Reporting and Analyzing Liabilities: Learning Objectives

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 10
REPORTING AND ANALYZING LIABILITIES
LEARNING OBJECTIVES
1. Account for current liabilities.
2. Account for instalment notes payable.
3. Identify the requirements for the financial statement presentation and analysis of
liabilities.
4. Account for bonds payable (Appendix 10A).
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 K 5. 1 C 9. 2 C 13. 3 C 17. 4 C
2. 1 C 6. 1,2 C 10. 2 C 14. 3 C
3. 1 C 7. 2 K 11. 3 K 15. 3 C
4. 1 C 8. 2 C 12. 3 C 16. 4 K
Brief Exercises
1. 1 AP 5. 1 AN 9. 2 AP 13. 4 AP 17. 4 AP
2. 1 AP 6. 2 AN 10. 3 K 14. 4 AP
3. 1 AP 7. 2 AP 11. 3 AP 15. 4 AP
4. 1 AP 8. 2 AP 12. 3 AN 16. 4 AP
Exercises
1. 1 AN 4. 1 C 7. 2 AN 10. 3 AN 13. 4 AP
2. 1 AP 5. 2 AP 8. 3 AP 11. 4 AN 14. 4 AP
3. 1 AP 6. 2 AP 9. 3 AN 12. 4 AP
Problems: Set A and B
1. 1,3 AP 3. 2 AP 5. 2,3 AP 7. 3 AN 9. 4 AP
2. 1,3 AP 4. 2,3 AP 6. 1,3 K 8. 3 AN 10. 3,4 AP
Accounting Cycle Review
1. 1,3 AP
Cases
1. 3 AN 3. 3 S 5. 3 S 7. 2,3 AP
2. 3 AN 4. 3 S 6. 3 AN
Solutions Manual 10-1 Chapter 10

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. Accounts payable and short-term notes payable are both forms of credit
used by a business to acquire the items or services they need to operate.
Both represent obligations of the business to repay amounts in the future
and are therefore considered to be liabilities. However, an account payable
is normally for a shorter period of time (e.g., 30, 60, 90 days) than a note
payable. A note payable usually provides for a longer period of time to
settle the amount owing.
A note payable involves a more formal arrangement than an account

payable. A note payable is an obligation in written form and will provide
documentation if legal action is required to collect the debt. As well, a note
payable often requires the payment of interest because it is generally used
when credit is to be granted for a longer period of time than for an account
payable.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. An operating line of credit, or credit facility, is used by a business to

overcome short-term cash demands or temporary cash shortfalls that
invariably happen during the operating cycle. It is not usually intended to be
a permanent type of financing and is generally used for operations. When
needed, the funds are used and then repaid as the liquidity improves and
cash becomes available from operations. Short-term bank loans are also
liabilities of the business and are often structured in such a way to deal with
short-term cash needs of the business. Short-term bank loans could be
used to finance inventory and accounts receivable. Bank loans are for
specific amounts that have structured terms for the repayment of the
principal.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

3. Disagree. The company only serves as a collection agent for the taxing
authority. It does not keep and report sales tax as revenue; it merely
forwards the amount paid by the customer to the government. Therefore,
until it is remitted to the government, sales tax is reported as a current
liability on the statement of financial position.
4. Unearned revenue should be recognized when sales of gift cards are made
to customers. When a gift card is presented to pay for items or services
received by the customer, the unearned revenue is reduced and the sales
or service revenue increased. If there is a legally permissible expiration
date on the gift card, once that date is reached, any unused balances on
gift cards should be recognized as revenue and the related unearned
revenue eliminated.
5. When determining whether an uncertain liability should be accrued as a

provision, management must first assess the level of uncertainty
concerning the outcome of a future event that will confirm either the
existence of the liability or the amount payable or both. Under IFRS, if the
outcome of a future event is probable and a reasonable estimate can be
made of the amount expected to be paid, the amount will appear as a
current liability on the statement of financial position. Probable, in this case
means “more likely than not” which is normally interpreted to mean that
there is more than a 50% probability of occurring.
The details of the reasons for the accrual will also be outlined in the
financial statement notes. If the outcome is not probable or if the amount
cannot be reasonably estimated, the details of the uncertain liability will be
disclosed in the notes to the financial statements. An uncertain liability that
is disclosed rather than recorded is known under IFRS as a contingent
liability. On the other hand, if the company is reporting under ASPE, the
probability needs to be “likely” ASPE does not use the term “provision”

Q 5 (continued)
If the liability is recorded it is referred to as a, contingent liability and there

is no special term for just having the contingency disclosed in a note to the
financial statements rather than recording it. This is a higher level of
probability that the standard used in IFRS.
LO 1 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
6. Current liabilities include those payments that are going to be due for
payment in one year from the financial statement date. Non-current
liabilities are to be paid beyond that period. Included in current liabilities
would be the principal portion of any loans or debt that will be paid in the
next year. Consequently, care must be taken to disaggregate balances of
such non-current loans or mortgages to ensure that the current portion of
the debt is properly classified as a current liability.
LO 1,2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7. Long-term instalment notes are similar to short-term notes in that they both
provide written documentation of a debtor’s obligation to the lender. The
main difference between the two types of notes is that long-term instalment
notes have maturities that extend beyond one year and have principal
repayments included in the periodic payments required by the note.
For both types of notes, interest expense is calculated by multiplying the

outstanding principal balance by the interest rate. However, because a
portion of the principal balance is usually repaid periodically throughout the
term of a long-term instalment note, the outstanding principal balance will
change (decrease). In contrast, the principal balance does not change
throughout the term of a short-term note.

8. Instalment notes usually require the borrower to pay down a portion of the
principal through fixed periodic payments relating to the principal along with
any interest that was due at that time. Each time a payment is made, a
constant amount of principal repayment is deducted from the note. The
total payment amount will decline over time as the interest expense portion
decreases due to reductions in the principal amount of the note.
An instalment note with a blended principal and interest payment is

repayable in equal periodic amounts and results in changing amounts of
interest and principal being applied to the note. The total payment remains
the same over the life of the note but the portion applied to the principal
increases over time as the interest portion decreases due to reductions in
the principal amount of the note.
LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9. (a) A student choosing the floating rate loan will initially pay a lower
interest rate, but if the prime lending rate changes so does the interest
rate that is charged on the balance of the loan. Since the loan
repayment typically takes several years, a floating interest rate
reduces the risk to the financial institution and provides a market return
on their loan to the student. With the fixed interest rate, the initial
interest rate paid is higher, but the rate does not change over the term
of the loan.
(b) If, in the view of the student, interest rates are expected to rise, the
fixed rate of interest is the better choice. On the other hand, if interest
rates are expected to remain steady or fall, the variable rate loan would
be the better choice.
LO 2 BT: C Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance

10. Doug is incorrect because the amount of interest paid each month will
decrease as payments are made and the outstanding (remaining) principal
balance decreases. The amount of interest is calculated as a percentage
of the outstanding principal amount. Because the monthly cash payment
remains constant, over time, greater portions of the payment will be applied
to the principal thereby more rapidly reducing the balance of the mortgage.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

11. (a) Current liabilities should be presented in the statement of financial

position with each major type shown separately. They are normally
listed in order of maturity, although other listing orders are also
possible. The notes to the financial statements should indicate the
terms, including interest rates, maturity dates, and other pertinent
information such as assets pledged as collateral.
(b) The nature and the amount of each non-current liability should be
presented in the statement of financial position or in schedules
included in the accompanying notes to the statements. The notes
should also indicate the interest rates, maturity dates, conversion
privileges, and assets pledged as collateral.
12. Liquidity ratios measure the short-term ability of a company to repay its
maturing obligations. Ratios such as the current ratio, receivables turnover,
and inventory turnover can be used to assess liquidity. In all three ratios, an
increase in the ratio demonstrates an improvement.
Solvency ratios measure the ability of a company to repay its total debt and
survive over a long period of time. Ratios that are commonly used to
measure solvency include debt to total assets and times interest earned
ratios. In the case of debt to total assets ratio, an increase in the ratio is
often interpreted as a deterioration in solvency, while for the times interest
earned ratio, an increase demonstrates an improvement.

13. An operating line of credit, or credit facility, is used by a business to

overcome short-term cash demands that invariably happen during the
operating cycle. It is not usually intended to be a permanent type of
financing and is generally used for operations. When needed, the funds are
used and then repaid as the liquidity improves and cash becomes available
from operations. This type of financing is extremely flexible because interest
charges are only incurred for the actual amount of cash borrowed for the
needed period of time when there is a cash shortfall from daily operations.
As a consequence, the business does not incur the constant charge for
interest on a long-term bank debt or mortgages and can save on interest
costs. The liquidity issues of a business can therefore be effectively dealt
with using an operating line of credit.
14. A company’s debt to total asset ratio should be measured in terms of its
ability to manage its debt. A company may have a high debt to total asset
ratio but still be able to meet its interest payments because of high income.
Alternatively, a company with a low debt to total assets may find itself in
financial difficulty if it does not have sufficient net income to cover required
interest payments. Therefore, it is important to interpret these two ratios in
conjunction with one another.
15. A company with significant operating leases has obligations that are
reported in the notes to the financial statements rather than on the
statement of financial position. This is referred to as off-balance sheet
financing. The existence of these off-balance sheet forms of financing
highlights the importance of including the information contained in the notes
in any analysis of a company’s solvency. These notes also help the financial
statement user forecast the amount of the future cash outflows that will
occur to satisfy these lease commitments.

*16. (a) A bond is a form of a long-term note payable. They are similar in that
both have fixed maturity dates and pay interest. The most significant
difference between a note payable and a bond is that bonds are often
traded on publicly whereas few notes are. In addition, bonds tend to
be issued for much larger amounts than notes. Because of these
differences, generally only large companies use bonds as a form of
debt financing.
(b) When it comes to large sums of money, a business would consider

the issue of shares or bonds for obtaining the necessary cash. Both
would be traded publicly.. Bonds are classified as debt on the
statement of financial position and common shares are classified as
equity. Bonds require principal and interest payments; common
shares do not have to be repaid. The board of directors may choose
to pay dividends to the common shareholders, however.
*17. (a) When a bond is sold at a discount, the proceeds received are less
than the face value of the bond because the stated rate of interest
that the bond offers is lower than the market interest rate. This has
made the bond less attractive to investors who will increase the return
they get from the bond by paying less than its face value. The bond
discount is considered to be an additional cost of borrowing. This
additional cost of borrowing should be recorded as additional interest
expense over the term of the bond through a process called
amortization. Initially, the discount is recorded by showing the Bond
Payable at an amount lower than its face value, but over time this
account is increased (credited) so that it will be equal to its face value
by the time it matures. The offsetting debit is made to interest
expense. This is the additional interest expense incurred by the
company for selling a bond at a discount. When interest is actually
paid, this amount is added to interest expense. So interest expense
will consist of a portion that is paid and a portion relating to the
amortization of the discount thereby making it greater than the cash
interest paid.

Q 17 (continued)
(b) When a bond is sold at a premium, the proceeds received are greater
than the face value of the bond because the stated rate of interest
that the bond offers is higher than the market interest rate. This has
made the bond very attractive to investors who will be prepared to pay
a higher price for the bond than its face value. The bond premium is
considered to be a reduction in interest. This benefit should be
recorded through reductions to interest expense over the term of the
bond through a process called amortization. Initially, the premium is
recorded by showing the Bond Payable at an amount higher than its
face value, but over time this account is decreased (debited) so that
it will be equal to its face value by the time it matures. The offsetting
credit is made to interest expense. This lowers interest expense to
reflect the benefit of the premium. When interest is actually paid, this
amount is added to interest expense. So interest expense will consist
of a portion that is paid minus a portion relating to the amortization of
the premium thereby making it lower than the interest paid.
LO 4 BT: C Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
(a)
Oct. 1 Cash ($6,000 + $780)............................................. 6,780
Sales ............................................................. 6,000
Sales Tax Payable ($6,000 × 13%) ............... 780
(b)
Oct. 1 Cash ($6,000 + $899)............................................. 6,899
Sales ............................................................. 6,000
Sales Tax Payable [($6,000 × 5%) +
($6,000 × 9.975%)] ..................................... 899
LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 10-2
(a)
Apr. 30 Property Tax Expense ($36,000 ÷ 12 × 4) ................ 12,000
Property Tax Payable ........................................ 12,000
(b)
July 15 Property Tax Payable ................................................ 12,000
Property Tax Expense ($36,000 ÷ 12 × 2.5) ............. 7,500
Prepaid Property Tax ($36,000 ÷ 12 × 5.5) ............... 16,500
Cash.................................................................. 36,000
(c)
Dec. 31 Property Tax Expense ............................................... 16,500
Prepaid Property Tax ........................................ 16,500
LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-3

(a) Aug. 24 Salaries Expense ................................................... 15,000
Employee Income Tax Payable ..................... 6,258
CPP Payable ................................................. 743
EI Payable ..................................................... 282
Cash ($15,000 – $6,258 – $743 – $282) ....... 7,717
(b) Aug. 24 Employee Benefits Expense ................................... 1,138

CPP Payable ................................................. 743
EI Payable ..................................................... 395
(c) Sept. 3 Employee Income Tax Payable .............................. 6,258

CPP Payable ($743 + $743) ................................... 1,486
EI Payable ($282 + $395) ....................................... 677
Cash ($6,258 + $1,486 + $677) ..................... 8,421
BRIEF EXERCISE 10-4

