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Chapter 11

Current Liabilities and Payroll

Questions1. A current liability is one that is payable within the coming year or within

the company’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.

2. The company reports current liabilities for the short-term note payable of $50,000 and for interest payable of $1,000 ($50,000 × 0.04 × 6/12).

3. 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.

4. Current portion of long-term debt is the amount of the principal of long-term debt due within one year. Because this amount is due within one year, it is reported as a current liability on the balance sheet.

5. 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.

6. Accounts payable and short-term notes payable are both current liabilities, that is, both are due and payable within one year or within the company’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.

7. 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.

8. 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.

9. 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.

10. 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.

11. The two basic categories of current liabilities are:– current liabilities of known amount

Accounts payable Accrued expensesSales tax payable Payroll liabilitiesGST payable Salary, commission and bonusShort-term notes payable payableCurrent portion of long-term Unearned revenues

debt– current liabilities that must be estimated

Estimated warranty payableEstimated vacation pay liabilityIncome tax payable

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

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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.

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Starters

(10 min.) S 11-1Req. 1

General JournalDATE2013 ACCOUNT TITLES AND EXPLANATIONS

POST.

REF. DEBIT CREDITa. Dec. 31 Interest Expense ($32,0000.056/12) 800

Interest Payable 800Accrued interest expense at year end.

2014b. June 30 Note Payable, Short-Term 32,000

Interest Payable 800Interest Expense ($32,000 × 0.05 × 6/12) 800

Cash 33,600Paid note and interest at maturity.

(5-10 min.) S 11-2Mission Corp.

Balance Sheet (partial)December 31, 2013

ASSETS LIABILITIESCurrent liabilities:

Note payable, short-term $32,000Interest payable 800

Mission Corp.Income Sheet (partial)

For the Year Ended December 31, 2013Revenues:Expenses:

Interest expense $800

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(10 min.) S 11-3Req. 1

General JournalDATE 2014 ACCOUNT TITLES AND EXPLANATIONS

POST. REF. DEBIT CREDIT

Jan. 31 Cash ($600,0000.30) 180,000Notes Receivable ($600,000 – $180,000) 420,000

Sales Revenue 600,000To record sales.

Warranty Expense ($600,0000.03) 18,000Estimated Warranty Payable 18,000

Estimated Warranty Payable 9,000Cash 9,000

To pay warranty claims.

Req. 2

Estimated Warranty Payable9,000 18,000

Bal. 9,000

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

(5-10 min.) S 11-4Warranty 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 11-51. 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.

2. 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 11-61. Straight-time pay for 40 hours.................................................... $840.00

Overtime pay for 10 hours: [10($840/401.5)].............. 315.00

Total pay..................................................................................... $1,155.00

2. Total pay..................................................................................... $1,155.00

Less: Withheld income tax ($1,1550.20)............ $231.00

Withheld CPP ($1,1550.0495)..................... 57.17

Withheld EI ($1,1550.0183)........................ 21.14 309 .31

Net pay........................................................................................ $845 .69

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(10 min.) S 11-7Straight-time pay for 40 hours........................................................... $ 840.00

Overtime pay for 10 hours: [10(840/40 1.5)]...................... 315 .00

Total pay to employee........................................................................ 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 ($1,1550.05)....................................................... 57.75

Provincial health insurance ($60 / 4)...................................... 15.00

Disability insurance ($8 / 4).................................................... 2.00 161 .52

Total expense of employer................................................................. $ 1,316 .52

(10-20 min.) S 11-8a.

JournalDATE ACCOUNT TITLES AND EXPLANATIONS


Salary Expense (see S 11-6) 1,155.00Employee Income Tax Payable (S 11-6) 231.00Canada Pension Plan Payable (S 11-6) 57.17Employment Insurance Payable (S 11-6) 21.14Salary Payable 845.69

To record salary expense and employee withholdings.

b.



Pension Expense (S 11-7) 57.75Provincial Health Insurance Expense (S 11-7) 15.00Disability Insurance Expense (S 11-7) 2.00

Employee Benefits Payable 74.75To record employee benefits payable.

c.



Employee Benefits Expense 86.77Canada Pension Plan Payable (S 11-7) 57.17Employment Insurance Payable (S 11-7) 29.60

To record employer’s payroll expenses. EI Payable is calculated as $21.14 x 1.4 = $29.60.

