)

Analysis of T-accounts is helpful:

2014 Payments

Notes Payable Dec. 31, 2013 X 2014 Borrowing Dec. 31, 2014

Balance 78 3 Balance 26

$78 + $3 – X = $26 X = $55 million During 2014, Vallarta Company paid off notes payable of $55 million.

Req. 2 Accrued Payrolls and Benefits Dec. 31, 2013 2014 Payments 250 2014 Expense Dec. 31, 2014

Balance 298 X Balance 270

$298 +– $250 = $270 X = $222 million Vallarta’s employee compensation expense for 2014 was $222 million.

E 11-18

Beyond the Numbers

(10-15 min.)

BN 11-1

Req. 1 A company would prefer not to disclose its contingent liabilities because they cast a shadow on the business and could create a negative impression. It might also give opposing lawyers facts for a stronger case against the company.

Req. 2 A contingent liability creates risk for a company. If the contingent liability is not reported, the bank may view the company as low-risk. This may lead the bank to loan money at low interest rates and with easy payment terms. With knowledge of the contingent liability, the bank might not have made the loan at all. Or the bank might have required a higher interest rate or more stringent payment terms.

Req. 3 Reporting a contingent liability requires a delicate balancing act. Ethics require that the usersâ&#x20AC;&#x2122; interests be protected. The company must disclose enough information to give users a reasonable basis for making informed decisions about the company. At the same time, the company should avoid giving away secrets that could damage its ownersâ&#x20AC;&#x2122; investment in the business.

(15-25 min.)

BN 11-2

In one sense, warranties payable are contingencies because it is possible that they may not have to be paid. However, it is more likely that the company must pay some amount for warranties. Due to this high likelihood, and because most companies can estimate their warranty payments, ASPE requires companies to record warranty expense and warranty payable, thus treating this contingency as a real liability.

Unearned revenues are liabilities because they represent goods or services owed by a company rather than cash.

In addition to interviews with management to identify a clientâ&#x20AC;&#x2122;s contingent liabilities, auditors examine the clientâ&#x20AC;&#x2122;s contracts (for example, lending, borrowing, notes receivable, and notes payable) to look for obligations that may create a liability. Auditors also ask the clientâ&#x20AC;&#x2122;s lawyers for a letter identifying any lawsuits involving the client. Lawsuits are a key cause of contingent liabilities.

Ethical Issue It is not unethical to commit a company to a high level of debt. Lenders and other creditors are hurt most directly by a company that cannot pay its debts. Presumably trade creditors and other lenders protect their own interests and can refuse to sell goods on credit or make loans as they please. As long as the borrower is honest, discloses all liabilities appropriately, and meets the requirements imposed by creditors, by shareholders, and by taxing and other legal authorities, then the borrower’s behaviour can be considered ethical. Taking on too much debt is risky because interest and principal must be paid according to the terms of the agreement—during bad times as well as good. Again, it is the creditor’s responsibility to evaluate a debtor’s ability to pay liabilities. Lenders that advance too much credit to a losing business are said to “throw good money after bad.”

Problems

Group A

(30-40 min.)

P 11-1A

General Journal DATE 2013 Jan. 3

Feb.

July

Nov.

Dec.

ACCOUNT TITLES AND EXPLANATIONS Machine GST Recoverable Note Payable, Short-term Cash [($1,570,000 + $109,900 + $78,500) × 0.20] Accounts Receivable [($1,570,000 + $109,900 + $78,500) × 0.80)] Sales Revenue Sales Tax Payable ($1,570,000 × 0.07) GST Payable ($1,570,000 × 0.05) Sales Tax Payable GST Payable GST Recoverable Cash Cash Note Payable, Long-term

POST. REF.

DEBIT 350,000 17,500

CREDIT

367,500

351,680 1,406,720 1,570,000 109,900 78,500 109,900 78,500 17,500 170,900 3,000,000 3,000,000

Note Payable, Short-term Interest Expense ($367,500 × 0.05× 181/365) Cash

367,500 9,112

Inventory GST Recoverable ($150,000 × 0.05) Note Payable, Short-term

150,000 7,500

Warranty Expense ($8,000,000 × 0.02) Estimated Warranty Payable

160,000

376,612

157,500

160,000

(continued)

P 11-1A

General Journal DATE 2013 Dec. 31

2014 Feb. 28

May

ACCOUNT TITLES AND EXPLANATIONS Interest Expense ($3,000,000 × 0.03 × 306/365 Interest Payable Interest Expense ($157,500 × 0.05 × 31/365) Interest Payable

POST. REF.

DEBIT 75,452

CREDIT 75,452

669 669

Note Payable, Long-term Interest Payable Interest Expense ($3,000,000 × 0.03 – $75,452) Cash

300,000 75,452 14,548

Note Payable Interest Payable Interest Expense ($157,500 × 0.05 × 151/365) Cash

157,500 669 3,258

390,000

161,427

(15-30 min.)

To:

P 11-2A

Austin Motors

Your business could expose you to some contingent liabilities. These are potential liabilities that have not yet materialized but that could become real debts if certain events occur. As I see it, you have several contingent liabilities. One could result from injury to your employees while conducting their work. An injury to an employee acting in the line of duty would be your responsibility so long as the employee is not negligent. Another contingent liability could result from potential injury to customers while on your premises. As they drop off and pick up their cars for repair, the possibility exists for a personal injury. A third contingent liability could arise from potential damage to customersâ&#x20AC;&#x2122; cars while on your premises. The movement of cars into and out of the service department and the body shop creates the potential for an accident and damage to an automobile. You need insurance to cover these contingent liabilities. Choose the company that will provide the most coverage at the best price. Iâ&#x20AC;&#x2122;m curiousâ&#x20AC;&#x201D;has something happened in your industry or at your dealership to increase the risk for the insurance company, causing it to double your premiums? If so, other insurance companies may also require much-higher premiums as well. Instructional Note: Student responses may vary considerably.

Req. 1 (solving for missing payroll amounts)

(20-30 min.)