(a) July 1 Cash ...................................................................... 60,000
Bank Loan Payable ....................................... 60,000
(b) (1) Aug. 1 Interest Expense ($60,000 × 5% × 1/12) ................ 250
Cash .............................................................. 250
(2) Aug. 31 Interest Expense .................................................... 250

Interest Payable............................................. 250
(3) Sept. 1 Interest Payable ..................................................... 250
Cash .............................................................. 250
(4) Oct. 1 Interest Expense .................................................... 250
Cash .............................................................. 250
(c) Oct. 1 Bank Loan Payable ................................................ 60,000

Cash ............................................................. 60,000

BRIEF EXERCISE 10-5

IFRS ASPE
a) Record and disclose a provision Record and disclose a contingent
(likely is a higher level of probability than probable,
liability, which in turn, is more likely than not)
b) Not recorded, disclose only Not recorded, disclose only
c) Not recorded nor disclosed Not recorded nor disclosed
d) Not recorded, disclose only Not recorded, disclose only
e) Not recorded, disclose only Not recorded, disclose only
LO 1 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 10-6
a) The advantage of the fixed interest rate option is that the rate will not
change during the 10-year period, regardless of what happens to interest
rates in the future. One could view this feature as a disadvantage in that a
decline in interest rates will not result in a reduction of interest costs. In
order to lock in the interest rate for such a long period of time, the monthly
instalment payment and the amount of interest is higher.
The disadvantage of the fixed interest rate option becomes the advantage
of the floating interest rate option. When interest rates decline, the loan
interest and the monthly instalment payment are reduced. The
disadvantage is that if interest rates increase, the opposite will occur.
b) Students generally have limited income upon graduation and so the

additional risk of possible increases in instalment payments for student
loans should be avoided. The fixed interest rate is recommended.
Alternately, choosing the floating rate makes the initial monthly payments
smaller, during the time when earnings may be at their lowest. As long as
rates do not increase too much, it could be the less expensive alternative.
LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-7
(a) [1] $50,000 × 7% = $3,500

[2] $13,500 – $3,500 = $10,000
[3] $12,800 – $2,800 = $10,000 or same as [2] as fixed principal reduction
[4] $40,000 – $10,000 = $30,000 (or $2,100 ÷ 7% = $30,000)
[5] $10,000 fixed principal reduction [6] + $2,100 = $12,100
[6] $10,000 fixed principal reduction
[7] $30,000 [4] – $10,000 [6] = $20,000
[8] $11,400 – $1,400 = $10,000 fixed principal reduction or $20,000 [7] – $10,000
[9] $10,700 – $700 = $10,000 fixed principal reduction
[10] $10,000 – $10,000 = $0
(b) The current portion of the note at the end of period 3 is the amount of
principal reduction in the next year (period 4), which is $10,000. This leaves
$10,000 ($20,000 less current portion of $10,000) as the non-current
portion of the debt.
LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-8

(a) [1] $50,000 × 7% = $3,500
[2] $12,195 fixed cash payment
[3] $12,195 [2] – $2,891 = $9,304 or $41,305 – $32,001
[5] $12,195 [4] – $9,955 = $2,240 or $32,001 × 7%
[6] $32,001 – $9,955 = $22,046
[8] $12,195 [7] – $1,543 = $10,652 or $22,046 [6] – $11,394 = $10,652
[10] $11,394 – $11,394 = $0
(b) The current portion of the note at the end of period 3 is the amount of
principal reduction in the next year (period 4), which is $10,652 [8]. This
leaves $11,394 ($22,046 [6] less current portion of $10,652) as the non-
current portion of the debt.

BRIEF EXERCISE 10-9

(a) Fixed principal payment
(B) (C)
(A) Interest Reduction of (D)
Monthly Cash Expense Principal Principal
Interest Payment (D) × 4% ÷ ($300,000 ÷ Balance
Period (B) + (C) 12 months 120) (D) ̶ (C)
Nov. 30, 2017 $300,000
Dec. 31, 2017 $3,500 $1,000 $2,500 297,500
Jan. 31, 2018 3,492 992 2,500 295,000
2017
Nov. 30 Cash ......................................................................... 300,000
Mortgage Payable ............................................ 300,000
Dec. 31 Interest Expense ....................................................... 1,000

Mortgage Payable ..................................................... 2,500
Cash................................................................. 3,500
2018
Jan. 31 Interest Expense ....................................................... 992
Mortgage Payable ..................................................... 2,500
Cash................................................................. 3,492

BRIEF EXERCISE 10-9 (CONTINUED)

(b) Blended principal and interest payment
(B)
Interest (C) (D)
Monthly (A) Expense Reduction Principal
Interest Cash (D) × 4% ÷ of Principal Balance
Period Payment 12 mos. (A) – (B) (D) – (C)
Nov. 30, 2017 $300,000
Dec. 31, 2017 $3,037 $1,000 $2,037 297,963
Jan. 31, 2018 3,037 993 2,044 295,919
01476.73 22,000
2017
Nov. 30 Cash .................................................................. 300,000
Mortgage Payable ..................................... 300,000
Dec. 31 Interest Expense ................................................ 1,000

Mortgage Payable .............................................. 2,037
Cash.......................................................... 3,037
2018
Jan. 31 Interest Expense ................................................ 993
Mortgage Payable .............................................. 2,044
Cash.......................................................... 3,037

BRIEF EXERCISE 10-10
a. Non-current liability
b. Current liability
c. Current liability
d. Neither – any unused portion is not a liability and no balance is outstanding
but line of credit limits should be disclosed in the notes to the financial
statements
e. Current liability
f. Neither – obligations are reported in the notes to the financial statements
g. Non-current liability
h. Current liability
i. Neither – current asset
j. Current liability for the $5,000 due next year. The remaining $70,000
balance is a non-current liability.
k. Neither – because the outcome has a remote probability, it is neither
recorded nor disclosed
(in $ millions)
(a) Current ratio

$443
= 1.0:1
$423
(b) Debt to total $1,014

= = 64.9%
assets $1,563
$76 + $19 + $28

(c) Times interest earned = = 6.5 times
$19
LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

(a) Debt to total assets Improvement

Times interest earned Deterioration
(b) Although Fromage’s debt to total assets ratio improved in 2018, its times
interest earned ratio deteriorated. Fromage’s overall solvency appears to
have deteriorated because even though liabilities relative to assets has
fallen, the company is generating less income before income tax and
interest relative to its interest expense than it did in the prior year.
LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

*BRIEF EXERCISE 10-13

(a) The proceeds received from the issue of the bonds = face value of the
bonds X price.
$200,000 x 96 = $192,000
(b) Interest expense on the first semi-annual interest payment = bond carrying
amount x effective interest rate x 6/12
$192,000 x 7% x 6/12 = $6,720
(c) The semi-annual interest payment based on the coupon rate of 6% x face
value of the bonds x 6/12 = $200,000 x 6% x 6/12 = $6,000
The amortization of the bond discount is $6,720 less $6,000 or $720
The amortization of the bond discount is added to the bond carrying
amount of $192,000 making the carrying amount after the first interest
payment $192,720.

(a) The proceeds received from the issue of the bonds = face value of the
bonds X price.
$100,000 x 109 = $109,000
(b) Interest expense on the first semi-annual interest payment = bond carrying
amount x effective interest rate x 6/12
$109,000 x 3% x 6/12 = $1,635
(c) The semi-annual interest payment based on the coupon rate of 5% x face
value of the bonds x 6/12 = $100,000 x 5% x 6/12 = $2,500
The amortization of the bond premium is $2,500 less $1,635 or $865
The amortization of the bond premium is deducted from the bond carrying
amount of $109,000 making the carrying amount after the first interest
payment $108,135.


(a) Key inputs: Future value (FV) = $500,000
Market interest rate (i) = 2.5% (5% × 6/12)
Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12)
Number of semi-annual periods (n) = 10 (5 years × 2)
Present value of $500,000 received in 10 periods

($500,000 × 0.78120) (n = 10, i = 2.5%) $390,600
Present value of $15,000 received each of 10 periods
($500,000 × 3% × 8.75206) (n = 10, i = 2.5%) 131,281
Present value (issue price) of the bonds $521,881
(b) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 3% (6% × 6/12)

($500,000 × 0.74409) (n = 10, i = 3%) $372,045
($500,000 × 3% × 8.53020) (n = 10, i = 3%) 127,953
Present value (issue price) of the bonds (rounded to $500,000) $500,000
This is rounded because we know that there would be no
discount or premium because the market and stated rate are equal
(c) Key inputs: Future value (FV) = $500,000


($500,000 × 0. 70892) (n = 10, i = 3.5%) $354,460
($500,000 × 3% × 8.31661) (n = 10, i = 3.5%) 124,749
Note to the instructor: Rounding discrepancies may arise depending on whether

present value tables, calculators, or spreadsheet programs are used to determine
the present value.


(a) CARVEL CORP.
Bond Premium Amortization
(A) (B) (C) (D) (E)

Semi- Interest Interest Premium Unamor- Bond
annual Payment Expense Amor- tized Carrying
Interest (6% × (5% × 6/12 tization Premium Amount
Periods 6/12 = = 2.5%) (A) – (B) (D) – (C) ($500,000 + D)
3%)
Jan. 1/18 $21,881 $521,881
July 1/18 $15,000 $13,047 $1,953 19,928 519,928
Jan. 1/19 15,000 12,998 2,002 17,926 517,926
(b) CARVEL CORP.
Interest Interest Bond

Semi- Payment Expense Carrying
annual (6% × (6% × 6/12 Amount
Interest 6/12 = = 3%) ($500,000)
Periods 3%)
Jan. 1/18 $500,000
July 1/18 $15,000 $15,000 500,000
Jan. 1/19 15,000 15,000 500,000

BRIEF EXERCISE 10-16 (CONTINUED)
(c) CARVEL CORP.

Bond Discount Amortization
(A) (B) (E)

Semi- (C) (D)
Interest to Be Interest Bond
annual Discount Unamortized
Paid Expense Carrying
Interest Amortization Discount
(6% × 6/12 = (7% × 6/12 Amount
Periods (A) – (B) (D) – (C)
3%) = 3.5%) ($500,000 – D)
Jan. 1/18 $20,791 $479,209

July 1/18 $15,000 $16,772 $1,772 19,019 480,981
Jan. 1/19 15,000 16,834 1,834 17,185 482,815

(a)
Jan. 1 Cash ........................................................... 521,881
Bonds Payable ................................... 521,881
July 1 Interest Expense ......................................... 13,047

Bonds Payable ............................................ 1,953
Cash ................................................... 15,000
Dec. 31 Interest Expense ......................................... 12,998

Bonds Payable ............................................ 2,002
Interest Payable.................................. 15,000
(b)
Jan. 1 Cash ........................................................... 500,000
Bonds Payable ................................... 500,000

Cash ................................................... 15,000

(c)
Jan. 1 Cash ........................................................... 479,209
Bonds Payable ................................... 479,209

Bonds Payable ................................... 1,772
Cash ................................................... 15,000

Bonds Payable ................................... 1,834

SOLUTIONS TO EXERCISES
EXERCISE 10-1
Shareholders’ Net
Assets Liabilities Revenues Expenses
Equity Income
1. + + NE NE NE NE
2. NE NE NE NE NE NE
3. NE + - NE + -
4. - - NE NE NE NE
5. + + + + NE +
6. - + - NE + -
7. NE + - NE + -
8. NE + - NE + -
9. + + NE NE NE NE
10. NE - + + NE +
LO 1 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 10-2
(a)
Mar. 17 Cash ............................................................ 56,000
Sales .................................................... 50,000
Sales Tax Payable ($2,500 + $3,500).. 6,000
May 1 Property Tax Expense ($52,800 ÷ 12 × 4) ... 17,600

Property Tax Payable .......................... 17,600
July 1 Property Tax Expense ($52,800 ÷ 12 × 2) ... 8,800

Prepaid Property Tax ($52,800 ÷ 12 × 6) ..... 26,400
Property Tax Payable .................................. 17,600
Cash .................................................... 52,800
Aug. 15 Salaries Expense ......................................... 81,000

CPP Payable ....................................... 4,010
EI Payable ........................................... 1,523
Employee Income Tax Payable ........... 16,020
Pension Payable .................................. 6,400
Cash .................................................... 53,047
15 Employee Benefits Expense ........................ 6,142

CPP Payable ....................................... 4,010
EI Payable ........................................... 2,132
22 CPP Payable ($4,010 + $4,010) .................. 8,020

EI Payable ($1,523 + $2,132) ...................... 3,655
Employee Income Tax Payable ................... 16,020
Cash .................................................... 27,695
Oct. 1 Cash ............................................................ 100,000

Bank Loan Payable .............................. 100,000

EXERCISE 10-3 (CONTINUED)
(b)
Dec. 31 Property Tax Expense ................................. 26,400
Prepaid Property Tax ........................... 26,400
31 Interest Expense ($100,000 × 4% × 3/12) .. 1,000

Interest Payable .................................. 1,000
(c)
April 1 Bank Loan Payable........................................... 100,000
Interest Payable ................................................ 1,000
Interest Expense ............................................... 1,000
Cash ........................................................ 102,000

EXERCISE 10-3
(a) Dougald Construction
(1) Oct. 1, 2017 Cash ........................................................ 250,000

Bank Loan Payable ........................... 250,000
(2) Dec. 31, 2017 Interest Expense ...................................... 3,125

Interest Payable ................................ 3,125
($250,000 × 5% × 3/12)
(3) July 1, 2018 Interest Expense ($250,000 × 5% × 6/12) 6,250

Interest Payable ................................ 6,250
Bank Loan Payable .................................. 250,000

Interest Payable ($3,125 + $6,250).......... 9,375
Cash .................................................. 259,375
(b) TD Bank
(1) Oct. 1, 2017 Notes Receivable ..................................... 250,000

Cash .................................................. 250,000
(2) Dec. 31, 2017 Interest Receivable .................................. 3,125

Interest Revenue ............................... 3,125
($250,000 × 5% × 3/12)
(3) July 1, 2018 Interest Receivable ($250,000 × 5% × 6/12) 6,250

Interest Revenue .............................. 6,250
Cash ........................................................ 259,375

Interest Receivable ($3,125 + $6,250) 9,375
Notes Receivable .............................. 250,000

EXERCISE 10-4
(a) Since the obligation for providing maintenance on the aircraft exists at the
time of signing the lease, the provision must be recorded at that time.
When the provision is established (by crediting that account), the offsetting
debit is recorded as an asset that is amortized over the period of the lease.
(b) The provision for aircraft maintenance is based on estimates of the costs
that are expected to be incurred when the maintenance work will be
performed in the future. Consequently, the amount estimated is subject to
change. In the case of accounts payable, the amounts owed are fixed and
determinable.