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(5-10 min.) S 11-9



Mar. 15 Employment Insurance Payable 50.74Canada Pension Plan Payable 114.34Employee Income Tax Payable 231.00

Cash 396.08To record remittance to CRA.EI Payable = $21.14 + $29.60 = $50.74CPP Payable = $57.17 + $57.17 = $114.34

(10 min.) S 11-9Mar5937

(10-15 min.) S 11-10

Gross pay ........................................................................................ $4,000

Less:

Withheld income tax deductions ($4,0000.20).. $(800)

Pension contribution ($4,0000.04)...................... (160)

Health insurance premium.......................................... (60) (1,020 )

Net pay .............................................................................................. $2,980

(10 min.) S 11-111. Total salary expense ($1,155.00 + $74.75 + $86.77)................. $1,316.52

2. Net (take-home) pay......................................................................... $845.69

3. Employee paid:

a. Income tax........................................................................... $231.00

b. CPP........................................................................... $57.17

EI................................................................................ 21.14 $78.31

4. Employer’s expense for:

a. CPP and EI ($57.17 + $29.60)............................................. $86.77

b. Benefits ($57.75 + $15.00 + $2.00)..................................... $74.75

(5-10 min.) S 11-12Internal 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 11-13a. 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

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i. Exercises

(5-10 min.) E 11-1General Journal

DATE2013 ACCOUNT TITLES AND EXPLANATIONS


June 1 Delivery Truck 86,000Note Payable, Short-term 86,000

Dec. 31 Interest Expense ($86,000 × 0.06 × 7/12) 3,010Interest Payable 3,010

2014June 1 Note Payable, Short-term 86,000

Interest Payable 3,010Interest Expense ($86,000 × 0.06 × 5/12) 2,150

Cash [$86,000 + ($86,000 × 0.06)] 91,160

(5-15 min.) E 11-2

General JournalDATE ACCOUNT TITLES AND EXPLANATIONS


June 30 Cash 128,800Sales Revenue 115,000Sales Tax Payable ($115,000 × 0.07) 8,050GST Payable ($115,000 × 0.05) 5,750

July 6 Sales Tax Payable 8,050GST Payable 5,750

Cash 13,800

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(5-15 min.) E 11-3December 31

2011 2012 2013 2014Current liabilities:

Current portion of long-term debt $500,000 $500,000 $500,000 $500,000

Interest payable 80,000 60,000 40,000 20,000Long-term liabilities:

Long-term debt 1,500,000 1,000,000 500,000 —

Interest computations:

$2,000,000 × 0.04 = $80,0001,500,000 × 0.04 = 60,0001,000,000 × 0.04 = 40,000

500,000 × 0.04 = 20,000

(15-20 min.) E 11-4Salem Electronics

Balance Sheet (partial)December 31, 2012

Current liabilities (partial):1. Unearned sales revenue $ 105,0002. Employee income tax payable ($600,000 × 0.16) 96,000

Canada Pension Plan payable ($600,000 × 0.099) 59,400Employment Insurance payable ($600,000 × 0.0183) × (1 + 1.4) 26,352

3. Estimated warranty payable ($30,000,000 × 0.01) 300,0004. Current portion of long-term note payable 10,000

Interest payable ($50,000 × 0.05 × 29/365) 199 Total current liabilities $ 596,951

Long-term liabilities (partial):Note payable ($50,000 – $10,000) $ 40,000

(10-15 min.) E 11-5

Current ratio = Total current assets = $325,000 = 1.69Total current liabilities $192,500

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

$325,000 – $60,000 = $265,000 = 2.25$192,500 – $60,000 $132,500

Equation:

$325,000 – x = 2.00$192,500 – x325,000 – x = 2.00(192,500 – x)

325, 000 = x + 385,000 – 2.00 x– x = –60,000

x = 60,000

Req. 1 (5-10 min.) E 11-6General Journal



Jan. 2 Cash 60,000Retainer Fees 60,000

Received retainer fees in advance.

Jan. 31 Retainer Fees 5,000Service Revenue 5,000

Earned revenue that was collected in advance.

Req. 2

Retainer FeesJan. 31, 2014 5,000 Jan. 2, 2014 60,000

Bal. 55,000

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

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(5-10 min.) E 11-7Req. 1



Oct. 1 Cash [$100 + ($100 × 0.07) + ($100 × 0.05)] 112.00Unearned Subscription Revenue 100.00GST Payable 7.00PST Payable 5.00

Nov. 15 PST Payable 5.00GST Payable 7.00

Cash 12.00

Dec. 31 Unearned Subscription Revenue ($100 ÷ 63) 50.00Subscription Revenue 50.00

Req. 2Unearned Subscriptions Revenue

50.00 100.00Bal. 50.00

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

Req. 3



Oct. 1 Cash($100 + ($100 × 0.12) 112.00Unearned Subscription Revenue 100.00HST Payable 12. 00

Nov. 15 HST Payable 12.00Cash 12.00

Dec. 31 Unearned Subscription Revenue ($100 ÷ 63) 50.00Subscription Revenue 50.00

Req. 1 (warranty entries) (5-15 min.) E 11-8General Journal

DATE 2014 ACCOUNT TITLES AND EXPLANATIONS


Dec. 31 Warranty Expense ($1,038,000 × 0.03) 31,140Estimated Warranty Payable 31,140

Estimated Warranty Payable 27,900Cash 27,900

Req. 2 (ending balance of Estimated Warranty Payable)

Estimated Warranty PayablePayments during Jan. 1, 2014 24,800period 27,900 Exp. for period 31,140

End. bal. 28,040

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

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(5-10 min.) E 11-9The contingent liability is material (25%) relative to Ludeman Security Systems’ total liabilities of $4.0 million. The lawsuit should be disclosed in a note to the financial statements.