P 11-3A

Employee Earnings: Regular employee earnings Overtime pay Total employee earnings

$19,947 5,595 a 25,542 b

Deductions and Net Pay: Withheld income tax

6,379

Canada Pension Plan

549 c

Employment Insurance

478

Medical Insurance

541

Total deductions Net pay

7,947 17,595

Accounts Debited: Salaries Expense

16,923 d

Wages Expense

6,938

Sales Commission Expense

1,681

Computations (in order of calculation): b.

Total employee earnings: Total deductions ($7,947) + Net pay ($17,595) = Total employee earnings ($25,542)

Overtime pay: Total employee earnings ($25,542) – Regular employee earnings ($19,947) = Overtime pay ($5,595)

Canada Pension Plan: Total deductions ($7,947) – Withheld income tax ($6,379) – Employment Insurance ($478) – Medical Insurance ($541) = Canada Pension Plan ($549)

Salary Expense: Total employee earnings ($25,542) – Wages expense ($6,938) – Sales commission expense ($1,681) = Salaries expense ($16,923)

Req. 2 (payroll entry)

(continued)

P 11-3A

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS Salaries Expense Wages Expense Sales Commission Expense CPP Expense EI Expense ($478 Ã&#x2014; 1.4) Employee Income Tax Payable CPP Payable ($549 + $549) EI Payable ($478 + $ 669) Employee Medical Insurance Payable Payroll Payable

POST. REF.

DEBIT 16,923 6,938 1,681 549 669

CREDIT

6,379 1,098 1,147 541 17,595

Req. 1 (gross pay and net pay)

(25-35 min.)

P 11-4A

Gross pay: Salary earnings ($7,500 × 12) Bonus ($90,000 × 0.10)

$90,000.00 9,000.00

Gross pay

$99,000.00

Deductions: Withheld income tax [($2,398 × 12) + $4,512] Canada Pension Plan

33,288.00 2,306.70

Employment Insurance

839.97

United Way contribution ($37.50 × 12)

450.00

RRSP Contribution ($55 × 12)

660.00

Total deductions Net pay

37,544.67 $ 61,455.33

Req. 2 (employer’s total annual cost of employee) Gross pay

$99,000.00

Employer payroll expenses: Canada Pension Plan Employment Insurance ($839.97 × 1.4)

2306.70 1,175.96

Fringe benefits: Health insurance for employee ($38 × 12) Pension benefits for employee ($90,000 × 0.07) Total annual cost of employee

456.00 6,300.00 $109,238.66

Req. 3 (employer’s payroll entries)

(continued)

P 11-4A

General Journal DATE 2012 a.

ACCOUNT TITLES AND EXPLANATIONS Employee’s total earnings: Salary Expense Bonus Expense Employee Income Tax Payable Canada Pension Plan Payable Employment Insurance Payable United Way Payable RRSP Contribution Payable Cash

CREDIT

90,000.00 9,000.00 33,288.00 2,306.70 839.97 450.00 660.00 61,455.33

3,482.66 2,306.70 1,175.96

Employer Cost of Employee Fringe Benefits: Health Insurance Expense for Employees Pension Expense Health Insurance Payable Company Pension Payable

DEBIT

Employer Payroll Expenses: Employee Benefits Expense CPP Payable Employment Insurance Payable

POST. REF.

456.00 6,300.00 456.00 6,300.00

(35-40 min.)

P 11-5A

Req. 1 and 2 (ledger accounts and posting)

Notes Payable, Short-term Bal. 20,000

Accounts Payable Bal. 235,620

Current Portion of Longterm Debt Payable (b) 50,000 Bal. 50,000

Interest Payable (a) 400 (b) 6,250 Bal. 6,650

Salaries Payable (c) 4,963 Bal. 4,963

Employee Income Tax Payable (c) 1,365 Bal. 1,365

Employer Payroll Costs Payable (d) 820 Bal. 820

Employee Insurance Benefits Payable (d) 991 Bal. 991

Estimated Vacation Pay Liability Bal. 12,360 (e) 8,850 Bal. 21,210

Sales Tax and GST Payable Bal.

(a) (b) (e) (f)

5,972

(f)

Unearned Rent Revenue 6,000 Bal. 18,000 Bal. 12,000

($20,000 × 0.06) × 4/12 = $400 ($250,000 × 0.03) × 10/12 = $6,250 ($147,500 × 0.06) = $8,850 $18,000 × 4/12 = $6,000

(b)

Long-term Debt Payable 50,000 Bal. 250,000 Bal. 200,000

(continued)

Req. 3 (liability section of June 30 balance sheet)

P 11-5A

Shell Storage Units

Shell Storage Units Balance Sheet June 30, 2014 LIABILITIES Current liabilities: Notes payable, short-term Accounts payable Current portion of long-term debt payable

20,000 235,620 50,000

Interest payable

6,650

Salaries payable

4,963

Employee income tax payable

1,365

Employer payroll costs payable

820

Employee insurance benefits payable

991

Estimated vacation pay liability

21,210

Sales tax and GST payable Unearned rent revenue Total current liabilities

5,972 12,000 359,591

Long-term liabilities: Long-term debt payable Total liabilities

200,000 $559,591

Contingent liabilities (Note X)

Note Xâ&#x20AC;&#x201D;At June 30, 2014, the company was the defendant in a lawsuit that could result in a $200,000 liability. The outcome is uncertain, but the company expects to win the case.

Req. 1 and 3 (payroll register)

(20-30 min.)

P 11-6A

Payroll Register GROSS PAY

EMPLOYEE NAME

TOTAL

INCOME TAX

CANADA PENSION PLAN

$1,335

$474.10

$ 0.00

520

67.60

135

535

800

$2,920

$330

HRS

STRAIG HT-TIME

OVERTIME

Molly Dodge

$1,200

$135

Tally Allard

520

George White

400

Luigi Valenti

Total

DEDUCTIONS EMPLOYME NT INS.

