SM 10

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth 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 C 6. 1 C 11. 2 K 16. 3 K 21. 4 C
2. 1 C 7. 1 C 12. 2 C 17. 3 C 22. 4 C
3. 1 C 8. 2 C 13. 2 C 18. 3 C 23. 4 C
4. 1 C 9. 2 C 14. 2 K 19. 3 C
5. 1 C 10. 2 C 15. 2 K 20. 4 K
Brief Exercises
1. 1 AP 5. 1 AN 9. 2 AP 13. 4 AP 17. 4 AP
2. 1 AP 6. 2 AP 10. 3 K 14. 4 AP
3. 1 AP 7. 2 AP 11. 3 AP 15. 4 AP
4. 1 AN 8. 2 AP 12. 3 AN 16. 4 AP
Exercises
1. 1 AN 4. 2 AP 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 C 6. 2 AP 9. 3 AN 12. 4 AP 15. 4 AP
Problems: Set A and B
1. 1,2,3 AP 4. 2,3 AP 7. 3 AN 10. 3,4 AP
2. 1,2,3 AP 5. 2,3 AP 8. 3 AN 11. 4 AP
3. 2 AP 6. 1,2,3 K 9. 4 AP
Accounting Cycle Review
1. 1,2,3 AP
Cases
1. 1,2,3 AN 3. 3 AN 5. 1,2,3 S 7. 1,2 AP
2. 3 AN 4. 3 S 6. 1,2,3 AN
Solutions Manual 10-1 Chapter 10

Copyright © 2020 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. 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.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. 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.
3. Deferred revenue should be recognized when sales of season’s ticket packages are
made to customers. When the team plays one of its games, the deferred revenue
is reduced and the service revenue increased whether or not the customer has
used his or her ticket for the game.
4. The three most common and mandatory deductions withheld from employee
paycheques are: Employee income taxes, CPP and EI.
5. Companies are required by law to contribute to the CPP and EI programs.

Contributions for CPP must be matched by the employer and EI contributions
must be 1.4 times that withheld from an employee’s paycheque.

6. 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. 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
as a contingent liability.
LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7. A grocer such as Sobeys can use the details of sales information obtained from
customer loyalty programs to build personalized profiles of customers. These
profiles include product preferences, shopping patterns, purchase habits and store
location visited. Once the information is gathered Sobeys can entice customers to
shop more often or for specific products by delivering personalized flyers to its
customers. Additional sales will improve cash flows from operating activities.
LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8. 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 short-term 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.
9. Short-term notes payable and short-term notes receivable are similar in that the
accounting for them is similar, although they are opposite to one another. Both
are classified as current on the statement of financial position. Where the two
differ is in the treatment of the interest that accrues on the notes. Short-term

notes payable generate interest expense and short-term notes receivable generate
interest income.
10. 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.
11. Bank loans requiring equal instalment payments 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 debt is that instalment bank
loans have maturities that extend beyond one year and have principal repayments
included in the periodic payments required by the loan.
For both types of debt, 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 an
instalment bank loan, the outstanding principal balance will change (decrease).
In contrast, the principal balance does not change throughout the term of a short-
term note.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12. (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
13. 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

14. Although the amount of interest payable in the next year can be accurately
determined, it should not be recorded as a current liability on the date the loan is
received. The interest expense related to the interest payable has not yet been
incurred and the company does not have an obligation to pay interest until the
interest has been incurred on the loan.
15. Two advantages of debt financing include: 1) interest cost is an expense which
reduces income but is tax deductible; 2) debt financing does not dilute the
ownership as is the case with equity financing.
Two disadvantages of debt financing include: 1) the company must pay back the
principal and interest on debt financing, which has serious cash flow
implications; 2) the company must generally pledge security for debt financing
such as land and buildings.
16. (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.
17. 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.
18. 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.