EXERCISE 10-5
(a) and (b)
(1) Fixed principal payment

(B) (C)
(A) Interest Reduction (D)
Semi-annual Cash Expense of Principal Principal
Interest Payment (D) × 5% × ($150,000 ÷ Balance
Period (B) + (C) 6/12 20) (D) – (C)
Dec. 31, 2017 $150,000
June 30, 2018 $11,250 $3,750 $7,500 142,500
Dec. 31, 2018 11,063 3,3,,53,563 7,500 135,000
01 01476.73 22,000
Issue of Mortgage
2017 Dec. 31 Cash ................................................... 150,000

Mortgage Payable ...................... 150,000
First Instalment Payment
2018 June 30 Interest Expense ($150,000 × 5% × 6/12) 3,750

Mortgage Payable ............................... 7,500
Cash ........................................... 11,250
Second Instalment Payment
Dec. 31 Interest Expense

[($150,000 – $7,500) × 5% × 6/12] 3,563
Cash ........................................... 11,063


(a) and (b) (continued)
(2) Blended principal and interest payment

(B)
Interest (C) (D)
Semi-annual (A) Expense Reduction Principal
Interest Cash (D) × 5% × of Principal Balance
Period Payment 6/12 (A) – (B) (D) – (C)
Dec. 31, 2017 $150,000
June 30, 2018 $9,622 $3,750 $5,872 144,128
Dec. 31, 2018 9,622 3,603 6,019 138,109
01 0 01476.73 22,000
Issue of Mortgage
2017 Dec. 31 Cash ................................................... 150,000

Mortgage Payable ...................... 150,000
2018 June 30 Interest Expense

($150,000 × 5% × 6/12) ................... 3,750
Cash ........................................... 9,622
Dec. 31 Interest Expense [($150,000

– $5,872) × 5% × 6/12] ................... 3,603
Mortgage Payable ............................. 6,019
Cash ......................................... 9,622
(c) Interest expense for the six-month period ended June 30, 2018 is the same
amount of $3,750 whether the payment is blended or based on fixed
principal payments because for this first period, the amount of the principal
balance of the loan is the same, at the initial amount of $150,000. Once
the six-month period is completed, the principal balance of the mortgage
payable on which interest charges are applied changes by a different
amount based on whether the principal payment is fixed or is blended with
interest, based on the repayment terms of the loan. Thereafter, the interest
expense will differ under the two approaches.

EXERCISE 10-6
(a)
(B) (C) (D)
Annual (A) Interest Reduction Principal
Interest Cash Expense of Principal Balance
Period Payment (D) × 4% (A) – (B) (D) – (C)
July 1, 2017 $15,000
June 30, 2018 $7,953 $600 $7,353 7,647
June 30, 2019 7,953 306 7,647 0
(b) 2017
(1) July 1 Cash ........................................................... 15,000
Notes Payable .................................... 15,000
(2) Dec. 31 Interest Expense ($600 × 6/12) .................. 300

Interest Payable ................................. 300
(3) 2018
June 30 Interest Expense......................................... 300
Interest Payable ......................................... 300
Notes Payable ............................................ 7,353
Cash ................................................... 7,953
(c) On December 31, 2018 another accrual for interest expense would be made
as follows:
Dec. 31 Interest Expense ($306 × 6/12) .................. 153

After making the above entry the company would have two current liabilities
relating to the note as follows:
Current liability
Interest payable $153
Note payable 7,647

EXERCISE 10-7
(a) This is a blended principal and interest payment schedule, as the cash
payment is constant at $23,097.48 each year.
(b) The interest rate is 5% ($5,000 ÷ $100,000).
(c) Interest Expense .................................................... 5,000.00

Bank Loan Payable ................................................ 18,097.48
Cash ............................................................. 23,097.48
(d) Current portion = $19,952.47

Non-current portion = $20,950.10 + $21,997.60 = $42,947.70
LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 10-8
(a) Current liabilities would likely include:

Accounts payable and accrued liabilities
Current portion of long-term debt
Income taxes payable
Dividends payable
Deferred (unearned) tenant deposits
Non-current liabilities would likely include:

Long-term debt
Deferred income taxes
Finance lease obligations
Depending on when the liability will become due, some items listed above
under non-current could instead be current; an example: finance lease
obligations. As well, some items listed above as current could be non-
current or portions of the balances could be non-current; an example:
deferred (unearned) tenant deposits.

(b)
DOLLARAMA INC.
Statement of Financial Position (partial)
February 1, 2015
(in thousands)
Current liabilities
Accounts payable and accrued liabilities ................. $ 175,739
Dividends payable ................................................... 10,480
Income taxes payable .............................................. 25,427
Deferred (unearned) tenant deposits ....................... 60,475
Current portion of long-term debt ............................. 3,846
Total current liabilities .................................. 275,967
Non-current liabilities
Long-term debt ........................................................ 560,641
Deferred income taxes ............................................. 122,184
Finance lease obligations ........................................ 1,566
Total non-current liabilities ........................... 684,391
Total liabilities ............................................................................... $960,358
LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10-9
($ in thousands)
(a) Current ratio
2018: $4,744 = 1.6:1 2017: $4,298 = 1.4:1

$3,011 $2,989
(1) Based only on the current ratio, Fruition’s liquidity is improving in

2018. There are proportionately more current assets to pay the
current liabilities.
(2) To make a proper assessment, information concerning the due dates

for the liabilities and the type of current assets that make up the
remaining assets would need to be scrutinized. For example, if current
assets consisted mainly of cash rather than inventory, we would
conclude that the company had greater liquidity. Knowing the quality
of receivables and the turnover of the inventory would be useful.
(b) Current ratio for 2018:
Before:
$4,744
= 1.6:1
$3,011
After:
$4,744 - $1,000
= 1.9:1
$3,011 - $1,000
Paying off the $1 million improves Fruition’s current ratio from 1.6:1 to
1.9:1. This is because $1 million represents a greater percentage of the
denominator than it does the numerator. The greater percentage decrease
to the denominator makes the ratio rise.

(c) Having access to an operating line of credit means that cash is available
on a short-term basis and therefore the assessment of the company’s
short-term liquidity is better than it first appeared. Although the ability to
access cash improves the liquidity position, it does not necessarily mean
that drawing down the operating line of credit will improve the current ratio.
If the unused line of credit were to be fully drawn down, Fruition’s current
assets would increase by the addition of $4 million of cash. At the same
time, the current liabilities would increase by the addition of a $4 million
bank loan payable. As is demonstrated in the calculation below, the current
ratio would deteriorate to 1.2:1.
$4,744 + $4,000
= 1.2:1
$3,011 + $4,000

EXERCISE 10-10
($ in millions)
(a)
2014
$2,258
Debt to total assets = = 57.9%
$3,900
$218 + $58 + $28

Times interest earned = = 10.9 times
$28
2015
$2,559
Debt to total assets = = 58.3%
$4,388
$234 + $32 + $55

Times interest earned = = 5.8 times
$55
Open Text Corporation’s debt to total assets ratio deteriorated slightly in

2015, with the increase from 57.9% to 58.3%. The company’s times
interest earned ratio decreased significantly from 10.9 times in 2014 to 5.8
times in 2015. This reveals a deterioration in Open Text’s solvency.
(b) Having access to an operating line of credit means that cash is available
on a short-term basis. None of the total line of credit available in the amount
of $300 million has been drawn down at the date of the financial
statements. Since no liability exists at the end of the year, only a note
disclosure of the available operating line of credit will be needed.
LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10-11
(a) The Province of Manitoba bonds are trading at a discount.
(b) The Loblaw Companies Limited bonds are trading at a premium.
(c) Cash (0.999 × $100,000) ............................................ 99,900

Bonds Payable ........................................................ 99,900
Cash (1.4409 × $100,000) .......................................... 144,090

Bonds Payable ..................................................... 144,090
(d) When initially issued, both Loblaws and the Province of Manitoba would
have an understanding of the rate of interest demanded by the market, for
equivalent risk, and would consequently set the coupon rate of interest on
their bonds at a level that would be very close to the market interest rate at
that time. When the market rate and the coupon rate are the same, the
bonds are issued at par or 100% of the face value of the bond. When
issued at par, there are is no premiums or discounts to amortize.
(e) The major reason for the change in the price of the bonds since they were
issued is the market rate changes that have occurred since the date of
issuance. If the market rate (yield demanded by bondholders) increases,
the price of the bonds will fall and they will trade at a discount. If the market
rate decreases, the price of the bonds will rise and they will trade at a
premium.
LO 4 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*EXERCISE 10-12
(a) 2018
1. Oct. 1 Cash ......................................................... 800,000
Bonds Payable ................................ 800,000
2. Dec. 31 Interest Expense ($800,000 × 5% × 3/12) 10,000

Interest Payable................................ 10,000
2019
3. Apr. 1 Interest Expense ($800,000 × 5% × 3/12) 10,000
Interest Payable ........................................ 10,000
Cash ($800,000 × 5% × 6/12) .......... 20,000
(b)
December 31, 2018
Current liabilities
Interest payable .................................................... $ 10,000
Bonds payable, due 2028 .................................... 800,000

*EXERCISE 10-13
(a) [1] $25,000 + $2,768 = $27,768

[2] $74,387 – $2,768 = $71,619
[3] $27,851 – $25,000 = $2,851
[4] $928,381 + $2,851[3] = $931,232 or $1,000,000 – $68,768
[5] $25,000 same as previous semi-annual payments
[6] $27,937 – $25,000 = $2,937
[7] $68,768 – $2,937 [6] = $65,831
(b) $1,000,000 face value ($925,613 carrying amount plus unamortized

discount $74,387 at issue date)
(c) The bonds were issued at a discount as the carrying amount of $925,613
is lower than the $1,000,000 face value of the bond at the issue date.
(d) Coupon interest rate: Semi-annual payments are $25,000 × 2 divided by

the face value $1,000,000 = 5% per year
Market interest rate: Interest expense April 30 (item [1] of part (a) $27,768)
divided by carrying amount at issue date $925,613 × 2 = 3% × 2 = annual
rate of 6%
(e) The effective rate of interest of 6% is greater than the coupon rate. Interest
expense is calculated using the market rate of interest and cash interest
paid is calculated using the coupon rate. Therefore, interest expense is
greater than cash interest paid.
(f) Interest expense is calculated by multiplying the carrying value of the

bonds by the market rate of interest. With each semi-annual payment, the
carrying amount of the bonds increases, from the semi-annual amortization
of the discount, and consequently, the amount of interest expense
increases.
(g) The carrying amount of the bonds will be equal to the face value of the
bonds of $1,000,000 as the entire amount of the discount will have been
amortized.