NET PAY

ACCOUNT DEBITED

RETIREMENT PROGRAM

OFFICE SALARIES EXPENSE

UNITED WAY

TOTAL

AMT.

$ 0.00

$25.00

$499.10

$ 835.9 0

106.80

22.41

9.52

2.00

101.53

418.47

41.60

520.00

63.70

23.15

9.79

2.00

98.64

436.36

42.80

535.00

860

352.00

39.24

0.00

5.00

396.24

463.76

68.80

$3,250

$957.40

$84.80

$19.31

$34.00

$1,095.5 1

$2,154.4 9

$260.00

SALES SALARIES EXPENSE

$1,335.00

860.00

$1,055.00

$2,195.00

Computations: Dodge: Straight-time hourly pay: 40 × $30 = $1,200 Overtime: 3 × $30 × 1.5 = $135 Allard: Straight-time hourly pay: 40 × $13 = $520

White: Straight-time hourly pay: 40 × $10 = $400 Overtime: 9 × $10 × 1.5 = $135 Valenti: Straight-time hourly pay: 40 × $20 = $800 Overtime: 2 × $20 × 1.5 = $60

Req. 2 (entry to record weekly payroll)

(continued)

P 11-6A

General Journal DATE Sept.

ACCOUNT TITLES AND EXPLANATIONS 21

POST. REF.

DEBIT

Office Salaries Expense

1,055.00

Sales Salaries Expense

2,195.00

Employee Income Taxes Payable

CREDIT

957.40

CPP Payable

84.80

Employment Insurance Payable

19.31

Employee United Way Payable

34.00

Cash

2,154.49

Req. 3 (entry to record employer’s payroll information)

General Journal DATE Sept.

ACCOUNT TITLES AND EXPLANATIONS 21

POST. REF.

Employee Benefits Expense CPP Payable

DEBIT

CREDIT

111.83 84.80

Employment Insurance Payable ($19.31× 1.4)

27.03

Req. 4 Dodge’s accumulated earnings exceed the maximum ($50,100 for CPP), and presumably the maximum Canada Pension Plan deduction of $2,306.70 has already been made. Dodge and Valenti have no EI deducted because their accumulated earnings exceed the maximum $45,900 and presumably the maximum deduction of $839.97 has already been made.

Req. 5 $3,250 × 0.04 = $130.00

(15-20 min.)

P 11-7A

a. Estimated warranty payable [$14,600 + ($911,000 × 0.02) – $15,600

$ 17,220

b. Note payable, short-term

$45,000

Interest payable ($45,000 × 0.06 × 4/12)

900

c. Unearned rent revenue ($36,000 × 2/3)

$24,000

*d. Provincial sales tax and GST payable ($80,000 × 1.05 × 0.10) + ($80,000 × 0.05)

$12,400

e. Portion of long-term note payable due within one year

$30,000

Interest payable ($150,000 × 0.05 × 3/12)

1,875

*Note in PEI, PST is charged on GST.

(40-60 min.)

P 11-8A

Req. 1–8

General Journal DATE 2012

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

CREDIT

1. Apr.

Sales salaries

167,000

Jobsite salaries

27,000

Office salaries

58,000

Income Tax payable

49,686

CPP payable

12,900

EI payable

3,800

RRSP contribution payable

7,600

Blue Cross Insurance payable

10,000

Cash or Salaries payable

168,014

To record payroll for last week of April

Employee Benefits Expense

18,220

CPP Payable

12,900

EI Payable ($3,800 × 1.4)

5,320

To record employers portion of the benefits

Sales salaries

33,400

Jobsite salaries

5,400

Office salaries

11,600

Income Tax payable

9,937

CPP payable

2,580

EI payable

760

RRSP contribution payable

1,520

Blue Cross Insurance payable

2,000

Salaries payable

33,603

To accrue 1/5 of the standard weekly payroll for the year ended April 30, 2012.

General Journal DATE 2012

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

CREDIT

4. Apr.

Employee Benefits Expense

3,644

CPP Payable

2,580

EI Payable ($760 × 1.4)

1,064

To accrue employer’s portion of the benefits; use 1/5 of the standard weekly payroll

5. May

Salaries payable

33,603

Sales salaries (4/5 x 167,000)

133,600

Jobsite salaries

(4/5 x 27,000)

21,600

Office salaries

(4/5 x 58,000)

46,400

Income Tax payable CPP payable EI payable

(4/5 x 49,686)

39,749

(4/5 x 12,900)

10,320

(4/5 x 3,800)

RRSP contribution payable

3,040

(4/5 x 7,600)

Blue Cross Insurance payable

6,080

(4/5 x

10,000)

8,000

Cash or Salaries payable

6. May

Employee Benefits Expense CPP Payable EI Payable ($3,040 × 1.4)

168,014

14,576 10,320 4,256

(30-50 min.)

P 11-9A

Req. 1

General Journal DATE 2014 Jan.

ACCOUNT TITLES AND EXPLANATIONS 31

POST. REF.

Cash

DEBIT 9,040

Accounts Receivable Warranty Expense

81,360 3,200

Sales

80,000

HST Payable

10,400

Estimated Warranty Payable

CREDIT

Property Tax Expense

3,200

5,000

Property Taxes Payable ($60,000/12)

Feb.

5,000

Estimated Warranty Payable

1,350

Repair Parts Inventory

500

Wages Expense

850

HST Payable

10,400

HST Recoverable

3,700

Cash

6,700

Property Tax Expense

5,000

Property Taxes Payable ($60,000/12)

5,000

Cash

15,594

Accounts Receivable

88,366

Warranty Expense

3,680

Sales

92,000

HST Payable

11,960

Estimated Warranty Payable

Mar.

HST Payable

11,960

HST Recoverable

4,750

Cash

7,210

No journal entry is appropriate as there is no reliable estimate of the cost of the lawsuit. Disclosure of the lawsuit should be made in a footnote to the statements.

3,680

Req. 1

(continued)

P 11-9A

General Journal DATE 2014 Mar.