19. 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.
*20. (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.
*21. (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 21 (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
*22. The reason the bond price is lower or higher that the bond’s face value is the
market rate of interest. If, at the date of issuance, the market rate demanded by
bondholders is higher than the stated rate or contractual rate of the bond, the
bonds price will have to be lower than the face value and the bond will be issued
at a discount. If the opposite is true, and at the date of issuance, the market rate
demanded by bondholders is lower than the stated rate or contractual rate of the
bond, the bonds price will have to be higher than the face value and the bond will
be issued at a premium.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*23. The price of a bond can be calculated using financial formulas, present value
tables, Excel functions or a financial calculator. In all cases the key variables of
the bond must be determined to perform the calculation. The price of the bond is
the present value (PV) of the future cash flows of the bond at the effective
interest rate (i). The remaining variables are the term in number of periods (n),
the periodic interest payments (PMT), and the future value (FV) which is the
face value of the bond paid at maturity.

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)
June 30 Property Tax Payable.......................................................... 12,000
Property Tax Expense ($36,000 ÷ 12 × 2).......................... 6,000
Prepaid Property Tax ($36,000 ÷ 12 × 6)........................... 18,000
Cash............................................................................
36,000
(c)
Dec. 31 Property Tax Expense......................................................... 18,000
Prepaid Property Tax.................................................
18,000
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 ($282 x 1.4).........................................
395
(c) Sept. 15 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) Record and disclose a provision
b) Not recorded, disclose only
c) Not recorded nor disclosed
d) Record
e) Record
LO 1 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.5
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 10.6

(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 10.7
(a) July 1 Loan Receivable.............................................................. 60,000

Cash.......................................................................
60,000
(b) (1) Aug. 1 Cash ($60,000 × 5% × 1/12)........................................... 250
Interest Receivable................................................
250
(2) Aug. 31 Interest Receivable.......................................................... 250

Interest Income......................................................
250
(3) Sept. 1 Cash ............................................................................... 250
250
(4) Oct. 1 Cash ............................................................................... 250
250
(c) Oct. 1 Cash ............................................................................... 60,000

Loan Receivable ...................................................
60,000

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.
LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.9
Blended principal and interest payment

(B)
Interest (C) (D)
Monthly (A) Expense Reduction Principal
Interest Cash (D) × 4% ÷ 12 of Principal Balance
Period Payment mos. (A) – (B) (D) – (C)
Nov. 30, 2020 $300,000
Dec. 31, 2020 $3,037 $1,000 $2,037 297,963
Jan. 31, 2021 3,037 993 2,044 295,919
01476.73 22,000
2020
Nov. 30 Cash .......................................................................... 300,000
Mortgage Payable.............................................
300,000
Dec. 31 Interest Expense.......................................................... 1,000

Mortgage Payable....................................................... 2,037
Cash..................................................................
3,037
2021
Jan. 31 Interest Expense.......................................................... 993
Mortgage Payable....................................................... 2,044
Cash..................................................................
3,037

BRIEF EXERCISE 10.10
a. Non-current liability for the bank loan payable; current liability for the interest
accrual for one month payable on the first of the following month.
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. Current liability for any portion of principal due next year and the remainder is a
non-current liability
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
l. Current liability
m. Current liability
(in $ millions)
(a) Current ratio

$661
= 1.1:1
$608
(b) Debt to total $866

= = 50.2%
assets $1,724
$111 + $9 + $40
(c) Times interest earned = = 17.8 times
$9
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 2021, 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 1.09 = $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 $1 5,000 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

Market interest rate (i) = 3.5% (7% × 6/12)

($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. 1/21 $21,881 $521,881
July 1/21 $15,000 $13,047 $1,953 19,928 519,928
Jan. 1/22 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. 1/21 $500,000

July 1/21 $15,000 $15,000 500,000
Jan. 1/22 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 (7% Carrying
Interest Amortization Discount
(6% × 6/12 = × 6/12 = Amount
Periods (A) – (B) (D) – (C)
3%) 3.5%) ($500,000 – D)
Jan. 1/21 $20,791 $479,209

July 1/21 $15,000 $16,772 $1,772 19,019 480,981
Jan. 1/22 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

15,000
(c)
Jan. 1 Cash ................................................................... 479,209
Bonds Payable...........................................
479,209

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

Bonds Payable...........................................
1,834
15,000


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............................................................
Sales Tax Payable ($2,500 + $3,500).........
Apr. 30 Sales Tax Payable................................................ 49,000

Cash.............................................................
Mar. 31 Property Tax Expense ($52,800 ÷ 12 × 3)........... 13,200

Property Tax Payable..................................
May 31 Property Tax Expense ($52,800 ÷ 12 × 2)........... 8,800