*EXERCISE 10-14
(a) Jan. 1 Cash ......................................................................... 925,617

Bonds Payable.................................................. 925,617
(b) July 1 Interest Expense ($925,617× 6% × 6/12) ................. 27,769

Bonds Payable ($27,769 – $25,000) ................ 2,769
Cash ($1,000,000 × 5% × 6/12) ........................ 25,000
(c) Dec. 31 Interest Expense [($925,617 + $2,769) × 6% × 6/12] 27,852

Bonds Payable ($27,852 – $25,000) ................ 2,852
Interest Payable ($1,000,000 × 5% × 6/12) ...... 25,000
(d) Key inputs: Future value (FV) = $1,000,000

Interest payment (PMT) = $25,000 ($1,000,000 × 5% × 6/12)
Present value of $1,000,000 received in 20 periods

($1,000,000 × 0.55368) (n = 20, i = 3%) $553,680
($1,000,000 × 2.5% × 14.87747 (n = 20, i = 3%) 371,937
One year later, December 31, 2019, the carrying amount of the bond is
$925,617 + $2,769 + $2,852 = $931,238
Key inputs: Future value (FV) = $1,000,000


($1,000,000 × 0.58739) (n = 18, i = 3%) $587,390
($1,000,000 × 2.5% × 13.75351 (n = 18, i = 3%) 343,838
Note to the instructor: Rounding discrepancies may arise depending on

whether present value tables, calculators, or a spreadsheet programs are
used to determine the present value.
LO 4 BT: AP Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
(a) Mar. 2 Accounts Payable .................................... 10,000

Notes Payable .................................. 10,000
5 Cash ......................................................... 45,200

Sales ................................................ 40,000
Sales Tax Payable ($40,000 × 13%) 5,200
Cost of Goods Sold .................................. 24,000

Inventory .......................................... 24,000
9 Property Tax Expense ($18,000 × 3/12) .. 4,500

Property Tax Payable ....................... 4,500
As we are now in the third month, expense 3 months of property taxes.
12 Unearned Revenue .................................. 11,300

Service Revenue .............................. 10,000
Sales Tax Payable ($11,300 ÷ 1.13 × 13%) . 1,300
13 Sales Tax Payable ................................... 5,800

Cash................................................. 5,800
16 CPP Payable ($1,340 + $1,340) .............. 2,680

EI Payable ($468 + $655) ........................ 1,123
Income Tax Payable ................................ 5,515
Cash................................................. 9,318
27 Accounts Payable ..................................... 30,000

Cash................................................. 30,000

PROBLEM 10-1A (CONTINUED)
(a) (continued)
Mar. 30 Salaries Expense ....................................... 16,000

CPP Payable ..................................... 792
EI Payable ......................................... 301
Employee Income Tax Payable......... 5,870
Cash..................................................
9,037
30 Employee Benefits Expense ..................... 1,213

CPP Payable ..................................... 792
EI Payable ......................................... 421
(b) Mar. 31 Interest Expense ....................................... 50

Interest Payable .................................... 50
($10,000 × 6% × 1/12)
(c)
MOLEGA LTD.
March 31, 2018
Current liabilities
Accounts payable ($42,500 – $10,000 – $30,000) ................. $ 2,500
Notes payable ......................................................................... 10,000
Unearned revenue ($15,000 – $11,300) ................................. 3,700
Employee income tax payable ($5,515 – $5,515 + $5,870) .... 5,870
Property tax payable ............................................................... 4,500
Sales tax payable ($5,800 + $5,200 + $1,300 - $5,800) ......... 6,500
CPP payable ($2,680 – $2,680 + $792 + $792) ...................... 1,584
EI payable ($1,123 – $1,123 + $301 + $421).......................... 722
Interest payable ...................................................................... 50
Total current liabilities ................................................. $35,426
LO 1,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10-2A
(a) Sept. 1 Inventory ................................................. 15,000

Accounts Payable .......................... 15,000
30 Bank Loan Payable ................................. 12,000

Interest Expense ($12,000 × 3% × 3/12) 90
Cash............................................... 12,090
Oct. 1 Accounts Payable ................................... 15,000

Notes Payable ................................ 15,000
2 Buildings ................................................. 25,000

Bank Loan Payable ........................ 25,000
Nov. 1 Interest Expense ($15,000 × 4% × 1/12) 50

Cash............................................... 50
1 Interest Expense ($25,000 × 3% × 1/12) 63

Cash............................................... 63
Dec. 1 Interest Expense ($15,000 × 4% × 1/12) 50

Cash............................................... 50
1 Interest Expense ($25,000 × 3% × 1/12) 63

Cash............................................... 63
3 Vehicles .................................................. 28,000

Bank Loan Payable ........................ 20,000
Cash............................................... 8,000
31 Interest Expense ($50* + $63** + $50***) 163

Interest Payable ............................. 163
* $15,000 × 4% × 1/12 = $50
** $25,000 × 3% × 1/12 = $63
*** $20,000 × 3% × 1/12 = $50


(b)
Interest Expense
Sept. 1 Bal. 0 Notes Payable
Sept. 30 90 Sept. 1 Bal. 0
Nov. 1 50 Oct.1 15,000
Nov. 1 63 Dec. 31Bal. 15,000
Dec. 1 50
Dec. 1 63
Dec. 31 163 Bank Loans Payable
Dec.31 Bal. 479 Sept. 1 Bal. 12,000
Sept. 30 12,000 Oct. 2 25,000
Interest Payable Dec. 3 20,000
Sept. 1 Bal. 0 Dec. 31Bal. 45,000
Dec. 31 163
Dec. 31Bal. 163
(c)
CLING-ON LTD.
Income Statement (partial)
Year Ended December 31, 2018
Other revenues and expenses

Interest expense ......................................................................... $479
(d)
CLING-ON LTD.
December 31, 2018
Current liabilities
Bank loans payable .................................................................... $45,000
Notes payable ............................................................................. 15,000
Interest payable .......................................................................... 163

PROBLEM 10-3A
(a) Table not required but source for detailed calculations
Interest
Quarterly Cash Expense Reduction of Principal
Interest Period Payment 4% × 3/12 Principal Balance
Sept. 30, 2017 $1,000,000

Dec. 31, 2017 $93,333 $10,000 $83,333 916,667
Mar. 31, 2018 92,500 9,167 83,333 833,334
June 30, 2018 91,666 8,333 83,333 750,001
2017
Sept. 30 Equipment .................................................. 1,100,000
Cash .................................................. 100,000
Bank Loan Payable ........................... 1,000,000
(b) 2017
Nov. 30 Interest Expense ($10,000 × 2/3) ............... 6,667
Interest payable................................. 6,667
(c) 2017
Dec. 31 Interest Payable ......................................... 6,667
Interest Expense ........................................ 3,333
Bank Loan Payable .................................... 83,333
Cash .................................................. 93,333
2018
Mar. 31 Interest Expense ...................................... 9,167
Bank Loan Payable .................................. 83,333
Cash ................................................ 92,500

(d) Table not required but source for detailed calculations
Interest
Quarterly Cash Expense Reduction of Principal
Sept. 30, 2017 $1,000,000

Dec. 31, 2017 $88,849 $10,000 $78,849 921,151
Mar. 31, 2018 88,849 9,212 79,637 841,514
June 30, 2018 88,849 8,415 80,434 761,080
2017
Nov. 30 Interest Expense ($10,000 × 2/3) ................. 6,667

Interest Payable .................................. 6,667
Dec. 31 Interest Expense .......................................... 3,333

Interest Payable ........................................... 6,667
Bank Loan Payable ...................................... 78,849
Cash .................................................... 88,849
2018
Mar. 31 Interest Expense .......................................... 9,212
Bank Loan Payable ...................................... 79,637
Cash .................................................... 88,849

PROBLEM 10-4A
(a)
Interest
Semi-annual Cash Expense Reduction of Principal
Interest Period Payment 6.5% × 6/12 Principal Balance
June 30, 2017 $700,000

Dec. 31, 2017 $48,145 $22,750 $25,395 0674,605
June 30, 2018 48,145 021,925 26,220 0648,385
Dec. 31, 2018 48,145 021,073 27,072 621,313
June 30, 2019 48,145 020,193 27,952 0593,361
(b) 2017
June 30 Cash ........................................................ 700,000
Mortgage Payable ........................... 700,000
(e) 2017;
Dec. 31 Interest Expense ...................................... 22,750
Mortgage Payable .................................... 25,395
Cash ................................................ 48,145
2018
June 30 Interest Expense ...................................... 021,925
Mortgage Payable .................................... 26,220
Cash ................................................ 48,145
(d)
STARLIGHT GRAPHICS LTD.
Statement of Financial Position (Partial)
June 30, 2018
Current liabilities
Current portion of mortgage payable ............................... $ 55,024*
Mortgage payable ............................................................ 0593,361
*($27,072 + $27,952) = $55,024

PROBLEM 10-5A
(a)
(A) (B) (C)
Cash Interest Principal (D)
Payment Expense Reduction Balance
Period (B) + (C) (D) × 9% × 3/12 $240,000 ÷ 12 (D) – (C)
Apr. 30, 2018 $240,000
July 31, 2018 $25,400 $5,400 $20,000 220,000
Oct. 31, 2018 24,950 4,950 20,000 200,000
Jan. 31, 2019 24,500 4,500 20,000 180,000
Apr. 30, 2019 24,050 4,050 20,000 160,000
July 31, 2019 23,600 3,600 20,000 140,000
Oct. 31, 2019 23,150 3,150 20,000 120,000
Jan. 31, 2020 22,700 2,700 20,000 100,000
Apr. 30, 2020 22,250 2,250 20,000 80,000
July 31, 2020 21,800 1,800 20,000 60,000
Oct. 31, 2020 21,350 1,350 20,000 40,000
Jan. 31, 2021 20,900 900 20,000 20,000
Apr. 30, 2021 20,450 450 20,000 0
Total $35,100 $240,000
(b)
2018
Apr. 30 Cash ............................................... 240,000
Notes Payable ........................ 240,000
(c)
July 31 Notes Payable ................................ 20,000
Interest Expense ............................. 5,400
Cash ....................................... 25,400
Oct. 31 Notes Payable ................................ 20,000

Interest Expense ............................. 4,950
Cash ....................................... 24,950

(d)
BISTRO SALLY INC.
October 31, 2018
Current liabilities
Current portion of 9% notes payable .................... $80,000*
Notes payable, 9%, due in 2021
($200,000 – $120,000)................................ 120,000
Total liabilities $200,000
*$20,000 × 4 = $80,000

(e) Had the repayment of the note been based on blended payments of
principal and interest, the instalment schedule would have been as follows.
(B) (C)
(A) Interest Principal (D)
Cash Expense Reduction Balance
Period Payment (D) × 9% × 3/12 (A) – (B) (D) – (C)
Apr. 30, 2018 $240,000
July 31, 2018 $23,044 $ 5,400 $17,644 222,356
Oct. 31, 2018 23,044 5,003 18,041 204,315
Jan. 31, 2019 23,044 4,597 18,447 185,868
Apr. 30, 2019 23,044 4,182 18,862 167,006
July 31, 2019 23,044 3,758 19,286 147,720
Oct. 31, 2019 23,044 3,324 19,720 128,000
Jan. 31, 2020 23,044 2,880 20,164 107,836
Apr. 30, 2020 23,044 2,426 20,618 87,218
July 31, 2020 23,044 1,962 21,082 66,136
Oct. 31, 2020 23,044 1,488 21,556 44,580
Jan. 31, 2021 23,044 1,003 22,041 22,539
Apr. 30, 2021 23,044 505 22,539 0
Total $36,528 $240,000
Interest expense would only be the same on July 31, 2018. After the first payment,
the principal reduction would be lower under the blended payment method for all
future payments. Correspondingly, the total interest expense over the term of the
note will be higher by $1,428 ($36,528 – $35,100) when paying using the blended
payment method. This is because the fixed principal payments earlier in the term
of the note under the fixed principal payment method are larger than with the
blended payments method shown above.

PROBLEM 10-6A
(a) 1. Current liabilities Property tax payable $ 0

(paid in May)
2. Current liabilities Interest payable 7,000

($200,000 × 7% × 6/12)
Current portion of note payable 40,000
Non-current liabilities Notes payable 160,000

($200,000 – $40,000)
3. Current liabilities Accounts payable 120,000
4. Current liabilities Unearned revenue 10,000

(earned in January)
5. Current liabilities Sales tax payable 1,040

($8,000 × 13%)
6. Current liabilities Salaries payable 2,157

[($18,000 × 1/5 days) – $175
– $68 – $1,200]
CPP payable 350
($175 + employer share $175)
EI payable 163
($68 + employer share $95 (1.4 × $68)
Employee income tax payable 1,200
7. Contingent liability Not on statement of financial position 0
8. Current liabilities Income tax payable 5,000

($50,000 – $45,000)
9. Current liabilities Debt due within one year 30,000

Non-current liabilities Non-current debt 220,000
($250,000 – $30,000)
10. Not on the financial statements as not drawn on

(b) The notes should disclose information on the contingent liability – the
lawsuit, including the fact that the likelihood of the loss cannot be
determined.
Information on the note payable should also be disclosed, including the

interest rate and repayment terms and payments required in each of the
next five years.
Details of Wendell’s non-current debt should be disclosed, including

interest rates, maturity dates, conversion privileges, and any assets
pledged as collateral.
Details of the operating line of credit terms and maximum balance should
be disclosed in the notes to the financial statements, even though no
funds have yet been drawn.
LO 1,3 BT: K Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10-7A
(a)
2015 2014
(in millions)
1. Current ratio $1,962 $1,896

= 1.7:1 = 1.1:1
$1,179 $1,725
2. Receivables $10,658 $9,223

= 13.4 times = 12.9 times
turnover $785 + $807 $807 + $625
2 2
3. Inventory $7,688 $6,518

turnover $1,006 + $933 $933 + $770
2 2
4. Debt to $3,172 $3,518

= 46.6% = 55.3%
total assets $6,800 $6,357
5. Times
interest earned $613+$237+$73 = 12.6 times $534+$225+$69 = 12.0 times
$73 $69

(b) Saputo’s current ratio has improved significantly and is more in line with
industry averages in 2015. The receivables turnover ratio also improved
from 12.9 times in 2014 to 13.4 times in 2015 and now matches the industry
average. The inventory turnover improved as well from 7.7 times in 2014
to 7.9 times in 2015. In this respect, Saputo is well ahead of industry
averages. This means that Saputo is collecting its receivables and moving
its inventory more quickly in 2015 than in 2014. Improvements in the
receivable and inventory turnover ratios likely lead to the improvement in
the current ratio in 2015 because as the turnovers improved, cash was
collected faster and used to pay down current liabilities. It is the reduction
in the denominator of this ratio that caused the most significant change in
the current ratio increase in 2015. . Overall, Saputo’s 2015 liquidity ratios
are quite healthy.
During 2015, Saputo’s debt to total assets ratio improved from 55.3% in
2014 to 46.6% in 2015. The company’s times interest earned ratio also
improved. In comparison to the industry average, Saputo is carrying less
debt compared to total assets (partly due to the lower current liabilities
mentioned in the previous paragraph), and its times interest earned ratio is
significantly higher. This indicates that the company appears to be earning
more than enough net income to make the required debt interest payments
or the majority of the debt is non-interest bearing. Therefore, there do not
appear to be any significant concerns regarding Saputo’s solvency in 2015.
(c) Saputo has secured a line of credit that helps it through short-term liquidity
problems during its operating cycle. The fact that it has used only 15% of
the $1.1 billion line of credit as of the end of 2015 demonstrates that it is
not in great need of cash to meet its obligations. Saputo is ready to take
advantage of opportunities that may come up in the future that would
require significant amounts of cash. As for the rise in the U.S. dollar relative
to the Canadian dollar in 2015, this has a detrimental effect on Saputo as
the business must purchase U.S. dollars to repay the debt. In addition,
balances for any U.S. dollar debt would be reported at higher exchange
rates as of the date on the statement of financial position.