ACCOUNT TITLES AND EXPLANATIONS 15

POST. REF.

Estimated Warranty Payable

DEBIT 3,700

Repair Parts Inventory

2,500

Wages Expense

1,200

Accounts Receivable

500

Estimated Warranty Payable

750

Repair Parts Inventory

750

Repair Revenues

500

Cash

9,944

Accounts Receivable Warranty Expense

89,496 3,520

Sales

88,000

HST Payable

11,440

Estimated Warranty Payable

CREDIT

Property Tax Expense Property Taxes Payable

3,520

6,500 6,500

($2,200,000 × 0.03)/12 = $5,500/month; 3 months = $16,500 Presently recorded = $10,000;

Difference = $6,500

Req. 2 Beaufort Explorations Balance Sheet March 31, 2014 LIABILITIES Current liabilities: Estimated warranty liabilities*

$ 4,600

Property taxes payable**

16,500

HST payable

11,440

Total current liabilities

$32,540

*$3,200 – $1,350 + $3,680 – $3,700 – $750 + $3,520 = $4,600 ** $5,000 + $5,000 + $5,500 + $500 (Jan adjustment) + $500 (Feb adjustment) = $16,500 Contingencies: Incidental to the business, Beaufort Explorations is party to a lawsuit that alleges negligence and liability for product failure. Due to the inherent uncertainty in the case, an estimate of the financial impact cannot be made at this time.

Problems

Group B

(30-40 min.)

P 11-1B

General Journal DATE 2013 Mar.

ACCOUNT TITLES AND EXPLANATIONS 3

POST. REF.

Equipment

CREDIT

66,000

GST Recoverable Note Payable, Short-term

DEBIT

3,300 69,300

Cash [($134,500 × 1.05) × 0.25] Accounts Receivable

35,306 105,919

[($134,500 × 1.05) × 0.75] Sales Revenue

134,500

GST Payable ($134,500 × 0.05)

Apr.

May

GST Payable

6,725

Cash

3,425

GST Recoverable

3,300

Cash

75,000

Note Payable, Long-term

Sept.

Note Payable, Short-term Interest Expense ($69,300 × 0.03 × 184/365)

75,000

69,300 1,048

Cash

70,348

Inventory

25,000

GST Recoverable

1,250

Note Payable, Short-term

Dec.

Warranty Expense ($1,445,000 × 0.03) Estimated Warranty Payable

26,250

43,350 43,350

Interest Expense ($75,000 × 0.05 × 214/365)

2,199

Interest Payable

Interest Expense ($26,250 × 0.05 × 92/365) Interest Payable

2,199

331 331

(continued)

P 11-1B

General Journal DATE 2014 Mar.

ACCOUNT TITLES AND EXPLANATIONS 31

POST. REF.

Note Payable

DEBIT 26,250

Interest Payable

331

Interest Expense ($26,250 × 0.05 × 90/365)

324

Cash

May

CREDIT

26,905

Note Payable, Long-term

15,000

Interest Payable

2,199

Interest Expense ($75,000 × 0.05 – $2,199)

1,551

Cash

18,750

(15-30 min.)

To:

P 11-2B

Alessandra Gesso, Skating Instructor

Your business exposes you to some contingent liabilities. These are potential liabilities that have not yet materialized but that could become real debts if certain events occur. As I see it, you have at least two contingent liabilities. One results from the possibility that a skater could fall and be hurt during a lesson. It seems that you could be held responsible for injury to a skater if a parent could prove that you were negligent in your teaching of the young children. The other contingent liability would result from damages to the arena premises caused by your pupils. In each of these situations, you could have a real liability. The most basic way for you to limit your exposure to these liabilities is to be diligent in conducting your lessons and in taking safety precautions such as requiring all skaters to wear helmets. In order to ensure the premises are not damaged by your skating students, it would be wise to have supervision of the skaters when they are not in lessons. Because your skaters are young and inexperienced, they will need lots of supervision. You may also be able to limit your liability by having the skatersâ&#x20AC;&#x2122; parents sign waivers agreeing not to hold you responsible for accidents that are beyond your control. Although you do not wish to purchase liability insurance at this time, I strongly recommend that you investigate the cost of such insurance, since it could be the best protection for you in case of a liability arising. Instructional Note: Student responses may vary.

(20-30 min.)

P 11-3B

Req. 1 (solving for missing payroll amounts) Employee Earnings: Regular earnings

$172.768 a

Overtime pay

13,994

Total employee earnings

186,762 b

Deductions and Net Pay: Withheld income tax

31,704

Canada Pension Plan

9,200

Employment Insurance

3,492

Dental and drug insurance

1,556

Total deductions

45,952 c

Net pay

140,810

Accounts Debited: Salaries Expense

66,468

Wages Expense

60,938 d

Sales Commission Expense

59,356

Computations (in order of completion): c.

Total deductions = $31,704 + $9,200 + $3,492 + $1556 = $45,952

Total employee earnings: Total deductions = ($45,952) + Net pay ($140,810) = Total employee earnings ($186,762)

Regular earnings: Total employee earnings = [($186,762) – Overtime pay ($13,994) = Regular earnings ($172,768)]

Wages expense: Total employee earnings ($186,762) – Salaries expense ($66,468) – Sales commission expense ($59,356) = Wages expense ($60,938)

Req. 2 (payroll entry)

(continued)

P 11-3B

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

Salaries Expense

66,468

Wages Expense

60,938

Sales Commission Expense

59,356

CPP Expense

9,200

EI Expense

4,889

CREDIT

Employee Income Tax Payable

31,704

CPP Payable

18,400

EI Payable

8,381

Employee Dental and Drug Insurance Payable Payroll Payable

1,556 140,810

(25-35 min.)