Prepaid Property Tax ($52,800 ÷ 12 × 7)............ 30,800
Property Tax Payable........................................... 13,200
Cash.............................................................
Aug. 20 Salaries Expense.................................................. 81,000

CPP Payable................................................
EI Payable...................................................
Employee Income Tax Payable..................
Pension Payable..........................................
Cash.............................................................
20 Employee Benefits Expense................................ 5,965

CPP Payable................................................
EI Payable...................................................
Sep. 15 CPP Payable ($4,128 + $4,128)........................... 8,256

EI Payable ($1,312 + $1,837).............................. 3,149
Employee Income Tax Payable........................... 16,020
Cash.............................................................
Dec. 31 Utilities Expense.................................................. 50,000

Accounts Payable........................................
b.
Dec. 31 Property Tax Expense.......................................... 30,800
Prepaid Property Tax.................................. 30,800

EXERCISE 10.3
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 10.4
a. and b.
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, 2020 $150,000
June 30, 2021 $9,622 $3,750 $5,872 144,128
Dec. 31, 2021 9,622 3,603 6,019 138,109
01 0 01476.73 22,000
Issue of Mortgage
2020 Dec. 31 Cash ......................................................... 150,000

Mortgage Payable............................
150,000
First Instalment Payment
2021 June 30 Interest Expense

($150,000 × 5% × 6/12) ......................... 3,750
Mortgage Payable...................................... 5,872
Cash.................................................
Second Instalment Payment
Dec. 31 Interest Expense [($150,000

– $5,872) × 5% × 6/12]......................... 3,603
Mortgage Payable..................................... 6,019
Cash................................................
c. Interest expense is lower in the second payment because the principal balance on
which the interest is calculated has been reduced by the principal portion of the
June 30 payment.

EXERCISE 10.5
a. Dougald Construction
(1) Oct. 1, 2020 Cash................................................................. 250,000

Notes Payable...........................................
(2) Dec. 31, 2020 Interest Expense.............................................. 3,125

Interest Payable........................................
($250,000 × 5% × 3/12)
(3) July 1, 2021 Interest Expense ($250,000 × 5% × 6/12)....... 6,250

Interest Payable........................................
Notes Payable.................................................. 250,000

Interest Payable ($3,125 + $6,250)................. 9,375
Cash..........................................................
259,375
b. Atco Finance
(1) Oct. 1, 2020 Notes Receivable............................................. 250,000

Cash..........................................................
250,000
(2) Dec. 31, 2020 Interest Receivable.............................................. 3,125

Interest Income.........................................
($250,000 × 5% × 3/12)
(3) July 1, 2021 Interest Receivable ($250,000 × 5% × 6/12)....... 6,250

Interest Income ........................................
6,250
Cash................................................................. 259,375
Interest Receivable ($3,125 + $6,250)......
Notes Receivable..................................... 250,000

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, 2020 $15,000
June 30, 2021 $7,953 $600 $7,353 7,647
June 30, 2022 7,953 306 7,647 0
b. 2020
(1) July 1 Cash ................................................................... 15,000
Notes Payable............................................
(2) Dec. 31 Interest Expense ($600 × 6/12).......................... 300

(3) 2021
June 30 Interest Expense................................................. 300
Interest Payable.................................................. 300
Notes Payable..................................................... 7,353
Cash...........................................................
(4) Dec. 31 Interest Expense ($306 × 6/12).......................... 153

c. At December 31, 2020 Granville would report:
Current liabilities
Interest payable $300
Current portion of Notes payable 7,353
Non-current liabilities
Notes payable 7,647
d. At December 31, 2021 Granville would report:
Current liabilities
Interest payable $153
Notes payable 7,647

EXERCISE 10.7
a. The interest rate is 5% ($5,000 ÷ $100,000).
b. Interest Expense ........................................................... 5,000.00

Bank Loan Payable.......................................................... 18,097.48
Cash......................................................................
c. 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 revenue
Non-current liabilities would likely include:

Long-term debt
Deferred income taxes
Lease liabilities
Depending on when the liability will become due, some items listed above under
non-current could instead be current; an example: lease liabilities. As well, some
items listed above as current could be non-current or portions of the balances
could be non-current; an example: deferred revenue.