(d) When assessing Saputo’s liquidity and solvency it is necessary to look at

operating lease commitments that will require cash payments in the same
way as all liabilities in the coming years. The fact that the amounts do not
appear as liabilities on the statement of financial position does not erase
the commitment to pay the amounts under those contracts in the future.
The absence of these commitments on the statement of financial position
artificially improves the company’s solvency. Upon further analysis, and
with the inclusion of these amounts, one can better assess the company’s
liquidity and solvency.


PROBLEM 10-8A
(a) When reviewing the liquidity ratios for the two companies, it would appear
that Sun-Oil is less liquid than Petro-Zoom. Sun-Oil has a lower current
ratio than Petro-Zoom. Although it is turning its receivables over faster than
Petro-Zoom, Petro-Zoom is able to move its inventory much more quickly
than Sun-Oil.
Furthermore, neither Petro-Zoom’s nor Sun-Oil’s receivables turnover
ratios are of particular concern. Both are collecting their receivables within
an average 30-day collection period (365 days divided by either 12 or 13
is approximately 30 days).
What is of concern is Sun-Oil’s inventory turnover of 10 times which is well
below Petro-Zoom’s of 16 times and the industry average of 19 times. This
may be of concern to a lender or other creditor as a company will not be
able to generate cash in the short-term if it cannot sell its inventory.
Based on the concerns over Sun-Oil’s inventory turnover, I would think that
Petro-Zoom is the more liquid of the two companies. I would be more
inclined to lend money to Petro-Zoom.
(b) In reviewing the solvency of these two companies we see that Petro-
Zoom’s debt to total assets ratio is marginally higher (worse) than Sun-Oil’s
ratio, indicating that Petro-Zoom has a higher percent of its assets financed
by debt. Sun-Oil also appears to be in a better position to make its interest
payments, as indicated by the higher times interest earned ratio (24 times
for Sun-Oil compared to 21 times for Petro-Zoom).
When compared to the industry, we can see that both companies have
debt to total assets ratios higher than the industry average. On the other
hand, these ratios are not far off the industry average and their high times
interest earned ratios leave little doubt that both companies are able to
make their respective interest payments on the debt.


(b) (Continued)
Based on the debt to total assets ratio and times interest earned ratio, Sun-
Oil seems to be the more solvent of the two. However, both companies
appear to be generating sufficient income to cover interest payments so I
would not be significantly concerned about the solvency of either company.


*PROBLEM 10-9A
(a) Able Limited – issued at par or 100 with coupon rate 6%:
2018
Jan. 1 Cash .................................................. 100,000
Bonds Payable .......................... 100,000
(b)
Dec. 31 Interest Expense ($100,000 × 6%) ..... 6,000
Cash .......................................... 6,000
(a) Beta Corp. – issued at a discount price 94 with coupon rate 4%:
2018
Jan. 1 Cash ($100,000 × .94)........................ 94,000
Bonds Payable .......................... 94,000
(b)
Dec. 31 Interest Expense ($94,000 × 6%) ....... 5,640
Bonds Payable ($5,640 – $4,000) 1,640
Cash ($100,000 × 4%) ............... 4,000
(a) Charles Inc. – issued at a premium price 105 with coupon rate 7%:
2018
Jan. 1 Cash ($100,000 × 1.05) ........................ 105,000
Bonds Payable ............................ 105,000
(b)
Dec. 31 Interest Expense ($105,000 × 6%) ....... 6,300
Bonds Payable ($7,000 – $6,300) ........ 700
Cash ($100,000 × 7%)................. 7,000

(c) As seen in parts (a) and (b), Able is the only company that issued the bonds
at par. This occurred because its coupon rate matched the market rate of
interest, both at 6% and therefore the interest expense it records is equal
to the interest paid. In the case of Beta Corp., since its coupon rate of 4%
allows it to pay less interest than the market rate of interest, it must issue
the bond at a discount and receive less than the face value of the bond at
the date of issuance. The discount is the mechanism that the investor uses
to obtain a return on the bond equal to the market interest rate. The
difference between the $94,000 Beta received at issuance and the
$100,000 that will be paid at the maturity of the bond will be allocated to
interest expense over the term of the bond. This will make the interest
expense greater than the amount of interest paid. In the case of Charles
Inc., since its coupon rate of 7% forces it to pay more interest than the
market rate of interest, it will issue the bond at a premium and receive more
than the face value of the bond at the date of issuance. The difference
between the $105,000 that Charles received and the $100,000 that will be
paid at the maturity of the bond will be allocated to interest expense over
the term of the bond and reduce the expense. This will make the interest
expense less than the amount of interest paid.
(d) Balance in Bonds Payable account December 31, 2018:
Able Limited:
Bond issue January 1, 2018 $100,000
No premium or discount Dec. 31, 2018 $100,000
Beta Corp:
Plus amortization of bond discount 1,640
Balance Dec. 31, 2018 $95,640
Charles Inc.:
Less amortization of bond premium 700
Balance Dec. 31, 2018 $104,300

*PROBLEM 10-10A
(a) GLOBAL SATELLITES CORPORATION

Bond Premium Amortization
(B) (C) (D) (E)

Semi- (A) Interest Premium Unamor- Bond
annual Interest Expense Amor- tized Carrying
Interest to Be to Be tization Premium Amount
Periods Paid (7% Recorded (A) – (B) (D) – (C) ($1,500,000 + D)
× 6/12 = (6% × 6/12
3.5%) = 3%)
July 1/17 $111,587 $1,611,587

Jan. 1/18 $52,500 $48,348 $4,152 107,435 1,607,435
July 1/18 52,500 48,223 4,277 103,158 1,603,158
Jan. 1/19 52,500 48,095 4,405 98,753 1,598,753
July 1/19 52,500 47,963 4,537 94,216 1,594,216
2017
(b) July 1 Cash ................................................. 1,611,587
Bonds Payable ........................ 1,611,587
Note: Interest would also be recorded January 1, 2018 and July 1, 2018 (not
illustrated here)
2018
(c) Dec. 31 Interest Expense .............................. 48,095
Bonds Payable ................................. 4,405
Interest Payable....................... 52,500

*PROBLEM 10-10A (CONTINUED)
(d)
GLOBAL SATELLITES CORPORATION
December 31, 2018
Current liabilities
Interest payable $ 52,500
Bonds payable, due 2027 1,598,753
2019
(e) Jan. 1 Interest Payable ............................. 52,500
Cash ...................................... 52,500
(f) Key inputs: Future value (FV) = $1,500,000


($1,500,000 × 0.55368) (n = 20, i = 3%) $ 830,520
($1,500,000 × 3.5% × 14.87747) (n = 20, i = 3%) 781,067
Present value (issue price) of the bonds $1,611,587

whether present value tables, calculators, or a spreadsheet program are
used to determine the present value. When using a calculator, students
should determine the present value to be $1,611,581.
LO 3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005CM: Reporting
and Finance

PROBLEM 10-1B
(a) Jan. 5 Cash ....................................................................... 22,400

Sales ............................................................. 20,000
Sales Tax Payable [($20,000 × 5%);
+ ($20,000 × 7%)] ..................................... 2,400
Cost of Goods Sold................................................. 14,000

Inventory ........................................................ 14,000
13 Sales Tax Payable .................................................. 7,500

Cash .............................................................. 7,500
13 Sales Tax Payable .................................................. 10,500

Cash .............................................................. 10,500
14 CPP Payable ($1,905 + $1,905) ............................. 3,810

EI Payable ($666 + $932) ....................................... 1,598
Employee Income Tax Payable .............................. 7,700
Cash .............................................................. 13,108
15 Cash ....................................................................... 18,000

Bank Loan Payable ....................................... 18,000
19 Unearned Revenue ................................................. 11,200

Service Revenue ........................................... 10,000
Sales Tax Payable [($10,000 × 5%) + ($10,000 × 7%)] 1,200
Service revenue before sales tax was $11,200 ÷ 1.12 = $10,000
22 Accounts Payable ................................................... 32,000

Cash .............................................................. 32,000
28 Property Tax Expense ($4,200 ÷ 12) ...................... 350

Property Tax Payable .................................... 350

PROBLEM 10-1B (CONTINUED)
(a) (continued)
Jan. 29 Salaries Expense .................................................... 40,000

CPP Payable ................................................. 1,980
EI Payable ..................................................... 752
Employee Income Tax Payable ..................... 9,474
Cash .............................................................. 27,794
29 Employee Benefits Expense ................................... 3,033

CPP Payable ................................................. 1,980
EI Payable ..................................................... 1,053
(b) Jan. 31 Interest Expense ($18,000 × 6% × 0.5/12) ............. 45

Interest Payable ............................................. 45
(c) BURLINGTON INC.

January 31, 2018
Liabilities
Current liabilities
Accounts payable ($52,000 – $32,000) .................................................. $20,000
Bank loan payable .................................................................................. 18,000
Unearned revenue ($16,000 – $11,200) ................................................ 4,800
Employee income tax payable ($7,700 – $7,700 + $9,474) ................... 9,474
CPP payable ($3,810 – $3,810 + $1,980 + $1,980) ............................... 3,960
EI payable ($1,598 – $1,598 + $752 + $1,053) ...................................... 1,805
Sales tax payable ($18,000 + $2,400 – $7,500 – $10,500 + $1,200) ..... 3,600
Property tax payable .............................................................................. 350
Interest payable ...................................................................................... 45
Total current liabilities ....................................................................... $62,034

PROBLEM 10-2B
(a) Mar. 2 Equipment ................................................... 16,000

Bank Loan Payable ............................ 16,000
31 Notes Payable............................................. 30,000

Interest Expense ($30,000 × 5% × 6/12) .... 750
Cash................................................... 30,750
Apr. 1 Land ........................................................... 50,000

Notes Payable .................................... 50,000
May 1 Interest Expense ($50,000 × 4% × 1/12) .... 167

Cash................................................... 167
2 Cash ........................................................... 36,000

June 1 Interest Expense ($50,000 × 4% × 1/12) .... 167

Cash................................................... 167
2 Bank Loan Payable ..................................... 16,000

Interest Expense ($16,000 × 3% × 3/12) .... 120
Cash................................................... 16,120
29 Vehicles ...................................................... 10,000

Cash................................................... 1,000
30 Interest Expense ($167 + $180*) ................ 347

($50,000 × 4% × 1/12 - $167)
(*$36,000 × 3% × 2/12 = $180)


(b)
Interest Expense
Mar. 1 Bal. 0
Mar.31 750
May 1 167
June 1 167
June 2 120
June 30 347
June 30 Bal. 1,551
Interest Payable
Mar. 1 Bal. 0
June 30 347
June 30 Bal. 347
Notes Payable
Mar. 31 30,000 Mar. 1 Bal. 30,000
April 1 50,000
June 30 Bal. 50,000
Bank Loans Payable

Mar. 1 Bal. 0
Mar. 2 16,000
May 2 36,000
June 2 16,000 June 29 9,000
June 30 Bal. 45,000

(c)
SPARKY’S MOUNTAIN BIKES LTD.
Income Statement (partial)
Year Ended June 30, 2018

Interest expense ............................................................... $1,551
(d)
SPARKY’S MOUNTAIN BIKES LTD.
June 30, 2018
Current liabilities
Bank loans payable .......................................................... $45,000
Notes payable ................................................................... 50,000
Interest payable ................................................................ 347

PROBLEM 10-3B
(a) July 31 Equipment .................................................. 750,000

Bank Loan Payable .......................... 700,000
Cash ................................................ 50,000
(b) Note that instalment schedule is not required. It is included for information only.
(B)
Interest (C) (D)
Monthly (A) Expense Reduction Principal
Interest Cash (D) × 4% × of Principal Balance
Period Payment 1/12 (A) – (B) (D) – (C)
Issue Date $700,000
Aug. 31/18 $15,805 $2,333 $13,472 686,528
Sept. 30/18 15,805 2,288 13,517 673,011
Oct. 31/18 15,805 2,243 13,562 659,449
Nov. 30/18 15,805 2,198 13,607 645,842
Dec. 31/18 15,805 2,153 13,652 632,190
Jan. 31/19 15,805 2,107 13,698 618,492
Feb. 28/19 15,805 2,062 13,743 604,749
Mar. 31/19 15,805 2,016 13,789 590,960
Apr. 30/19 15,805 1,970 13,835 577,125
May 31/19 15,805 1,924 13,881 563,244
June 30/19 15,805 1,877 13,928 549,316
July 31/19 15,805 1,831 13,974 535,342
Aug. 31/19 15,805 1,784 14,021 521,321
Sept. 30/19 15,805 1,738 14,067 507,254
Aug. 31 Interest Expense ($700,000 × 4% × 1/12) .................... 2,333