P 11-4B

Req. 1 (gross pay and net pay) Gross pay: Salary earnings ($6,500 × 12) Bonus ($78,000 × 0.20)

$78,000.00 15,600.00

Gross pay

$93,600.00

Deductions: Withheld income tax [($1,762.28 × 12) + $4,095.11] Canada Pension Plan

25,242.47 2,306.70

Employment Insurance

839.97

Charitable donations ($6,500 × 0.015 × 12) Life insurance ($68 × 12)

1,170.00 816.00

Total deductions

30,375.14

Net pay

$63,224.86

Req. 2 (employer’s total annual cost of employee) Gross pay

$93,600.00

Employer payroll taxes (benefits expense): Canada Pension Plan

2,306.70

Employment Insurance ($839.97 × 1.4)

1,175.96

Fringe benefits: Health insurance for employee ($65 × 12) Pension benefits for employee Total annual cost of employee

780.00 5,350.00 $103,212.66

Req. 3 (employer’s payroll entries)

(continued)

P 11-4B

General Journal DATE

ACCOUNT TITLES AND EXPLANATIONS a.

POST. REF.

DEBIT

Employee’s total earnings:

Salary Expense

78,000.00

Executive Bonus Compensation

15,600.00

Employee Income Tax Payable

25,242.47

Canada Pension Plan Payable

2,306.70

Employment Insurance Payable

839.97

Charitable Donations Payable

1,170.00

Employee Life Insurance Payable

816.00

Cash

63,224.86

Employer Payroll Expense:

Employee Benefits Expense

CREDIT

3,482.66

Canada Pension Plan Payable

2,306.70

Employment Insurance Payable

1,175.96

Employer Cost of Employee Fringe Benefits:

Health Insurance Expense for Employees Pension Expense

780.00 5,350.00

Health Insurance Payable Company Pension Payable

780.00 5,350.00

(35-40 min.)

P 11-5B

Req. 1 and 2 (ledger accounts and posting)

Note Payable, Short-term Bal. 74,000

Interest Payable (a) (b) Bal.

Salaries Payable 3,392 5,500 8,892

Employer Payroll Costs Payable (d) 2,788 Bal. 2,788

GST Payable Bal.

(b)

Current Portion of Longterm Debt Payable (b) 60,000 Bal. 60,000

Accounts Payable Bal. 355,680

4,900

Employee Withholdings Payable (c) 4,756 Bal. 4,756

16,690 16,690

Employee Insurance Benefits Payable (d) Bal.

Estimated Vacation Pay Liability

300 300

Property Tax Payable Bal. 9,284

Bal. (e) Bal.

(f)

7,896 14,400 22,296

Unearned Service Revenue 6,000 Bal. 18,000 Bal. 12,000

Long-term Debt Payable 60,000 Bal. 300,000 Bal. 240,000 (a) (b) (e)

($74,000 × 0.05) × 11/12 = $3,392 ($300,000 × 0.055) × 4/12 = $5,500 ($240,000 × 0.06) = $14,400

(continued)

Req. 3 (liability section of June 30 balance sheet)

P 11-5B

Uptown Hardware

Uptown Hardware Balance Sheet June 30, 2014 LIABILITIES Current liabilities: Notes payable, short-term

$ 74,000

Accounts payable

355,680

Current portion of long-term debt payable

60,000

Interest payable

8,892

Salaries payable

16,690

Employee withholdings payable

4,756

Employer payroll costs payable

2,788

Employee Insurance benefits payable

300

Estimated vacation pay liability

22,296

GST payable

4,900

Property tax payable

9,284

Unearned service revenue Total current liabilities

12,000 571,586

Long-term liabilities: Long-term debt payable

240,000

Total liabilities

$811,586

Contingent liabilities (Note Y)

Req. 4 Note Y: At June 30, 2014, the company was the defendant in a lawsuit that could result in a $100,000 liability. The outcome is uncertain, but the company expects to win the case.

(20-30 min.)

P 11-6B

Req. 1 and 3 (payroll register)

Payroll Register GROSS PAY

EMPLOYEE NAME

DEDUCTIONS

TOTAL

INCOM E TAX

CANADA PENSION PLAN

EMPLOYMENT INS.

$ 82.50

$ 522.50

$ 62.8 5

$22.53

$ 9.56

500.00

187.50

687.50

73.25

30.70

850.00

286.88

1,136.88

184.10

380.00

$2,726.88

HRS

STRAIGHTTIME

OVERTIME

Bourdon

$ 440.00

Wells

Boyd Lamont

Total

$2,170.00

$556.88

Computations: Bourdon: Straight-time pay: $440/40 = $11 Overtime: 5 × $11 × 1.5 = $82.50 Wells: Straight-time pay: $500/40 = $12.50

NET PAY

UNITED WAY

ACCOUNT DEBITED OFFICE SALARIES EXPENSE

SALES SALARIES EXPENSE

TOTAL

AMOUNT

CHQ . NO.

$ 16.00

$ 110.94

$ 411.56

178

12.58

16.00

132.53

554.97

179

$ 687.50

0.00

40.00

224.10

912.78

180

1,136.88

42.60

15.48

6.95

4.00

69.03

310.97

181

$362.8 0

$68.71

$29.09

$76.00

$536.60

$2,190.28

$522.50

380.00

$902.50

$1,824.38

Overtime: 10 × $12.50 × 1.5 = $187.50 Boyd: Straight-time pay: $850/40 = $21.25 Overtime: 9 × $21.25 × 1.5 = $286.88

Req. 2 (entry to record weekly payroll)

(continued)

P 11-6B

General Journal DATE 2012 Dec.

ACCOUNT TITLES AND EXPLANATIONS 18

POST. REF.

DEBIT

Office Salaries Expense

902.50

Sales Salaries Expense

1,824.38

Employee Income Tax Payable

CREDIT

362.80

CPP Payable

68.71

Employment Insurance Payable

29.09

Employee United Way Charities Payable

76.00

Cash

2,190.28

Req. 3 (entry to record employer’s payroll information)

General Journal DATE 2012 Dec.

ACCOUNT TITLES AND EXPLANATIONS 18

POST. REF.