EXERCISE 10.8 (CONTINUED)
b.
DOLLARAMA INC.
Statement of Financial Position (partial)
February 3, 2019
(in thousands)
Current liabilities
Accounts payable and accrued liabilities.......................... $ 233,417
Dividends payable............................................................. 12,650
Income taxes payable........................................................ 34,602
Deferred revenue............................................................... 101,700
Current portion of long-term debt..................................... 7,383
Total current liabilities......................................... 389,752
Long-term debt.................................................................. 1,890,845
Deferred income taxes...................................................... 127,585
Lease liabilities................................................................. 3,809
Total non-current liabilities................................... 2,022,239
Total liabilities.........................................................................................$2,411,991
LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 10.9
($ in thousands)
a. Current ratio
2021: $4,744 = 1.6:1 2020: $4,298 = 1.4:1

$3,011 $2,989
(1) Based only on the current ratio, Fruition’s liquidity is improving in 2021.
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 2021:
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.

EXERCISE 10.9 (CONTINUED)
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
(U.S.$ in millions)
a.
2018
$4,048
Debt to total assets = = 52.1%
$7,765
$242 + $144 + $139

Times interest earned = = 3.8 times
$139
2019
$4,049
Debt to total assets = = 51.0%
$7,934
$286 + $155 + $137

Times interest earned = = 4.2 times
$137
Open Text Corporation’s debt to total assets ratio improved slightly in

2019, with the decrease from 52.1% to 51.0%. The company’s times interest
earned ratio increased significantly from 3.8 times in 2018 to 4.2 times in 2019.
This reveals an improvement 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
$450 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 Government of Canada bonds are trading at a discount.
b. The Greater Toronto Airport Authorities bonds are trading at a premium.
c. Cash (0.968 × $100,000)...................................................... 96,800

Bonds Payable ............................................................... 96,800
Cash (1.4815 × $100,000).................................................... 148,150

Bonds Payable ........................................................... 148,150
d. 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. 2021
1. Oct. 1 Cash................................................................. 800,000
Bonds Payable.......................................
800,000
2. Dec. 31 Interest Expense ($800,000 × 5% × 3/12)....... 10,000

Interest Payable.......................................
2022
3. Apr. 1 Interest Expense ($800,000 × 5% × 3/12)....... 10,000
Interest Payable................................................. 10,000
Cash ($800,000 × 5% × 6/12).................
b.
December 31, 2021
Current liabilities
Interest payable.............................................................. $ 10,000
Bonds payable, due 2031.............................................. 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. Jan. 1 Interest Payable.................................................. 25,000

Cash...........................................................................
25,000
e. Nov. 30 Interest Expense [($925,617 + $2,769) × 6% × 5/12] 23,210

Bonds Payable ($23,210 – $20,833)......................... 2,377
Interest Payable ($1,000,000 × 5% × 5/12)..............
20,833
f. Jan. 1 Interest Payable........................................................... 20,833

Interest Expense [($925,617 + $2,769) × 6% × 1/12] 4,642
Bonds Payable ($25,000 – $20,833 - $4,642)........... 475
Cash...........................................................................
25,000

*EXERCISE 10.15
a. 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
Present value of $25,000 received each of 20 periods
($1,000,000 × 2.5% × 14.87747 (n = 20, i = 3%) 371,937
b. One year later, January 1, 2022, 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
c. Amount of amortization to July 1, 2021 (refer to E10.14) $2,769

Amount of amortization from July 1 to December 31, 2021 2,852
Total $5,621
Or
Carrying amount December 31, 2021 $931,228
Carrying amount December 31, 2020 925,617
Amortization amount $5,611
(difference of $10)
Note to the instructor: Rounding discrepancies may arise depending on whether

present value tables, calculators, or Excel functions are used to determine the
present value.
d. The amount of the interest expense on the statement of income ($27,769 +

$27,852 = $55,621) is higher than the amount of cash received by the bondholders
of ($25,000 x 2 = $50,000) by $5,621 which is the amortization of the bond
discount for the year ended December 31, 2021.
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.........................................
3 Cash .....................................................45,200
Sales........................................................
Sales Tax Payable ($40,000 × 13%)......
Cost of Goods Sold.......................................... 24,000

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

Property Tax Payable.............................
As we are now in the third month, expense 3 months of property taxes.
12 Cash .....................................................11,300
Service Revenue.....................................
Sales Tax Payable ($10,000 × 13%)....................
16 CPP Payable ($1,340 + $1,340)...................... 2,680

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

Cash........................................................