Bank Loan Payable ($15,805 – $2,333) ....................... 13,472
Cash................................................................... 15,805
Sept. 30 Interest Expense

[($700,000 – $13,472) × 4% × 1/12] ............................. 2,288
Bank Loan Payable ($15,805 – $2,288) ....................... 13,517
Cash................................................................... 15,805

(c) Note that instalment schedule is not required. It is included for information only.
(B) (C)
(A) Interest Reduction (D)
Cash Expense of Principal Principal
Monthly Payment (D) × 4% × ($700,000 ÷ Balance
Interest Period (B) + (C) 1/12 48) (D) – (C)
Issue Date $700,000
Aug. 31/18 $16,916 $2,333 $14,583 685,417
Sept. 30/18 16,868 2,285 14,583 670,834
Oct. 31/18 16,819 2,236 14,583 656,251
Nov. 30/18 16,771 2,188 14,583 641,668
Dec. 31/18 16,722 2,139 14,583 627,085
Jan. 31/19 16,673 2,090 14,583 612,502
Feb. 28/19 16,625 2,042 14,583 597,919
Mar. 31/19 16,576 1,993 14,583 583,336
Apr. 30/19 16,527 1,944 14,583 568,753
May 31/19 16,479 1,896 14,583 554,170
June 30/19 16,430 1,847 14,583 539,587
July 31/19 16,382 1,799 14,583 525,004
Aug. 31/19 16,333 1,750 14,583 510,421
Sept. 30/19 16,284 1,701 14,583 495,838
Aug. 31 Interest Expense ($700,000 × 4% × 1/12) ............ 2,333

Bank Loan Payable ............................................... 14,583
Cash ($2,333 + $14,583) .......................... 16,916
Sept. 30 Interest Expense

[($700,000 – $14,583) × 4% × 1/12] ..................... 2,285
Bank Loan Payable ............................................... 14,583
Cash ......................................................... 16,868

PROBLEM 10-4B
(a)
Interest
Semi-annual Cash Expense Reduction of Principal
Dec. 31, 2017 $1,000,000
June 30, 2018 $90,000 $40,000 $50,000 0950,000
Dec. 31, 2018 088,000 38,000 50,000 0900,000
June 30, 2019 086,000 36,000 50,000 0850,000
Dec. 31, 2019 084,000 34,000 50,000 0800,000
(b) 2017
Dec. 31 Cash ....................................................... 1,000,000
Mortgage Payable .......................... 1,000,000
(c) 2018
June 30 Interest Expense ..................................... 40,000
Mortgage Payable ................................... 50,000
Cash ............................................... 90,000
Dec. 31 Interest Expense ..................................... 38,000
Mortgage Payable ................................... 50,000
Cash ............................................... 088,000
(d) BEAUMONT BUILDING SUPPLIES LIMITED

December 31, 2018
Liabilities
Current liabilities
Current portion of mortgage payable ............................... $100,000
Mortgage payable ............................................................ 800,000*
* $900,000 – $100,000 = $800,000 or see Dec. 31, 2019 balance.

PROBLEM 10-5B
(B) (C)
(A) Interest Principal (D)
Cash Expense Reduction Balance
Period Payment (D) × 8% (A) – (B) (D) – (C)
April 1, 2017 $200,000
March 31, 2018 $ 60,384 $16,000 $ 44,384 155,616
March 31, 2019 60,384 12,449 47,935 107,681
March 31, 2020 60,384 8,614 51,770 55,911
March 31, 2021 60,384 4,473 55,911 0
Total $241,536 $41,536 $200,000
(b)
April 1/17 Cash ................................................... 200,000
Loan Payable ............................... 200,000
(c)
March 31/18 Loan Payable ...................................... 44,384
Interest Expense .................................. 16,000
Cash ............................................ 60,384
March 31/19 Loan Payable ....................................... 47,935

Interest Expense .................................. 12,449
Cash ............................................ 60,384

(d) ALPINE GOLF COURSE LTD.

March 31, 2019
Liabilities
Current liabilities
Current portion of 8% loan payable $51,770
Loan payable, 8%, due in 2021
($107,681 – $51,770) 55,911
(e) Had the repayment of the loan been in fixed principal payments, the
instalment schedule would have been as follows.
(A) (B) (C)

Cash Interest Principal (D)
Payment Expense Reduction Balance
Period (B) + (C) (D) × 8% ($100,000 ÷ 4) (D) – (C)
April 1, 2017 $200,000
March 31, 2018 $ 66,000 $16,000 $ 50,000 150,000
March 31, 2019 62,000 12,000 50,000 100,000
March 31, 2020 58,000 8,000 50,000 50,000
March 31, 2021 54,000 4,000 50,000 0
Total $240,000 $40,000 $200,000
As can be seen, the total amount of the interest expense over the term of
the loan would be slightly lower as the fixed principal payments earlier in
the term of the loan are larger than with the blended payments
demonstrated in (a) above.

PROBLEM 10-6B
(a) 1. Current liabilities Property tax payable $ 4,000

($12,000 × 4/12)
2. Current liabilities Interest payable 150
($30,000 × 6% × 1/12)
Bank loan payable 30,000
($35,000 – $5,000)
3. Current liabilities Accounts payable 7,000
4. Current liabilities Sales tax payable 750
($15,000 × 5%)
5. Current liabilities Unearned revenue 25,000
6. Current liabilities Salaries payable 4,257
[($40,000 × 1/5 days) – $393
– $150 – $3,200]
CPP payable 786
($393 + employer share $393)
EI payable 360
[$150 + employer share $210 (1.4 × $150)]
7. Not a liability
(contingent liability) Not reported on statement of financial
position. Disclosed only in the notes to the
financial statements

‘(a) (continued)
8. Current liabilities Income tax payable ($95,000 - $80,000) 15,000
9. Current liabilities Debt due within one year 15,000
Non-current liabilities Non-current liabilities 135,000
($150,000 – $15,000)
10. Not a liability Since the operating line of credit has not yet
been drawn on, it would be disclosed only in
the notes to the financial statements [see (b)]
and not recorded.
(b) The notes should disclose information on the bank loan payable,
including the interest rate and repayment terms. The notes should also
disclose pertinent details regarding the environmental lawsuit, including
management’s assessment of the likely outcome. Details of Iqaluit’s
non-current debt should be disclosed including interest rates, maturity
dates, conversion privileges, and any assets pledged as collateral.
Details of the operating line of credit terms and maximum balance should
be disclosed in the notes to the financial statements even though no
funds have yet been drawn.
LO 1,3 BT: K Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10-7B
(a)
(in USD millions) 2015 2014
1. Current ratio $2,707 $3,215

= 1.1:1 = 1.2:1
$2,415 $2,663
2. Receivables $34,530 $37,962

turnover = 23.6 times = 22.7 times
$1,195 + $1,726 $1,726 + $1,616
2 2
3. Inventory $29,262 $32,974

turnover = 34.3 times = 38.9 times
$860 + $848 $848 + $846
2 2
4. Debt to total $6,931 $6,568

= 64.0% = 62.3%
assets $10,838 $10,545
5. Times interest $933 + $306 + $92 $812 + $134 + $111

earned $92 $111
(b) During the year Couche-Tard’s liquidity has deteriorated slightly. It has a
lower current ratio (1.1:1 in 2015 compared to 1.2:1 in 2014). The
company’s receivables are being collected slightly more quickly as
evidenced by the receivables turnover ratio which increased from 22.7
times in 2014 to 23.6 times in 2015. In addition, the inventory turnover ratio
deteriorated from 38.9 times in 2014 to 34.6 times in 2015 indicating that
inventory is not selling as quickly as it did in the prior year. When compared
to the industry average, Couche-Tard has a much lower current ratio and
receivables turnover ratio, but its inventory turnover ratio is significantly
ahead of the industry average.

(b) (continued)
In 2015, the company’s solvency deteriorated slightly because the debt to

total assets ratio increased from 62.5% in 2014 to 64.0% in 2015. This ratio
remains significantly higher (worse) than other companies in the industry
as the industry average is only 44%. Couche-Tard showed a strong times
interest earned ratio of 14.5 times in 2015 which is well ahead of its industry
peers for that year. We can therefore conclude that although this company
has taken on more debt, it is using those borrowed funds to increase
profitability and in turn, the times interest earned ratio.
(c) A bank would be willing to provide a line of credit to a company if it believed

that the company had sufficient income to pay the interest on the line of
credit. In this case, with an increasing times interest earned ratio,
Alimentation Couche-Tard would likely have no problem getting a bank to
offer such a form of financing. A line of credit helps the business through
short-term liquidity problems during its operating cycle. The fact that none
of the $3 billion line of credit has been used Couche-Tard by as of the end
of 2015 demonstrates that it is not in great need of cash to meet its
obligations. The company is ready to take advantage of opportunities that
may come up in the future that would require significant amounts of cash.
The bank understands the purpose of the line of credit and expects it to be
used for short periods of time and for the purposes described above.
Should the line of credit be used for immediate large transactions, those
transactions can later be refinanced with more permanent type financing,
either by issuing bonds, shares, or by borrowing using term loans with the
bank.


PROBLEM 10-8B
(a) When reviewing the liquidity ratios for the two companies, we can see that
the current ratios are similar although slightly lower than the industry
average. The receivables turnover ratio shows that Grab ’N Gab is turning
its receivables over faster than Chick ’N Lick, which indicates that the
company is able to convert sales to cash more quickly. However, Chick ’N
Lick is moving its inventory faster than Grab ’N Gab, as indicated by the
inventory turnover ratio. I would be more likely to lend money to Chick ‘N
Lick because of its higher inventory turnover. In a fast food industry,
inventory turnover is the most important ratio. This is especially true when
you note that a receivables turnover ratio of 38 times (365 ÷ 38 = 10 days)
is still excellent, even if it is lower than that of its competition. Fast food
businesses are, after all, primarily cash businesses.
(b) In reviewing the solvency of these two companies, we see that Chick ’N
Lick’s debt to total assets ratio is the better of the two companies. However,
although Grab ’N Gab has a higher debt to total assets ratio, its higher
times interest earned ratio of 10 times indicates that the company is able
to support this level of debt. Chick ’N Lick’s times interest earned ratio is
significantly lower than Grab ’N Gab’s and somewhat lower than the
industry average. Nonetheless, the company does not appear to be having
solvency problems as it is carrying less debt and still has reasonable
interest coverage. Based on this analysis, I would not be significantly
concerned about the solvency of either business.


*PROBLEM 10-9B
(a) Delta Limited – issued at par or 100 with coupon rate 5%:
2018
Jan. 1 Cash ...................................................... 200,000
Bonds Payable .............................. 200,000
(b)
Dec. 31 Interest Expense ($200,000 × 5%) ......... 10,000
Cash .............................................. 10,000
(a) Founders Corp. – issued at a discount price 94 with coupon rate 3%:
2018
Jan. 1 Cash ($200,000 × .94)............................ 188,000
Bonds Payable .............................. 188,000
(b)
Bonds Payable ($9,400 – $6,000) . 3,400
Cash ($200,000 × 3%)................... 6,000
(a) Grand Inc. – issued at a premium price 108 with coupon rate 7%:
2018
Jan. 1 Cash ($200,000 × 1.08) .......................... 216,000
Bonds Payable .............................. 216,000
(b)
Bonds Payable ($14,000 – $10,800) ...... 3,200
Cash ($200,000 × 7%)................... 14,000

*PROBLEM 10-9B (CONTINUED)
(c) As seen in parts (a) and (b), Delta is the only company that issued bonds
at par. This occurred because its coupon rate matched the market rate of
interest, both at 5% and therefore, the interest expense it records is equal
to the interest paid. In the case of Founders, since its coupon rate of 3%
allows it to pay less interest than the market rate of interest, it must issue
the bond at a discount and receive less than the face value of the bond at
the date of issuance. The discount is the mechanism that the investor uses
to obtain a return on the bond equal to the market interest rate. The
difference between the $188,000 Founders received and the $200,000 that
will be paid at the maturity of the bond will be allocated to interest expense
over the term of the bond. This will make the interest expense greater than
the amount of interest paid. In the case of Grand, since its coupon rate of
7% forces it to pay more interest than the market rate of interest, it will
issue the bond at a premium and receive more than the face value of the
bond at the date of issuance. The difference between the $216,000 Grand
received and the $200,000 that will be paid at the maturity of the bond will
be allocated to interest expense over the term of the bond and reduce the
expense. This will make the interest expense less than the amount of
interest paid.
(d) Balance in Bonds Payable account December 31, 2018:

Delta Limited:
No premium or discount Dec. 31, 2018 $200,000
Founders Corp:
Plus amortization of bond discount 3,400
Balance Dec. 31, 2018 $191,400
Grand Inc.:
Less amortization of bond premium 3,200
Balance Dec. 31, 2018 $212,800

*PROBLEM 10-10B
(a) PONASIS CORPORATION

Bond Discount Amortization
(A) (B) (E)

Semi- (C) (D)
Interest to Be Interest Bond
annual Discount Unamortized
Paid Expense Carrying
Interest Amortization Discount
(6% × 6/12 = (7% × 6/12 Amount
Periods (A) – (B) (D) – (C)
3%) = 3.5%) ($1,000,000 – D)
July 1/17 $71,058 $928,942