Employee Benefits Expense CPP Payable

DEBIT

CREDIT

109.44 68.71

Employment Insurance Payable ($29.09 ×1.4)

40.73

Req. 4 Boyd has no Canada Pension Plan or Employment Insurance deducted because the maximum pensionable ($50,100) and insurable earnings ($45,900) have been reached; Boyd’s earnings to date are $56,380.

(15-20 min.)

a. Note payable, short-term

P 11-7B

$120,000

Interest payable ($120,000 × 0.05 × 6/12)

3,000

b. Estimated warranty payable [$29,300 + ($2,103,000 × 0.03) – $55,700]

$36,690

c. Deposits on equipment

$10,000

d. GST payable ($323,000 × 0.05)

$16,150

e. Portion of long-term note payable due within one year

$40,000

Interest payable ($200,000 × 0.04)

8,000

(40-60 min.)

P 11-8B

Req. 1–8

General Journal DATE 2012

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

CREDIT

1. Apr.

Sales salaries expense

334,000

Jobsite salaries expense

54,000

Office salaries expense

116,000

Income Tax payable

99,372

CPP payable

25,800

EI payable

7,600

RRSP contribution payable

15,200

Blue Cross Insurance payable

20,000

Cash or Salaries payable

336,028

To record payroll for last week of April.

Employee Benefits Expense

36,440

CPP Payable

25,800

EI Payable ($7,600 × 1.4)

10,640

To record employers portion of the benefits

Sales salaries expense

66,800

Jobsite salaries expense

10,800

Office salaries expense

23,200

Income Tax payable CPP payable

5,160

EI payable

1,520

RRSP contribution payable

3,040

Blue Cross Insurance payable

4,000

Salaries payable To accrue 1/5 of the standard weekly payroll for the year ended April 30, 2012.

19,874

67,206

(continued)

P 11-8B

General Journal DATE 2012

ACCOUNT TITLES AND EXPLANATIONS

POST. REF.

DEBIT

CREDIT

4. Apr.

Employee Benefits Expense

7,288

CPP Payable

5,160

EI Payable ($1,520 × 1.4)

2,128

To accrue employer’s portion of the benefits use 1/5 of the standard weekly payroll.

5. May

Salaries payable

67,206

Sales salaries expense (4/5 x 334,000)

267,200

(4/5 x 54,000)

43,200

(4/5 x 116,000)

92,800

Jobsite salaries expense Office salaries expense Income Tax payable CPP payable EI payable

(4/5 x 99,372)

79,498

(4/5 x 25,800)

20,640

(4/5 x 7,600)

RRSP contribution payable

6,080

(4/5 x

15,200)

12,160

Blue Cross Insurance payable (4/5

20,000)

16,000

Cash or Salaries payable

6. May

Employee Benefits Expense

336,028

29,152

CPP Payable

20,640

EI Payable ($6,080 × 1.4)

8,512

To record employer’s portion of the benefits.

7. May

Income Tax payable (99,372 + 19,874)

119,246

CPP payable (25,800 x 2) + (5,160 x 2)

61,920

EI payable (7,600 + 10,640 + 1,520 + 2,128)

21,888

Cash

203,054

To record remittance to CRA.

RRSP contribution payable (15,200 + 3,040)

18,240

Blue Cross Insurance payable (20,000 + 4,000)

24,000

Cash (cheque to financial institution)

18,240

Cash (cheque to Blue Cross)

24,000

To record remittances for RRSP and Blue Cross contributions.

(30-50 min.)

P 11-9B

Req. 1

General Journal DATE 2014 Jan.

ACCOUNT TITLES AND EXPLANATIONS 31

POST. REF.

Cash

19,775

Accounts Receivable

DEBIT

375,725

CREDIT

Warranty Expense

7,000

Sales

350,000

HST Payable

45,500

Estimated Warranty Payable

Property Tax Expense

7,000

9,500

Property Taxes Payable ($114,000/12)

Feb.

9,500

Estimated Warranty Payable

6,250

Software Inventory

3,000

Wages Expense

3,250

HST Payable

45,500

HST Recoverable

15,610

Cash

29,890

Property Tax Expense

9,500

Property Taxes Payable

9,500

($114,000/12)

Cash

36,725

Accounts Receivable Warranty Expense

330,525 6,500

Sales

325,000

HST Payable

42,250

Estimated Warranty Payable

Mar.

HST Payable

42,250

HST Recoverable

18,648

Cash

23,602

No journal entry is appropriate as there is no reliable estimate of the cost of the lawsuit. Disclosure of the lawsuit should be made in a footnote to the statements.

6,500

Req. 1

(continued)

P 11-9B

General Journal DATE 2014 Mar.

ACCOUNT TITLES AND EXPLANATIONS 15

POST. REF.

Estimated Warranty Payable

DEBIT 6,250

Software Inventory

3,500

Wages Expense

2,750

Accounts Receivable

1,650

Estimated Warranty Payable

1,500

Software Inventory

1,500

Repair Revenues

1,650

Cash

71,190

Accounts Receivable Warranty Expense

284,760 12,600

Sales

CREDIT

315,000

HST Payable

40,950

Estimated Warranty Payable

12,600

Property Tax Expense Property Taxes Payable

13,200 13,200

($2,300,000 × 0.056)/12 = $10,733.33/month; 3 months = $32,200;

Presently recorded = $19,000 Difference = $13,200

Req. 2 Sundial Technologies Balance Sheet March 31, 2014 LIABILITIES Current liabilities: Estimated warranty liability

$ 12,100*

Property taxes payable

32,200**

HST payable

40,950

Total current liabilities

$85,250

*$7,000 – 6,250 + 6,500 – 6,250 – 1,500 + 12,600 = $12,100 ** $9,500 + $9,500 + $10,733 + $1,233 (Jan adjustment) + $1,233 (Feb adjustment) = $32,200 (rounded) (continued)

P 11-9B

Contingencies: Incidental to the business, Sundial Technologies is party to a lawsuit that alleges liability for product failure. The company is not yet in a position to comment on the likelihood of the lawsuit’s outcome.