The note disclosure would be:

Note X—

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 company’s financial position.

Instructional Note: Any note that captures the essence of the situation is acceptable.

(5-10 min.) E 11-10Since 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 X—

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.



Loss from Damage Claim 300,000Liability for Damage Claim 300,000

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(10–15 min.) E 11-11



Dec. 31 Income Tax Expense 16,000 Income Tax Payable 16,000To record the monthly estimate or installment

2014Jan. 15 Income Tax Payable 16,000

Cash 16,000($10,000 x 11 = $110,000; $126,000 -

$110,000 = $16,000)

(10-15 min.) E 11-12Gross pay: $1,875 + ($50,000 × 0.07) $5,375.00

Deductions:Charitable contribution $ 50.00Dental insurance 49.15Income tax ($5,375.00 × 0.20) 1,075.00Employment Insurance premium ($5,375.00 × 0.0183) 98.36Canada Pension Plan [($5,375.00 – $291.67*) × 0.0495] 251.62 1,524 .13

Net Pay $3,850 .87

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

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Req. a (gross pay and net pay) (10-15 min.) E 11-13Straight-time earnings for 35 hours (35 × $10.50) $367.50Overtime 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) 111.56CPP contributions [($446.25 – $67.31*) × 0.0495] 18.76EI premiums ($446.25 × 0.0183) 8.17RRSP contribution 10.00

Total deductions 148 .49 Net pay $297 .76

* $3,500 52 = $67.31

Req. b (employers’ payroll entry)



Wages Expense $446.25Canada Pension Plan Expense* 18.76Employment Insurance Expense* 11.44

($8.17 × 1.4)Employee Income Tax Payable 111.56CPP Payable ($18.76 + $18.76) 37.52EI Payable ($8.17 + $11.44) 19.61RRSP Contribution Payable 10.00Wages Payable 297.76

* Could also debit Employee Benefits Expense

(10-15 min.) E 11-14General Journal

DATE ACCOUNT TITLES AND EXPLANATIONSPOST. REF. DEBIT CREDIT

Entry for payroll expenses:Employee Benefits Expense 7,136.40

CPP Payable ($95,000 × 0.0495) 4,702.50EI Payable ($95,000 × 0.0183 × 1.4) 2,433.90

Entry for fringe benefits:Dental Insurance Expense for Employees 5,723.09Life Insurance Expense for Employees 441.09Pension Expense 1,745.60

Employee Benefits Payable 7,909.78

(10 min.) E 11-15

Gross pay $38,710.00Employer payroll expenses:

CPP contributions $1,732.00EI premium 991 .75 * 2,723.75

Pension ($38,710 × 0.05) 1,935.50Dental insurance (12 × $35) 420.00Parking (12 × $10) 120 .00 Total payroll expense $43,909 .25

*(708.39 × 1.4) = $991.75

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Req. 1 (gross pay and net pay) (10–15 min.) E 11-16Total gross pay for the month $2,000.00

Deduction:Withheld federal income tax $138.55Withheld provincial income tax 99.70CPP contributions [($2,000–$291.67*) × 0.0495] 84.56EI premiums ($2,000 × 0.0183) 36.60

Total deductions 359.41Net pay $1.640.59

*$3,500 ÷ 12 = $291.67

Req. 2 (employers’ payroll entry)



Salary Expense 2,000.00Canada Pension Plan Expense* 84.56Employment Insurance Expense* ($36.60 × 1.4) 51.24

Employee Income Taxes Payable ($138.55 + $99.70) 238.25

CPP Payable ($84.56 + $84.56) 169.12EI Payable ($36.60 + $51.24) 87.84Wages Payable 1,640.59

* Could also debit Employee Benefits Expense

Req. 1 (15-30 min.) E 11-17

Current ratio reported by the corporation =

Billions

2014 2013

Total current assets = $24.50 = 2.10 $22.92 = 1.52Total current liabilities $11.66 $15.12

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

Req. 2

2014

Current ratio withoutreclassification of currentliabilities as long-term

$24.50 = 1.31$11.66 + $7.00

It appears that the corporation needed to refinance and reclassify the current liabilities as long-term 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.