Jan.1/18 $30,000 $32,513 $2,513 68,545 931,455
July 1/18 30,000 32,601 2,601 65,944 934,056
Jan.1/19 30,000 32,692 2,692 63,252 936,748
(b) 2017
July 1 Cash .............................................. 928,942
Bonds Payable ...................... 928,942
Note: Interest would also be recorded December 31, 2017 and July 1, 2018
(not illustrated here)
2018
(c) Dec. 31 Interest Expense ............................ 32,692
Bonds Payable ...................... 2,692
Interest Payable..................... 30,000

*PROBLEM 10-10B (CONTINUED)
(d)
PONASIS CORPORATION
December 31, 2018
Liabilities
Current liabilities
Interest payable ....................................................... $ 30,000
Bonds payable, due 2027 ....................................... 936,748
Total liabilities ................................................. $966,748
2019
(e) Jan. 1 Interest Payable ........................ 30,000
Cash ................................. 30,000
(f) Key inputs: Future value (FV) = $1,000,000


($1,000,000 × 0.50257) (n = 20, i = 3.5%) $502,570
($1,000,000 × 3% × 14.21240) (n = 20, i = 3.5%) 426,372

whether present value tables, calculators, or a spreadsheet programs are
used to determine the present value. When using a calculator, students
should determine the amount to be $928,938.
LO 4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


ACR10-1 ACCOUNTING CYCLE REVIEW

(a) and (c)
Cash Accumulated Depreciation-Equipment

Dec. 31 80,000 #1 12,000 Dec. 31 480,000
#9 780,000 #3 24,000 #4 44,000
#5 92,000 Bal. 524,000
#6 218,548
#7 9,000 Accounts Payable
#13 350,000 Dec. 31 321,000
#16 4,000 #13 350,000 #12 250,000
Bal. 150,452 #12 49,000
Bal. 270,000
Accounts Receivable
Dec. 31 480,000 #9 780,000
Interest Payable
#8 745,000 #10 16,000
#1 4,000 Dec. 31 4,000
Bal. 429,000 #2 3,973
Bal. 3,973
Allowance for Doubtful Accounts
Dec. 31 24,000
Employee Income Tax Payable
#10 16,000 #11 22,000
#5 52,000 Dec. 31 52,000
Bal. 30,000
#6 52,000
Inventory Bal. 52,000
Dec. 31 356,000 #8 270,000
#12 250,000 #15 1,250 CPP Payable
Bal. 334,750 #5 28,000 Dec. 31 28,000
#6 14,000
Prepaid Insurance #6 14,000
Dec. 31 0 Bal. 28,000
#3 24,000 # 3 2,000
Bal. 22,000 EI Payable
#5 12,000 Dec. 31 12,000
Equipment
#6 5,452
Dec. 31 1,800,000
#6 7,633
Bal. 13,085
ACR10-1 (CONTINUED)
(a) and (c) (continued)
Provisions

Dec. 31 35,000
#14 20,000 Cost of Goods Sold
Bal. 55,000 #8 270,000
#15 1,250
Unearned Revenue Bal. 271,250
#15 5,000 Dec. 31 12,000
Bal. 7,000 Administrative Expenses
#12 49,000
#14 20,000
Bank Loan Payable Bal. 69,000
#1 8,000 Dec. 31 1,200,000
Bal. 1,192,000 Salaries Expense
#6 290,000
Common Shares
Dec. 31 60,000 Employee Benefits Expense
#6 21,633
Retained Earnings
Dec. 31 488,000 Insurance Expense
#3 2,000
Dividends Declared
#16 4,000 Depreciation Expense
#4 44,000
Sales
#8 745,000 Bad Debts Expense
#15 5,000 #11 22,000
Bal. 750,000
Interest Expense
#2 3,973
Income Tax Expense

#7 9,000

ACR10-1 (CONTINUED)
(b) Transactions:
Item Account Titles Debit Credit
1 Interest Payable ........................................................ 4,000*

Bank Loan Payable ................................................... 8,000
Cash ................................................................. 12,000
*(1,200,000 x .04 x 1/12 = 4,000)
3 Prepaid Insurance ..................................................... 24,000

Cash ................................................................. 24,000
5 CPP Payable ............................................................. 28,000

EI Payable ................................................................. 12,000
Employee Income Tax Payable ................................ 52,000
Cash ................................................................. 92,000
6 Salaries Expense ...................................................... 290,000

CPP Payable .................................................... 14,000
EI Payable ........................................................ 5,452
Employee Income Tax Payable........................ 52,000
Cash ................................................................. 218,548
Employee Benefits Expense ..................................... 21,633

CPP Payable .................................................... 14,000
EI Payable ........................................................ 7,633
7 Income Tax Expense ................................................ 9,000

Cash ................................................................. 9,000
8 Accounts Receivable................................................. 745,000

Sales ................................................................ 745,000
Cost of Goods Sold ................................................... 270,000

Inventory .......................................................... 270,000

ACR10-1 (CONTINUED)
(a) and (c) (continued)
Transactions:
Item Account Titles Debit Credit
9 Cash ......................................................................... 780,000

Accounts Receivable........................................ 780,000
10 Allowance for Doubtful Accounts .............................. 16,000

Accounts Receivable........................................ 16,000
11 Bad Debts Expense .................................................. 22,000

Allowance for Doubtful Accounts...................... 22,000
[$30,000 - ($24,000 – $16,000)]
12 Inventory ................................................................... 250,000

Accounts Payable ............................................ 250,000
Administrative Expenses ........................................... 49,000

Accounts Payable ............................................ 49,000
13 Accounts Payable ..................................................... 350,000

Cash ................................................................. 350,000
16 Dividends Declared ................................................... 4,000

Cash ................................................................. 4,000

ACR10-1 (CONTINUED)
Adjusting Entries
2 Interest Expense ....................................................... 3,973

Interest Payable ............................................... 3,973
($1,200,000- $8,000) x 4% x 1/12
3 Insurance Expense ($24,000 ÷ 12) ........................... 2,000

Prepaid Insurance ............................................ 2,000
4 Depreciation Expense ............................................... 44,000

Accumulated Depreciation—Equipment .......... 44,000
($1,800,000 - $480,000 x 40% x 1/12
14 Administrative Expenses ........................................... 20,000

Provisions......................................................... 20,000
15 Unearned Revenue ($12,000 - $7,000)..................... 5,000

Sales ................................................................ 5,000
Cost of Goods Sold ($5,000 x 25%) .......................... 1,250

Inventory .......................................................... 1,250

ACR10-1 (CONTINUED)
(d)
WASCANA LTD.
Adjusted Trial Balance
January 31, 2018
Cash $150,452
Accounts receivable 429,000
Allowance for doubtful accounts $30,000
Inventory 334,750
Prepaid insurance 22,000
Equipment 1,800,000
Accumulated depreciation–equipment 524,000
Accounts payable 270,000
Interest payable 3,973
CPP payable 28,000
EI payable 13,085
Provisions 55,000
Unearned revenue 7,000
Bank loan payable 1,192,000
Common shares 60,000
Retained earnings 488,000
Dividends declared 4,000
Sales 750,000
Cost of goods sold 271,250
Administrative expenses 69,000
Salaries expense 290,000
Employee benefits expense 21,633
Insurance expense 2,000
Depreciation expense 44,000
Bad debts expense 22,000
Interest expense 3,973
Income tax expense 9,000 ____ ____
$3,473,058 $3,473,058

ACR10-1 (CONTINUED)
(e) (1)
WASCANA LTD.
Income Statement
Month Ended January 31, 2018
Sales ......................................................................... $750,000

Cost of goods sold ...................................................... 271,250
Gross profit ................................................................ 478,750
Operating expenses
Administrative expenses .................................... $ 69,000
Salaries expense ............................................... 290,000
Employee benefits expense ............................... 21,633
Insurance expense ............................................ 2,000
Depreciation expense ........................................ 44,000
Bad debts expense ............................................ 22,000 448,633
Income from operations .............................................. 30,117
Interest expense ................................................ 3,973
Income before income tax .......................................... 26,144
Income tax expense ................................................... 9,000
Net income ................................................................. $17,144
(e) (2)
WASCANA LTD.
Statement of Changes in Equity
Month Ended January 31, 2018
Common Retained Total

Shares Earnings Equity
Balance, January 1, 2017 ................... $
$60,000 $488,000 548,000
Net income .......................................... 17,144 17,144
Dividends declared ............................. 00 000 (4,000) (4,000)
Balance, January 31, 2017 ................. $60,000 $501,144 $561,144

ACR10-1 (CONTINUED)
(e) (3) WASCANA LTD.
Statement of Financial Position
January 31, 2018
Assets
Current assets
Cash ................................................................... $150,452
Accounts receivable............................................ $429,000
Less: allowance for doubtful accounts ................ 30,000 399,000
Inventory ............................................................. 334,750
Prepaid insurance ............................................... 22,000
Total current assets ................................... 906,202
Property, plant, and equipment
Equipment .......................................................... $1,800,000
Less: Accumulated depreciation—equipment.... 524,000 1,276,000
Total assets .................................................................. $2,182,202
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .......................................................... $ 270,000
Employee taxes payable................................................ 52,000
CPP payable .................................................................. 28,000
EI payable...................................................................... 13,085
Provisions ...................................................................... 55,000
Interest payable ............................................................. 3,973
Unearned revenue ......................................................... 7,000
Current portion of bank loan payable ............................. 96,000
Total current liabilities ........................................... 525,05
Bank loan payable ......................................................... 1,096,000
Total liabilities ....................................................... 1,621,058
Shareholders’ equity
Common shares ............................................................ 60,000
Retained earnings.......................................................... 501,144
Total shareholders’ equity ..................................... 561,144
Total liabilities and shareholders’ equity ................................. $2,182,202
LO 1,3 BT: AP Difficulty: C Time: 75 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT10-1 FINANCIAL REPORTING CASE

(a) The North West Company Inc. shows the following current and non-current
liabilities on its consolidated balance sheet at January 31, 2016:
Current liabilities:
Accounts payable and accrued liabilities
Current portion of long-term debt (for previous comparative year only)
Income tax payable
Non-current liabilities:
Long-term debt
Deferred benefit plan obligation
Deferred tax liabilities
Other long-term liabilities
(b) There is no current portion for long-term debt at January 31, 2006.
The most significant component of the long-term debt balances are
revolving loan facilities.
(c) North West has chosen both fixed and floating interest rates when
negotiating terms for their long-term senior notes payable. A floating rate
loan will initially pay less interest, but as the prime lending rate changes so
does the amount of interest that is charged on the balance owed on the
notes. Since the senior notes repayment is typically several years in length,
this changing of interest rate reduces the risk to the financial institution to
get a proper return on their loan to North West. With the fixed interest rate,
the initial interest rate paid is higher, but the rate does not change over the
term of the loan. Using this strategy, North West has protected itself to some
degree against the effects of changing interest rates.
LO 3 BT: AN Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

CT10-2 FINANCIAL REPORTING CASE

(a)
Ratios North West ($ in thousands) Sobeys ($ in millions)
1. Current ratio $335,581 $2,581.4

= 2.2:1 = 1.0:1
$155,501 $2,707.4
2. Receivables $1,796,035 $24,618.8

turnover $79,373 + $72,506 $489.4 + $499.7
2 2
3. Inventory $1,273,421 $18,661.2

turnover $211,736 + $204,812 $1,287.3 + $1,260.3
2 2
4. Debt to $436,183 $5,230.9

= 54.9% = 65.7%
total assets $793,795 $7,960.6
5. Times $69,779 + $31,332 + $(2,119.2) + $(463.4)

interest $6,210 + $134.6 Not
= 17.3 times =
earned Applicable
$6,210 $134.6

CT10-2 (CONTINUED)
(b) Liquidity:
Based on the current ratio, North West is more liquid than Sobeys.
As for receivable and inventory turnovers, Sobey’s is far ahead of North
West. North West must be offering terms on some of their sales, which is
not the case for Sobeys. This may in part be due to higher amounts of
accounts receivable for North West as indicated by its lower receivables
turnover. On the other hand, North West’s inventory turnover is much lower
than Sobeys. Compared to the industry average, North West has a higher
current ratio while Sobeys is lower than the industry average. The opposite
is true for both the receivables turnover and inventory turnover ratios,
where Sobey’s ratios are higher than the industry while North West’s are
lower. All of the ratios are important for the assessment.
Solvency:
The higher a company’s percentage of debt to total assets is, the greater
the risk that this company may be unable to meet its maturing obligations.
North West’s debt to total assets ratio of 54.9% is higher (worse) than that
of the industry average of 47.1%, but Sobey’s is even higher at 65.7%.
North West has a times interest earned ratio that is much higher than the
industry average which means that the company is very able to make its
interest payments. Sobeys on the other hand, has a negative (not
measureable) ratio due to the loss it reported. Both ratios are important,
but the high level of Sobey’s debt is most alarming.
LO 3 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005

CT10-3 FINANCIAL ANALYSIS CASE

Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a)
Current Assets: 2018 2017 Average

Cash $ 2,000 $10,000 $6,000
Accounts receivable 20,000 5,000 12,500
Inventory 30,000 7,500 18,750
52,000 22,500 37,250
Property, plant and equipment, net 60,000 50,000

Total assets $112,000 $72,500
Current liabilities:
Accounts payable $ 30,930 $16,550
Non-current liabilities 40,000 30,000
Total liabilities $ 70,930 $46,550
Income before taxes and interest $24,000 (1) $20,000 (2)

(1) $100,000 – $50,000 – $26,000
(2) $50,000 – $20,000 – $10,000

CT10-3 (CONTINUED)
(a) (continued)
Please note that when calculating turnover ratios, amounts from the current year
statement of financial position are used as given in the instructions.
in thousands 2018 2017
1. Current ratio $52,000 $22,500

= 1.7:1 = 1.4:1
$30,930 $16,550
2. Receivables $100,000 = 5.0 times $50,000 = 10.0 times

turnover $20,000 $5,000
3. Inventory $50,000 $20,000

turnover $30,000 $7,500
4. Debt to $70,930 $46,550

= 63.3% = 64.2%
total assets $112,000 $72,500
5. Times
interest $24,000 = 10.0 times $20,000 = 13.3 times
earned $2,400 $1,500
(b) Although Jim might conclude that profitability and liquidity has improved, a
closer scrutiny of all ratios reveals issues with the liquidity and solvency of
Atlas Limited. The current ratio has increased from 1.4:1 to 1.7:1 in 2018
but this was due to the high levels of accounts receivable and inventory.
The receivables turnover has deteriorated substantially from 10 times in
2017 to only 5 times in 2018. The inventory turnover has also deteriorated,
from 2.7 times to 1.7 times. Atlas needs to improve its collection of
receivables and its inventory turnover. Furthermore, Jim needs to keep in
mind that some cash has been retained by negotiating an interest-only loan
that will end in 2020. This advantage will not continue forever.