PROBLEM 10.1A (CONTINUED)
a. (continued)
Mar. 30 Salaries Expense................................................ 16,000

CPP Payable.............................................
EI Payable................................................
Employee Income Tax Payable...............
Cash.......................................................... 9,070
30 Employee Benefits Expense............................. 1,164

CPP Payable.............................................
EI Payable................................................
31 Sales Tax Payable.............................................. 5,800

Cash..........................................................
b. Mar. 31 Interest Expense ..........................................50

Interest Payable............................................
($10,000 × 6% × 1/12)
c.
MOLEGA LTD.
March 31, 2021
Current liabilities
Accounts payable ($42,500 – $10,000 – $30,000)............................
Notes payable.....................................................................................
Employee income tax payable ($5,515 – $5,515 + $5,870)..............
Property tax payable..........................................................................
Sales tax payable ($5,800 + $5,200 + $1,300 - $5,800)....................
CPP payable ($2,680 – $2,680 + $801 + $801).................................
EI payable ($1,123 – $1,123 + $259 + $363)....................................
Interest payable..................................................................................
Total current liabilities..........................................................
LO 1,2,3 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.................................
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 Cash .............................................................. 25,000

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

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

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

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

Cash......................................................
3 Cash .............................................................. 20,000

Bank Loan Payable..............................
31 Interest Expense ($50* + $63** + $50***). . 163

Interest Payable....................................
* $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.
Statement of Income (partial)
Year Ended December 31, 2021
Other income and expenses

Interest expense...................................................................................... $479
d.
CLING-ON LTD.
December 31, 2021
Current liabilities
Bank loans payable................................................................................ $45,000
Notes payable......................................................................................... 15,000
Interest payable...................................................................................... 163
LO 1,2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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, 2021 $1,000,000

Dec. 31, 2021 $88,849 $10,000 $78,849 921,151
Mar. 31, 2022 88,849 9,212 79,637 841,514
June 30, 2022 88,849 8,415 80,434 761,080
2021
Sept. 30 Cash ....................................................................1,000,000
Bank Loan Payable.................................. 1,000,000
b. Nov. 30 Interest Expense ($10,000 × 2/3).......................... 6,667

Interest Payable...........................................
c. Dec. 31 Interest Expense.................................................... 3,333

Interest Payable..................................................... 6,667
Bank Loan Payable............................................... 78,849
Cash............................................................
2022
Mar. 31 Interest Expense.................................................... 9,212
Bank Loan Payable............................................... 79,637
Cash............................................................

PROBLEM 10.4A
a.
Interest
Semi-annual Cash Expense Reduction of Principal
Interest Period Payment 6.5% × 6/12 Principal Balance
June 30, 2021 $700,000

Dec. 31, 2021 $48,145 $22,750 $25,395 0674,605
June 30, 2022 48,145 021,925 26,220 0648,385
Dec. 31, 2022 48,145 021,073 27,072 621,313
June 30, 2023 48,145 020,193 27,952 0593,361
b. 2021
June 30 Cash ................................................................ 700,000
Mortgage Payable..................................
700,000
c. 2021;
Dec. 31 Interest Expense............................................... 22,750
Mortgage Payable............................................ 25,395
Cash........................................................
2022
June 30 Interest Expense............................................... 021,925
Mortgage Payable............................................ 26,220
Cash........................................................
d.
STARLIGHT GRAPHICS LTD.
Statement of Financial Position (Partial)
June 30, 2022
Current liabilities
Current portion of mortgage payable......................................... $ 55,024*
Mortgage payable..................................................................... 0593,361
*($27,072 + $27,952) = $55,024

e. Because the next loan payment is July 1, 2022, the last journal entry in part c.
would be an accrual instead of a payment as follows:
2022
June 30 Interest Expense............................................... 21,925
Interest Payable......................................
STARLIGHT GRAPHICS LTD.