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Req. 1 (10-20 min.) E 11-18

Analysis of T-accounts is helpful:

Notes PayableDec. 31, 2013 Balance 78

2014 Payments X 2014 Borrowing 3Dec. 31, 2014 Balance 26

$78 + $3 – X = $26X = $55 million

During 2014, Vallarta Company paid off notes payable of $55 million.

Req. 2

Accrued Payrolls and BenefitsDec. 31, 2013 Balance 298

2014 Payments 250 2014 Expense XDec. 31, 2014 Balance 270

$298 +– $250 = $270X = $222 million

Vallarta’s employee compensation expense for 2014 was $222 million.

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 users’ 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 owners’ investment in the business.

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(15-25 min.) BN 11-2a. 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.

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

c. In addition to interviews with management to identify a client’s contingent liabilities, auditors examine the client’s contracts (for example, lending, borrowing, notes receivable, and notes payable) to look for obligations that may create a liability. Auditors also ask the client’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.”

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Problems

Group A

(30-40 min.) P 11-1AGeneral Journal



Jan. 3 Machine 350,000GST Recoverable 17,500

Note Payable, Short-term 367,500

29Cash [($1,570,000 + $109,900 + $78,500) × 0.20] 351,680Accounts Receivable 1,406,720[($1,570,000 + $109,900 + $78,500) × 0.80)]

Sales Revenue 1,570,000Sales Tax Payable ($1,570,000 × 0.07) 109,900GST Payable ($1,570,000 × 0.05) 78,500

Feb. 5 Sales Tax Payable 109,900GST Payable 78,500

GST Recoverable 17,500Cash 170,900

28 Cash 3,000,000Note Payable, Long-term 3,000,000

July 3 Note Payable, Short-term 367,500Interest Expense ($367,500 × 0.05× 181/365) 9,112

Cash 376,612

Nov. 30 Inventory 150,000GST Recoverable ($150,000 × 0.05) 7,500



(continued) P 11-1AGeneral Journal



Dec. 31 Interest Expense ($3,000,000 × 0.03 × 306/365 75,452Interest Payable 75,452

31 Interest Expense ($157,500 × 0.05 × 31/365) 669Interest Payable 669

2014Feb. 28 Note Payable, Long-term 300,000

Interest Payable 75,452Interest Expense ($3,000,000 × 0.03 – $75,452) 14,548

Cash 390,000

May 31 Note Payable 157,500Interest Payable 669Interest Expense ($157,500 × 0.05 × 151/365) 3,258

Cash 161,427

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(15-30 min.) P 11-2A

To: 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 customers’ 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.

I’m curious—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 11-3AEmployee Earnings:

Regular employee earnings $19,947

Overtime pay 5,595 a

Total employee earnings 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 7,947

Net pay 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)

a. Overtime pay:

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

c. Canada Pension Plan:

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

d. Salary Expense:

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

34


Req. 2 (payroll entry) (continued) P 11-3AGeneral Journal


Salaries Expense 16,923Wages Expense 6,938Sales Commission Expense 1,681CPP Expense 549EI Expense ($478 × 1.4) 669

Employee Income Tax Payable 6,379CPP Payable ($549 + $549) 1,098EI Payable ($478 + $ 669) 1,147Employee Medical Insurance Payable 541Payroll Payable 17,595

Req. 1 (gross pay and net pay) (25-35 min.) P 11-4A

Gross pay:Salary earnings ($7,500 × 12) $90,000.00Bonus ($90,000 × 0.10) 9,000.00

Gross pay $99,000.00

Deductions:Withheld income tax [($2,398 × 12) + $4,512] 33,288.00Canada Pension Plan 2,306.70Employment Insurance 839.97United Way contribution ($37.50 × 12) 450.00RRSP Contribution ($55 × 12) 660.00 Total deductions 37,544 .67

Net pay $ 61,455 .33

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

Gross pay $99,000.00Employer payroll expenses:

Canada Pension Plan 2306.70Employment Insurance ($839.97 × 1.4) 1,175.96

Fringe benefits:Health insurance for employee ($38 × 12) 456.00Pension benefits for employee ($90,000 × 0.07) 6,300 .00

Total annual cost of employee $109,238 .66

36


Req. 3 (employer’s payroll entries) (continued) P 11-4AGeneral Journal



a. Employee’s total earnings:

Salary Expense 90,000.00Bonus Expense 9,000.00

Employee Income Tax Payable 33,288.00Canada Pension Plan Payable 2,306.70Employment Insurance Payable 839.97United Way Payable 450.00RRSP Contribution Payable 660.00Cash 61,455.33

b. Employer Payroll Expenses:

Employee Benefits Expense 3,482.66CPP Payable 2,306.70Employment Insurance Payable 1,175.96

c. Employer Cost of Employee FringeBenefits:

Health Insurance Expense for Employees 456.00Pension Expense 6,300.00

Health Insurance Payable 456.00Company Pension Payable 6,300.00

(35-40 min.) P 11-5AReq. 1 and 2 (ledger accounts and posting)

Notes Payable,Short-term Accounts Payable

Current Portion of Long-term Debt Payable

Bal. 20,000 Bal. 235,620 (b) 50,000Bal. 50,000

Interest Payable Salaries Payable Employee Income Tax Payable

(a) 400 (c) 4,963 (c) 1,365(b) 6,250 Bal. 4,963 Bal. 1,365Bal. 6,650

Employer Payroll Costs Payable

Employee Insurance BenefitsPayable

Estimated VacationPay Liability

(d) 820 (d) 991 Bal. 12,360Bal. 820 Bal. 991 (e) 8,850

Bal. 21,210

Sales Tax andGST Payable Unearned Rent Revenue Long-term Debt Payable

Bal. 5,972 (f) 6,000 Bal. 18,000 (b) 50,000 Bal. 250,000Bal. 12,000 Bal. 200,000

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

38


(continued) P 11-5AReq. 3 (liability section of June 30 balance sheet) Shell Storage Units

Shell Storage UnitsBalance SheetJune 30, 2014

LIABILITIESCurrent liabilities:

Notes payable, short-term $ 20,000Accounts payable 235,620Current portion of long-term debt payable 50,000Interest payable 6,650Salaries payable 4,963Employee income tax payable 1,365Employer payroll costs payable 820Employee insurance benefits payable 991Estimated vacation pay liability 21,210Sales tax and GST payable 5,972Unearned rent revenue 12,000 Total current liabilities 359,591

Long-term liabilities:Long-term debt payable 200,000

Total liabilities $559,591 Contingent liabilities (Note X)

Note X—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 11-6APayroll Register

GROSS PAY DEDUCTIONS NET PAY ACCOUNT DEBITED

EMPLOYEE NAME HRS

STRAIGHT-TIME

OVER-TIME TOTAL

INCOME TAX

CANADA PENSION

PLAN

EMPLOYMENT

INS.UNITED

WAY TOTAL AMT.RETIREMENT

PROGRAM

OFFICE SALARIES EXPENSE

SALES SALARIES EXPENSE

Molly Dodge 43 $1,200 $135 $1,335 $474.10 $ 0.00 $ 0.00 $25.00 $499.10 $ 835.90 106.80 $1,335.00Tally Allard 40 520 520 67.60 22.41 9.52 2.00 101.53 418.47 41.60 520.00George White 49 400 135 535 63.70 23.15 9.79 2.00 98.64 436.36 42.80 535.00Luigi Valenti 42 800 60 860 352.00 39.24 0.00 5.00 396.24 463.76 68.80 860.00Total $2,920 $330 $3,250 $957.40 $84.80 $19.31 $34.00 $1,095.51 $2,154.49 $260.00 $1,055.00 $2,195.00

Computations:

Dodge:

Straight-time hourly pay: 40 × $30 = $1,200Overtime: 3 × $30 × 1.5 = $135

Allard:

Straight-time hourly pay: 40 × $13 = $520

White:

Straight-time hourly pay: 40 × $10 = $400Overtime: 9 × $10 × 1.5 = $135

Valenti:

Straight-time hourly pay: 40 × $20 = $800Overtime: 2 × $20 × 1.5 = $60

40

Req. 2 (entry to record weekly payroll) (continued) P 11-6AGeneral Journal


Sept. 21 Office Salaries Expense 1,055.00Sales Salaries Expense 2,195.00

Employee Income Taxes Payable 957.40CPP Payable 84.80Employment Insurance Payable 19.31Employee United Way Payable 34.00Cash 2,154.49

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



Sept. 21 Employee Benefits Expense 111.83CPP Payable 84.80Employment 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

42 Copyright © 2014 Pearson Canada Inc.


(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 $45,000Interest 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 $30,000Interest payable ($150,000 × 0.05 × 3/12) 1,875

*Note in PEI, PST is charged on GST.


(40-60 min.) P 11-8AReq. 1–8



1.Apr. 27 Sales salaries 167,000

Jobsite salaries 27,000Office 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

2. 27 Employee Benefits Expense 18,220CPP Payable 12,900EI Payable ($3,800 × 1.4) 5,320

To record employers portion of the benefits

3. 30 Sales salaries 33,400Jobsite salaries 5,400Office 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 33,603To accrue 1/5 of the standard weekly payroll for the year ended April 30, 2012.