CT10-3 (CONTINUED)
(b) (continued)
From a solvency point of view, Atlas has a very similar debt to total assets
ratio in both years but the ratio remains rather high given that more than
60% of the company’s assets have been purchased with debt financing. In
addition, Atlas’ times interest earned ratio had diminished from 13.3 times
in 2017 to 10 times in 2018, indicating a strong, but reduced, capability to
pay the interest on the loan. Furthermore, it is likely that the existing loan
is secured by the plant and equipment. The loan now represents 67% of
the plant and equipment balance, up from 60% of the year before. This
increase arises because the carrying value of plant and equipment is
declining.
(c) Some of the underlying causes for the slowdown in the turnover of
accounts receivable might be that Atlas has given its customers too
generous terms for payment, possibly to improve sales or there has been
a lack of attention paid to delinquent accounts.
In looking at the income statement, the banker will notice that gross profit
did not rise as much as sales. This is due in part to the fact that cost of
goods sold is now 50% of sales in 2018 compared to 40% of sales in 2017.
Also, although sales have doubled, operating expenses more than doubled
and lastly, it appears that the interest rate on the loan has risen to 6% from
5%. These factors that have decreased profitability will concern the banker.
A final area of concern for the banker will be the future settlement of the
contingent liability stemming from the lawsuit launched against Atlas.
Although no amount could be accrued for this contingency as no
reasonable estimate could be arrived at, the mere mention of this looming
potential obligation will rightly bring doubt as to Atlas’ ability to deal with
any related payments in the near future.
LO 3 BT: S Difficulty: C Time: 40 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005


(a) The likely explanation why shareholders’ equity increased in spite of a loss
incurred during the year is the issuance of shares.
(b) Before the issuance of shares, debt was used to finance the expansion.
Once shares were issued, the cash was used in part to retire debt.
(c) When a company expands through the use of debt, interest is charged on
that debt. It is therefore critical for such a company to earn sufficient income
from the projects that were financed with this debt in order to pay the
interest on this debt. However, when oil prices began to fall, the company
realized that it would be difficult to pay interest on its loans, so to decrease
that burden on the company’s cash flows, it needed to pay down its debt
quickly in order to reduce interest payments. The best way to do that was
to issue shares to obtain cash to pay down that debt.
(d) It would have been difficult for Baytex to be successful in issuing additional
shares after the downturn in the oil prices. It is more likely that the issue
occurred before the downturn. Following the drop in oil prices and related
losses, the stock would have dropped in value as shareholders exited their
investment in Baytex.
LO 3 BT: S Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


(a)
1. Debt to $45,000
= 45%
total assets $100,000
2. Times Interest $120,000

earned = 6 times
$20,000
(b)
Error Error description Accounts affected Direction Amount
1. Interest not accrued Interest Expense Understated $2,500

Interest Payable Understated 2,500
2. Posting of interest Interest Expense Understated 1,800

payment Bank Loan Payable Understated 1,800
3. Sale of gift cards Sales Overstated 2,700

Unearned Revenue Understated 2,700
(c) Effect of error on income before taxes (net)

Overstatement of Sales $2,700
Understatement of Interest Expense 2,500
Understatement of Interest Expense 1,800
Total overstatement of income before taxes 7,000
Income taxes at 30% 2,100
Net income effect $(4,900)
Income Tax Expense overstated by 2,100

Income Tax Payable overstated by 2,100

CT10-5 (CONTINUED)
(d) All of the errors identified above will affect the calculation of debt but none
of the errors affect assets. Therefore, the revised debt is:
As originally determined $45,000

Correct error #1 – interest not accrued 2,500
Correct error #2 – loan payment not allocated to interest 1,800
Correct error #3 – unearned revenue understated 2,700
Correct error #4 – overstatement of income tax (2,100)
Corrected balance $49,900
Only error #3 will affect the numerator (net income before interest and
income tax) of the times interest earned ratio because this ratio excludes
interest and income tax from the numerator and errors #1, #2, and #4 affect
interest or income tax. Therefore, the revised numerator is $120,000 – the
effect of error #3 of $2,700 = $117,300.
Interest expense (the denominator in the times interest earned ratio) will
be revised as follows:
As originally determined $20,000

Correct error #1 – interest not accrued 2,500
Correct error #2 – loan payment not allocated to interest 1,800
Corrected balance $24,300
1. Debt to $49,900
= 49.9%
total assets $100,000
2. Times Interest $120,000 - $2,700

earned = 4.8 times
$20,000 + $2,500 + $1,800
(e) Based on the revised calculations, ABC is close to breaching the covenant
pertaining to debt to total assets, and below the requirement for times
interest earned.

CT10-5 (CONTINUED)
(f) Although all the errors affected the elements in the two ratios in adverse
ways, it is unlikely that the errors were intentional. An indication of this
conclusion is that the errors were soon detected by Jennifer Woo.
LO 3 BT: S Difficulty: C Time: 10 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005

CT10-6 ETHICS CASE

(a) The stakeholders in this situation include:
Shareholders
The bank and other creditors
Employees
Management
(b) Currently, operating lease payments are treated as rent expense. The
details of the amount of the future payments under the lease contract are
reported in the notes to the financial statements. On the other hand, a
finance lease is treated as a means of financing the acquisition of the asset
and so the asset being leased is added to the assets and the total
obligations under the lease appear in the liabilities section of the statement
of financial position. Payments on finance lease obligations are treated as
part interest expense and part debt repayment. A finance lease causes
increased interest expense and debt on the financial statements and so
the debt to total assets ratio and the times interest earned ratio are
adversely affected.
(c) There are many ways to structure a lease so that it is accounted for as an
operating lease. Many of these ways are legitimate while other ways can
be unethical. For example, if a lease is structured to last for 360 days, it will
most likely be accounted for as an operating lease and doing so is
completely appropriate. If an option exists in the lease agreement for the
lessee to purchase the asset at the end of the lease at a “bargain price, the
lease should not be accounted for as an operating lease. But if
management has negotiated such an option in a document separate from
the lease agreement but claims that such an option does not exist thereby
allowing the company to account for the lease as an operating lease, this
would be unethical. Such behaviour could be construed as a type of
financial engineering which is designed to deceive others and remove
obligations that occur as a result of a transaction. In this case, management
must meet some specific financial conditions with respect to its debt
covenants with the bank. Following through with the plan might put the
bank at a disadvantage in obtaining recourse under its loan agreement with
Crown Point Inc.

CT10-6 (CONTINUED)
(d) Analysts are not fooled by financial engineering involving leases.

Notwithstanding the application of the current rules surrounding the
capitalization of leases, analysts will make the necessary adjustments to
the financial results to interpret the impact of the treatment of operating
versus finance leases.
LO 3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics

CT10-7 SERIAL CASE

(a) The balance of the mortgage payable at November 25, 2018 is $46,718 as
calculated below.
(B)
Interest (C) (D)
(A) Expense Reduction Principal
Monthly Cash (D) × 5% of Principal Balance
Interest Period Payment × 1/12 (A) – (B) (D) – (C)
June 25, 2018 Balance $49,050
July 25, 2018 $667 $204 $463 48,587
Aug. 25, 2018 667 202 465 48,122
Sept. 25, 2018 667 201 466 47,656
Oct. 25, 2018 667 199 468 47,188
Nov. 25, 2018 667 197 470 46,718
(b) The $46,718 balance of the mortgage payable at November 25, 2018 will
increase by $25,000 to a total of $71,718 after the mortgage is
renegotiated.
Nov. 25, 2018 Cash..................................................... 25,000

Mortgage Payable ........................ 25,000

CT10-7 (CONTINUED)
(c)
(B)
Interest (C) (D)
(A) Expense Reduction Principal
Monthly Cash (D) × 4% of Principal Balance
Interest Period Payment × 1/12 (A) – (B) (D) – (C)
Nov. 25, 2018 Balance $71,718

Dec. 25, 2018 $1,320 $239 $1,081 70,637
Jan. 25, 2019 1,320 235 1,085 69,552
Feb. 25, 2019 1,320 232 1,088 68,464
Mar. 25, 2019 1,320 228 1,092 67,372
Apr. 25, 2019 1,320 225 1,095 66,277
May 25, 2019 1,320 221 1,099 65,178
June 25, 2019 1,320 217 1,103 64,075
July 25, 2019 1,320 214 1,106 62,969
Aug. 25, 2019 1,320 210 1,110 61,859
Sept. 25, 2019 1,320 206 1,114 60,745
Oct. 25, 2019 1,320 202 1,118 59,627
Nov. 25, 2019 1,320 199 1,121 58,506
Dec. 25, 2019 1,320 195 1,125 57,381
Jan. 25, 2020 1,320 191 1,129 56,252
Feb. 25, 2020 1,320 188 1,132 55,120
Mar. 25, 2020 1,320 184 1,136 53,984
Apr. 25, 2020 1,320 180 1,140 52,844
May 25, 2020 1,320 176 1,144 51,700
June 25, 2020 1,320 172 1,148 50,552

CT10-7 (CONTINUED)
(d)
2018 Dec. 25 Interest Expense ................................................... 239

Mortgage Payable....................................... 1,081
Cash ................................................. 1,320
2019 Jan. 25 Interest Expense ................................................... 235

Mortgage Payable....................................... 1,085
Cash ................................................. 1,320
(e) ANTHONY BUSINESS COMPANY LTD.

June 30, 2019
Liabilities
Current liabilities
Current portion of 4% mortgage payable $13,523
($64,075 – $50,552)
Mortgage payable, 4%, due in 2023 50,552
Total liabilities 64,075
LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic and Communication CPA: cpa-t001
CM: Reporting

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVI xi FI)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 10-1 Chapter 10

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual 10-2 Chapter 10

A note payable involves a more formal arrangement than an account

2. An operating line of credit, or credit facility, is used by a business to

Solutions Manual 10-3 Chapter 10

5. When determining whether an uncertain liability should be accrued as a

Solutions Manual 10-4 Chapter 10

If the liability is recorded it is referred to as a, contingent liability and there

For both types of notes, interest expense is calculated by multiplying the

Solutions Manual 10-5 Chapter 10

An instalment note with a blended principal and interest payment is

LO 2 BT: C Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

Solutions Manual 10-6 Chapter 10

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

11. (a) Current liabilities should be presented in the statement of financial

Solutions Manual 10-7 Chapter 10

13. An operating line of credit, or credit facility, is used by a business to

Solutions Manual 10-8 Chapter 10

(b) When it comes to large sums of money, a business would consider

Solutions Manual 10-9 Chapter 10

Solutions Manual 10-10 Chapter 10

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

BRIEF EXERCISE 10-2

Solutions Manual 10-11 Chapter 10

BRIEF EXERCISE 10-3

(b) Aug. 24 Employee Benefits Expense ................................... 1,138

(c) Sept. 3 Employee Income Tax Payable .............................. 6,258

BRIEF EXERCISE 10-4

(2) Aug. 31 Interest Expense .................................................... 250

(c) Oct. 1 Bank Loan Payable ................................................ 60,000

Solutions Manual 10-12 Chapter 10

BRIEF EXERCISE 10-5

BRIEF EXERCISE 10-6

b) Students generally have limited income upon graduation and so the

Solutions Manual 10-13 Chapter 10

BRIEF EXERCISE 10-7

(a) [1] $50,000 × 7% = $3,500

Solutions Manual 10-14 Chapter 10

BRIEF EXERCISE 10-8

Solutions Manual 10-15 Chapter 10

BRIEF EXERCISE 10-9

Dec. 31 Interest Expense ....................................................... 1,000

Solutions Manual 10-16 Chapter 10

BRIEF EXERCISE 10-9 (CONTINUED)

Dec. 31 Interest Expense ................................................ 1,000

Solutions Manual 10-17 Chapter 10

BRIEF EXERCISE 10-10

BRIEF EXERCISE 10-11

(a) Current ratio

(b) Debt to total $1,014

$76 + $19 + $28

Solutions Manual 10-18 Chapter 10

BRIEF EXERCISE 10-12

(a) Debt to total assets Improvement

LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

*BRIEF EXERCISE 10-13

Solutions Manual 10-19 Chapter 10

*BRIEF EXERCISE 10-14

Solutions Manual 10-20 Chapter 10