Challenge Problems

(10-20 min.)

P 11-1C

The student should recognize that the effect of failing to record a liability at year end results in the understatement of a liability and the understatement of either an asset, or, more likely, an expense. In the case of an unrecorded expense, net income will be overstated. Understatement of a liability results in the company appearing more solvent than it may be; most times the current ratio will be overstated even if an asset were omitted. Understatement of an expense makes the company appear to be more profitable than it may be.

(15-25 min.)

P 11-2C

The cost of the frequent flyer ticket when there are unsold seats would be the cost of processing the ticket and baggage and any snack cost. The cost of the frequent flyer ticket when a paying passenger is bumped would be the ticket revenue forgone. The airline should probably record the lesser amount unless all or most of their flights are fully booked. There is no hard-and-fast rule in the case where no reasonable estimate can be made based on past history.

The airline should be able to estimate the potential usage based on its own experience and that of the industry. The matching principle requires that some expense should be charged against revenue when the original ticket is sold because the airline knows that there will be some usage of the frequent flyer miles. The issue is how much to charge at the time of sale.

Decision Problem (10-15 min.) Decision

Problem

Req. 1 The efficiency weakness is the use of a single payroll bank account. The business can correct this weakness by using two bank accounts, one for day-today business transactions and one for payroll only. This would allow two, simpler reconciliations to be done instead of one rather complicated reconciliation.

In addition, matching signatures from the cheques to the signatures on the TD1 Forms is cumbersome and a task that is completed after the cheque is cashed. Terminated employees may still have a TD1 Form on file and once the cheque is cashed, it is hard to recover the funds. Tiwannee could also use direct deposit and rely the on the financial institution to verify the employee.

Req. 2 A supervisor can enter a fictitious employee on a weekly time sheet, submit the time sheet to the company, and receive and keep the pay cheque. The supervisor may forge a TD1 form with a fake signature and use that same signature to endorse the cheque. Also, a supervisor can keep submitting hours worked for a terminated employee. The supervisor can take the paycheque made payable to that employee and keep it for personal use.

Req. 3 To safeguard the company against frauds identified in Requirement 2, Neil Tiwannee (or a home office employee) should make unscheduled visits to construction sites and distribute payroll cheques. If a pay cheque is payable to an employee not present to receive it, Neil Tiwannee can hold the cheque for pickup at the office or ask other workers if the absent person has been working on that job. If the workers say no, Neil Tiwannee will have uncovered a possible fraud. As discussed earlier, Tiwannee could also use direct deposit and rely the on the financial institution to verify the employee.

(continued) Decision

Problem

Note: The separation of hiring and terminating employees from the duty of distributing pay cheques would safeguard the company against fraud. However, this separation of duties is not customary in the construction business because it is more economical for the supervisors to manage all the hiring and termination of crews and to distribute pay cheques on the job site than for all the workers to come to the home office to fill in employment forms and to receive their pay.

Financial Statement Cases (25-35 min.) Financial

Statement Case 1

Req. 1 Gildanâ&#x20AC;&#x2122;s current liabilities at October 2, 2011 and 2010 (all amounts in thousands): Accounts payable and accrued liabilities Income taxes payable -

$ 315,269 315,269

$ 186,205 5,024 191,229

Req. 2 The Company's joint venture, CanAm, has a revolving line of credit in the amount of $4.0 million. Borrowings are due on demand and bear interest at LIBOR plus 2.0%, with a minimum interest rate of 4.0%, resulting in an initial rate of 4.0% per annum. The line of credit is secured by a first ranking security interest on the assets of CanAm. There were no amounts drawn under the line of credit at October 2, 2011 and October 3, 2010. Req. 3 Note 13 describes, a) operating lease, b) contractual obligations outstanding of approximately $54.9 million for the acquisition of property, plant and equipment (2010 - $76.1 million) c) During fiscal 2011, the United States Department of Agriculture advanced $3.3 million (2010 $3.1 million; 2009 - $4.3 million) to CanAm, in connection with a subsidy program with the intent of assisting domestic spinning and textile manufacturers. d) class action lawsuits e) Gildan is a party to other claims and litigation arising in the normal course of operations. Guarantees- The Company, and some of its subsidiaries, have granted corporate guarantees, irrevocable standby letters of credit and surety bonds, to third parties to indemnify them in the event the Company and some of its subsidiaries do not perform their contractual obligations.

(continued) Financial

Req. 4

Statement Case 1

None of these commitments requires an amount to recorded as a liability. For example “On August 3, 2010, the Company announced that it had entered into an agreement to settle all claims raised in these class action lawsuits, subject to final approval from the courts, on behalf of all persons who acquired the Company’s common shares between August 2, 2007 and April 29, 2008 (the “Class Members”). Final court approval of the settlement was obtained from each of the courts in February and March 2011 and all of the actions have been dismissed on terms including releases from Class Members of the claims against the Company and the named senior officers. The settlement agreement provided for a total settlement amount of $22.5 million, which has been entirely funded by the Company’s insurers. Therefore no provision has been recorded in the consolidated financial statements and no amounts have been disbursed by the Company in respect of the settlement.” Req. 5 NOTE 14. GUARANTEES: “The Company, and some of its subsidiaries, have granted corporate guarantees, irrevocable standby letters of credit and surety bonds, to third parties to indemnify them in the event the Company and some of its subsidiaries do not perform their contractual obligations. As at October 2, 2011, the maximum potential liability under these guarantees was $15.1 million (2010 - $21.8 million), of which $5.0 million (2010 - $5.1 million) was for surety bonds and $10.1 million (2010 - $16.7 million) was for corporate guarantees and standby letters of credit. The surety bonds are automatically renewed on an annual basis, the corporate guarantees and standby letters of credit mature at various dates in fiscal 2012. As at October 2, 2011, the Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for the aforementioned items. Management has determined that the fair value of the non-contingent obligations requiring performance under the guarantees in the event that specified triggering events or conditions occur approximates the cost of obtaining the standby letters of credit and surety bonds.”