4.Apr. 30 Employee Benefits Expense 3,644

CPP Payable 2,580EI Payable ($760 × 1.4) 1,064

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

5.May 4 Salaries payable 33,603

Sales salaries (4/5 x 167,000) 133,600Jobsite salaries (4/5 x 27,000) 21,600Office salaries (4/5 x 58,000) 46,400 Income Tax payable (4/5 x 49,686) 39,749 CPP payable (4/5 x 12,900) 10,320

EI payable (4/5 x 3,800) 3,040 RRSP contribution payable (4/5 x 7,600) 6,080 Blue Cross Insurance payable (4/5 x 10,000) 8,000 Cash or Salaries payable 168,014

6.May 4 Employee Benefits Expense 14,576

CPP Payable 10,320EI Payable ($3,040 × 1.4) 4,256

To record employer’s portion of the benefits

7.May 15 Income Tax payable (49,686 + 9,937) 59,623

CPP payable (12,900 x 2) + (2,580 x 2) 30,960 EI payable (3,800 + 5,320 + 760 + 1,064) 10,944 Cash 101,527To record the April 2012 remittance to CRA.

8. 31 RRSP contribution payable (7,600 + 1,520) 9,120 Blue Cross Insurance payable (10,000 + 2,000) 12,000 Cash (cheque to financial institution) 9,120 Cash (cheque to Blue Cross) 12,000To record the remittances for RRSP and Blue Cross contributions.


(30-50 min.) P 11-9AReq. 1



Jan. 31 Cash 9,040Accounts Receivable 81,360Warranty Expense 3,200

Sales 80,000HST Payable 10,400Estimated Warranty Payable 3,200

31 Property Tax Expense 5,000Property Taxes Payable($60,000/12) 5,000

Feb. 4 Estimated Warranty Payable 1,350Repair Parts Inventory 500Wages Expense 850

7 HST Payable 10,400HST Recoverable 3,700Cash 6,700


28 Cash 15,594Accounts Receivable 88,366Warranty Expense 3,680


Mar. 7 HST Payable 11,960HST Recoverable 4,750Cash 7,210

8 No journal entry is appropriate as there is noreliable estimate of the cost of the lawsuit.Disclosure of the lawsuit should be made ina footnote to the statements.



Req. 1 (continued) P 11-9AGeneral Journal



Mar. 15 Estimated Warranty Payable 3,700Repair Parts Inventory 2,500Wages Expense 1,200

21 Accounts Receivable 500Estimated Warranty Payable 750

Repair Parts Inventory 750Repair Revenues 500



31 Property Tax Expense 6,500Property Taxes Payable 6,500($2,200,000 × 0.03)/12 = $5,500/month; 3 months = $16,500Presently recorded = $10,000;Difference = $6,500

Req. 2

Beaufort ExplorationsBalance SheetMarch 31, 2014

LIABILITIESCurrent liabilities:Estimated warranty liabilities* $ 4,600Property taxes payable** 16,500HST 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 11-1BGeneral Journal



Mar. 3 Equipment 66,000GST Recoverable 3,300


31 Cash [($134,500 × 1.05) × 0.25] 35,306Accounts Receivable 105,919[($134,500 × 1.05) × 0.75]

Sales Revenue 134,500GST Payable ($134,500 × 0.05) 6,725

Apr. 7 GST Payable 6,725Cash 3,425

GST Recoverable 3,300

May 31 Cash 75,000Note Payable, Long-term 75,000

Sept. 3 Note Payable, Short-term 69,300Interest Expense ($69,300 × 0.03 × 184/365) 1,048

Cash 70,348

30 Inventory 25,000GST Recoverable 1,250



31 Interest Expense ($75,000 × 0.05 × 214/365) 2,199Interest Payable 2,199



31 Interest Expense ($26,250 × 0.05 × 92/365) 331Interest Payable 331


(continued) P 11-1BGeneral Journal



Mar. 31 Note Payable 26,250Interest Payable 331Interest Expense ($26,250 × 0.05 × 90/365) 324

Cash 26,905

May 31 Note Payable, Long-term 15,000Interest Payable 2,199Interest Expense ($75,000 × 0.05 – $2,199) 1,551

Cash 18,750



(15-30 min.) P 11-2B

To: 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 skaters’ 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 11-3BReq. 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

b. Total employee earnings:

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



a. Regular earnings:

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

d. 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 11-3BGeneral Journal


Salaries Expense 66,468Wages Expense 60,938Sales Commission Expense 59,356CPP Expense 9,200EI Expense 4,889

Employee Income Tax Payable 31,704CPP Payable 18,400EI Payable 8,381Employee Dental and Drug

Insurance Payable 1,556Payroll Payable 140,810



(25-35 min.) P 11-4BReq. 1 (gross pay and net pay)Gross pay:

Salary earnings ($6,500 × 12) $78,000.00Bonus ($78,000 × 0.20) 15,600.00

Gross pay $93,600.00

Deductions:Withheld income tax [($1,762.28 × 12) + $4,095.11] 25,242.47Canada Pension Plan 2,306.70Employment Insurance 839.97Charitable donations ($6,500 × 0.015 × 12) 1,170.00Life insurance ($68 × 12) 816.00 Total deductions 30,375 .14

Net pay $63,224 .86

Req. 2 (employer’s total annual cost of employee)Gross pay $93,600.00Employer payroll taxes (benefits expense):

Canada Pension Plan 2,306.70Employment Insurance ($839.97 × 1.4) 1,175.96

Fringe benefits:Health insurance for employee ($65 × 12) 780.00Pension benefits for employee 5,350 .00

Total annual cost of employee $103,212 .66


Req. 3 (employer’s payroll entries) (continued) P 11-4BGeneral Journal


a. Employee’s total earnings:

Salary Expense 78,000.00Executive Bonus Compensation 15,600.00

Employee Income Tax Payable 25,242.47Canada Pension Plan Payable 2,306.70Employment Insurance Payable 839.97Charitable Donations Payable 1,170.00Employee Life Insurance Payable 816.00Cash 63,224.86

b. Employer Payroll Expense:

Employee Benefits Expense 3,482.66Canada Pension Plan Payable 2,306.70Employment Insurance Payable 1,175.96

c. Employer Cost of Employee Fringe Benefits:

Health Insurance Expense for Employees 780.00Pension Expense 5,350.00

Health Insurance Payable 780.00Company Pension Payable 5,350.00



(35-40 min.) P 11-5BReq. 1 and 2 (ledger accounts and posting)

Note Payable,Short-term Accounts Payable

Current Portion of Long-term Debt Payable

Bal. 74,000 Bal. 355,680 (b) 60,000Bal. 60,000

Interest Payable Salaries Payable Employee Withholdings Payable

(a) 3,392 (c) 16,690 (c) 4,756(b) 5,500 Bal. 16,690 Bal. 4,756Bal. 8,892

Employer Payroll Costs Payable

Employee Insurance BenefitsPayable

Estimated VacationPay Liability

(d) 2,788 (d) 300 Bal. 7,896Bal. 2,788 Bal. 300 (e) 14,400

Bal. 22,296

GST Payable Property Tax PayableUnearned Service

RevenueBal. 4,900 Bal. 9,284 (f) 6,000 Bal. 18,000

Bal. 12,000

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

Bal. 240,000

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


(continued) P 11-5BReq. 3 (liability section of June 30 balance sheet) Uptown Hardware

Uptown HardwareBalance SheetJune 30, 2014

LIABILITIESCurrent liabilities:

Notes payable, short-term $ 74,000Accounts payable 355,680Current portion of long-term debt payable 60,000Interest payable 8,892Salaries payable 16,690Employee withholdings payable 4,756Employer payroll costs payable 2,788Employee Insurance benefits payable 300Estimated vacation pay liability 22,296GST payable 4,900Property tax payable 9,284Unearned service revenue 12,000 Total current liabilities 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 11-6BReq. 1 and 3 (payroll register)

Payroll RegisterGROSS PAY DEDUCTIONS NET PAY ACCOUNT DEBITED

EMPLOYEE NAME HRS

STRAIGHT-TIME

OVER-TIME TOTAL

INCOME TAX

CANADA PENSION

PLAN

EMPLOY-MENTINS.

UNITED WAY TOTAL AMOUNT

CHQ. NO.

OFFICE SALARIES EXPENSE

SALES SALARIES EXPENSE

Bourdon 45 $ 440.00 $ 82.50 $ 522.50 $ 62.85 $22.53 $ 9.56 $ 16.00 $ 110.94 $ 411.56 178 $522.50Wells 50 500.00 187.50 687.50 73.25 30.70 12.58 16.00 132.53 554.97 179 $ 687.50Boyd 49 850.00 286.88 1,136.88 184.10 0.00 0.00 40.00 224.10 912.78 180 1,136.88Lamont 40 380.00 380.00 42.60 15.48 6.95 4.00 69.03 310.97 181 380.00Total $2,170.00 $556.88 $2,726.88 $362.80 $68.71 $29.09 $76.00 $536.60 $2,190.28 $902.50 $1,824.38

Computations:

Bourdon:

Straight-time pay: $440/40 = $11Overtime: 5 × $11 × 1.5 = $82.50

Wells:

Straight-time pay: $500/40 = $12.50Overtime: 10 × $12.50 × 1.5 = $187.50

Boyd:

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


Req. 2 (entry to record weekly payroll) (continued) P 11-6BGeneral Journal



Dec. 18 Office Salaries Expense 902.50Sales Salaries Expense 1,824.38

Employee Income Tax Payable 362.80CPP Payable 68.71Employment Insurance Payable 29.09Employee United Way Charities Payable 76.00Cash 2,190.28

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



Dec. 18 Employee Benefits Expense 109.44CPP Payable 68.71Employment 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.) P 11-7B

a. Note payable, short-term $120,000Interest 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 $40,000Interest payable ($200,000 × 0.04) 8,000


(40-60 min.) P 11-8BReq. 1–8



1.Apr. 27 Sales salaries expense 334,000

Jobsite salaries expense 54,000Office 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.