(25-35 min.)

Financial Statement Case 2

Req. 1 Rainmaker’s current liabilities at December 31, 2011 are: Dec. 31 2011

Dec. 31 2010

Jan 1 2010

Current Accounts payable and accrued liabilities Bank indebtedness Note 8 Deferred revenue Note 9 Current portion of finance lease obligations Note 10

$ 1 ,382,210 1 ,524,027 3 ,657,900 1 ,701,936

$ 1,197,602

$ 1 ,308,881 6 ,249,146 3 ,947,355 2 ,060,516

5,088,808 1,620,515

Req. 2 The current portion of any long-term debt is calculated by totaling the amount of the debt principal payable within the next year. Interest payable related to the debt is recorded in a separate account. The current portion of these lease payments is likely calculated using the same method.

Req. 3 Rainmaker’s long term obligations and other indebtedness at December 31, 2011 and 2010 is; Dec. 31 Dec. 31 Jan 1 2011 2010 2010 Finance lease obligations

Note 10

1,737,190

2 ,693,894

4,096,780

Other

Note 11

46,309

123,460

208,263

The Company leases certain of its operating equipment and computer software under finance lease as well as operating leases. The Company’s obligations under finance leases are secured by the lessor’s title to the leased assets. The other liability is made up of a compensation plan whereby it agrees to pay certain executives and directors the cash equivalent of shares of the Company upon the termination of their respective employment agreement. During 2011 cash payments of $116,766 (2010 – NIL) were paid representing all the outstanding deferred compensation liabilities remaining under this plan.

Req. 4

(continued) Financial

Statement Case 2

Contingent liabilities The Company and a subsidiary have been named in a suit filed in the New York Supreme Court naming various companies, in relation to alleged profit participation rights on the film Escape from Planet Earth, as well as other claims unrelated to the Company. The Company had obtained an indemnification agreement from the copyright owner and distributor of the film covering claims arising from the work by the Company and its subsidiary on the film. The copyright owner and distributor of the film is defending the suit on behalf of all of the defendants. Accordingly, the Company believes there will be no material liability or material adverse effects on operations of the Company or its subsidiaries. The Company has been served with a Writ with respect to contamination at a property where a predecessor company formerly leased operating space from the property owner, Sun Life Assurance Company of Canada. A Writ has been filed in the British Columbia Supreme Court by Sun Life naming various parties, including Rainmaker Entertainment Inc., as defendants. Sun Life is seeking unspecified damages from the named defendants. The Company continues to evaluate the matter to determine the risk of potential liability associated with this claim. A reasonable estimate of potential liability cannot be determined at this time.

(15-25 min.) IFRS

Mini-Case

The first situation for Merit Resources and the situation for Harris Distribution are identical in that both will represent a contingent gain. Under IFRS, Merit has more flexibility than Harris will have under ASPE. The CICA Handbook for ASPE is very strict and states that contingent gains shall not be accrued in financial statements. This stipulation is in place because we do not want to recognize a gain that may never be realized. In this case, the government has indicated that there will be an expropriation but an agreement has not yet been reached and Harris has not yet been compensated. Consequently, Harris cannot recognize the gain. In Merit’s case, the IFRS standard provides more flexibility. IAS 37.31 states that contingent assets that would lead to a contingent gain (think about the journal entry), shall not be recognized. The section goes on to state that contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. In Merit’s case, the proposed expropriation by the government was unexpected. However, it appears the outcome is still uncertain so the contingent asset and the corresponding gain should not be recognized. The section further goes on to state that when the realization of income (the gain) is virtually certain, the related asset is no longer considered contingent and recognition is appropriate. Referring to Merit, it may be able to make the case that the discussions with the government have reached a point where there is virtual certainty that the $3,000,000 gain will be attained. If so, the gain should be recognized. This option is not available under ASPE. The second situation for Merit represents a possible contingent liability. Under IFRS, a contingent liability is a possible obligation that arises from a past event or events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. In the Merit example, the lawsuit arises from a past event (the supposed breach of contract). The future event that is not wholly controllable by Merit is the outcome of the judicial process. It would appear that a contingent liability exists. The question then becomes: How should this contingent liability be recognized in the financial statements of Merit? IFRS 37 states that a contingent liability should not be recognized. However, if it appears that if there is the probability of an outflow of resources embodying economic benefits to settle the obligation, a provision should be made. In Merit’s case, then, if it is more likely than not that the lawsuit will not be settled in their favour and a reasonable estimate of the payment can be made, the liability should be recognized.

Comprehensive Problem

Comprehensive Problem for Part 2 Req. 1

Nootka Resort net income for the last three years as originally reported

$284,100

Revisions: Additional uncollectible account expense

(1,075)

Additional cost of goods sold due to conversion to weighted average

(3,750)

Additional amortization expense for the last three years: Building—DDB Yr 1

($960,000 × 2/35) =

($960,000 – $54,857) × 2/35 =

($960,000 – $54,857 – $51,722) × 2/35 =

$54,857 51,722 48,767

SL: ($960,000 – 216,000)/35 × 3 (as originally reported)

$155,346 63,772

Excess of DDB amort. over SL amort

(91,574)

Furniture and fixtures—DDB Yr 1

($401,500 × 2/7) =

($401,500 – $114,714) × 2/7 =

($401,500 – $114,714 – $81,939) × 2/7 =

$114,714 81,939 58,528

SL (as originally reported)

$255,181 120,500

Excess of DDB amort. over SL amort.

(134,681)

Nootka Resort net income for last three years, as revised.

$53,020

Req. 2 To make a meaningful comparison between the resorts, we must apply the same accounting methods to the data of the two resorts. We apply the Critter Cove Resort accounting methods to convert the Nootka Resort figures to the basis used by Critter Cove Resort. Before the conversion, Nootka Resort had higher total net income. After converting the income statement amounts, however, we see that Critter Cove Resort has higher net income.

Based primarily on the net income comparison, Critter Cove Resort looks like the better business.

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