2. 27 Employee Benefits Expense 36,440CPP Payable 25,800EI Payable ($7,600 × 1.4) 10,640

To record employers portion of the benefits

3. 30 Sales salaries expense 66,800Jobsite salaries expense 10,800Office salaries expense 23,200 Income Tax payable 19,874 CPP payable 5,160 EI payable 1,520 RRSP contribution payable 3,040 Blue Cross Insurance payable 4,000 Salaries payable 67,206To accrue 1/5 of the standard weekly payroll for the year ended April 30, 2012.



(continued) P 11-8BGeneral Journal



4.Apr. 30 Employee Benefits Expense 7,288


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

5.May 4 Salaries payable 67,206

Sales salaries expense (4/5 x 334,000) 267,200Jobsite salaries expense (4/5 x 54,000) 43,200Office salaries expense (4/5 x 116,000) 92,800 Income Tax payable (4/5 x 99,372) 79,498 CPP payable (4/5 x 25,800) 20,640 EI payable (4/5 x 7,600) 6,080 RRSP contribution payable (4/5 x 15,200) 12,160 Blue Cross Insurance payable (4/5 x 20,000) 16,000 Cash or Salaries payable 336,028

6.May 4 Employee Benefits Expense 29,152


To record employer’s portion of the benefits.

7.May 15 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 203,054To record remittance to CRA.

8. 31 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) 24,000To record remittances for RRSP and Blue Cross contributions.


(30-50 min.) P 11-9BReq. 1



Jan. 31 Cash 19,775Accounts Receivable 375,725Warranty Expense 7,000



Feb. 4 Estimated Warranty Payable 6,250Software Inventory 3,000Wages Expense 3,250

7 HST Payable 45,500HST Recoverable 15,610Cash 29,890

28 Property Tax Expense 9,500Property Taxes Payable 9,500($114,000/12)



Mar. 7 HST Payable 42,250HST Recoverable 18,648Cash 23,602

8 No journal entry is appropriate as there is noreliable estimate of the cost of the lawsuit.Disclosure of the lawsuit should be made ina footnote to the statements.



Req. 1 (continued) P 11-9BGeneral Journal



Mar. 15 Estimated Warranty Payable 6,250Software Inventory 3,500Wages Expense 2,750

21 Accounts Receivable 1,650Estimated Warranty Payable 1,500

Software Inventory 1,500Repair Revenues 1,650



31 Property Tax Expense 13,200Property Taxes Payable 13,200($2,300,000 × 0.056)/12 =

$10,733.33/month;3 months = $32,200;Presently recorded = $19,000Difference = $13,200

Req. 2Sundial Technologies

Balance SheetMarch 31, 2014

LIABILITIESCurrent 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 11-1CThe 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 11-2C1. 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.

2. 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 ProblemReq. 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-to-day 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

Gildan’s current liabilities at October 2, 2011 and 2010 (all amounts in thousands):

Accounts payable and accrued liabilities $ 315,269 $ 186,205Income taxes payable - 5,024

315,269 191,229

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.



Req. 4 (continued) Financial Statement Case 1None 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 Dec. 31 Jan 12011 2010 2010

CurrentAccounts payable and accrued liabilities $ 1 ,308,881 $ 1 ,382,210 $ 1,197,602Bank indebtedness Note 8 6 ,249,146 1 ,524,027 -Deferred revenue Note 9 3 ,947,355 3 ,657,900 5,088,808Current portion of finance lease obligations Note 10 2 ,060,516 1 ,701,936 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 12011 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 liabilitiesThe 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 threeyears as originally reported $284,100Revisions:

Additional uncollectible account expense (1,075)Additional cost of goods sold due to conversionto weighted average (3,750)Additional amortization expense for the last threeyears: Building—DDBYr 1 ($960,000 × 2/35) = $54,857

2 ($960,000 – $54,857) × 2/35 = 51,7223 ($960,000 – $54,857 – $51,722)

× 2/35 = 48,767 $155,346SL: ($960,000 – 216,000)/35 × 3 (as originally reported) 63,772 Excess of DDB amort. over SL amort (91,574)Furniture and fixtures—DDBYr 1 ($401,500 × 2/7) = $114,714

2 ($401,500 – $114,714) × 2/7 = 81,9393 ($401,500 – $114,714 – $81,939)

× 2/7 = 58,528 $255,181SL (as originally reported) 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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