June 30, 2022
Current liabilities
Interest payable.......................................................................... $21,925
Current portion of mortgage payable1........................................ 53,292
Mortgage payable..................................................................... 621,313
1
($674,605 – $621,313 = $53,292)
LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.5A
a.
(B) (C)
(A) Interest Principal (D)
Cash Expense Reduction Balance
Period Payment (D) × 8% × 3/12 (A) – (B) (D) – (C)
Apr. 30, 2021 $240,000
July 31, 2021 $22,694 $ 4,800 $17,894 222,106
Oct. 31, 2021 22,694 4,442 18,252 203,854
Jan. 31, 2022 22,694 4,077 18,617 185,237
Apr. 30, 2022 22,694 3,705 18,989 166,248
July 31, 2022 22,694 3,325 19,369 146,879
Oct. 31, 2022 22,694 2,938 19,756 127,123
Jan. 31, 2023 22,694 2,542 20,152 106,971
Apr. 30, 2023 22,694 2,139 20,555 86,416
July 31, 2023 22,694 1,728 20,966 65,450
Oct. 31, 2023 22,694 1,309 21,385 44,065
Jan. 31, 2024 22,694 881 21,813 22,252
Apr. 30, 2024 22,694 442* 22,252 0
Total $32,328 $240,000
*rounded
b.
2021
Apr. 30 Cash .........................................240,000
Bank Loan Payable......................
c.
July 31 Bank Loan Payable............................... 17,894
Interest Expense.................................... 4,800
Cash..............................................
Oct. 31 Bank Loan Payable............................... 18,252

Interest Expense.................................... 4,442
Cash..............................................

d.
BISTRO SALLY INC.
October 31, 2021
Current liabilities
Current portion of 8% bank loan payable...................... $76,731*
Bank loan payable, 8%, due in 2024.............................. 127,123
Total liabilities $203,854
*$203,854 - $127,123 = $76,731
e.
BISTRO SALLY INC.
November 30, 2021
Current liabilities
Interest payable1............................................................. $ 1,359
Current portion of 8% bank loan payable2..................... 76,731
Bank loan payable, 8%, due in 2024.............................. 127,123
Total liabilities $205,213
1
$4,077 / 3 = $1,359
2
$203,854 - $127,123 = $76,731
LO 2,3 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.6A
a. 1. Current liabilities Property tax payable

(paid in May)
2. Current liabilities Interest payable

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

($200,000 – $34,778)
3. Current liabilities Accounts payable
4. Current liabilities Deferred revenue

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

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

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

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

Non-current liabilities Bank loans
($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 amount 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 bank loans should be disclosed, including interest rates,

maturity dates, payments required in each of the next five years 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 1,2,3 BT: K Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 10.7A
a.
2019 2018
(in millions)
1. Current ratio $3,134 $2,422

= 1.6:1 = 1.9:1
$1,932 $1,293
2. Receivables $13,502 $11,542

= 12.3 times = 12.8 times
turnover $1,248 + $945 $945 + $863
2 2
3. Inventory $9,179 $7,961

= 6.3 times = 6.6 times
turnover $1,681 + $1,234 $1,234 + $1,172
2 2
4. Debt to $4,465 $3,205

= 45.2% = 40.0%
total assets $9,886 $8,003
5. Times
interest earned $755+$230+$67 = 15.7 times $852+$97+$34 = 28.9 times
$67 $34

b. Saputo’s current ratio has deteriorated significantly but is well ahead of industry
averages in 2019. The receivables turnover ratio also deteriorated from 12.8
times in 2018 to 12.3 times in 2019 but exceeds the industry averages by a wide
margin. The inventory turnover deteriorated as well from 6.6 times in 2018 to 6.3
times in 2019. In this respect, Saputo is well behind industry averages. This
means that Saputo is collecting its receivables and moving its inventory more
slowly in 2019 than in 2018. The deterioration of the receivable and inventory
turnover ratios likely lead to cash being collected more slowly. Overall, Saputo’s
2019 liquidity ratios are fair.
During 2019, Saputo’s debt to total assets ratio deteriorated from 40.0% in 2018
to 45.2% in 2019. The company’s times interest earned ratio also deteriorated
significantly. In comparison to the industry average, Saputo is carrying more
debt compared to total assets 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 2019.
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 10% of the
$1.3 billion line of credit as of the end of 2019 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.


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%:

2021
Jan. 1 Cash ............................................100,000
Bonds Payable.................................
b.
Dec. 31 Interest Expense ($100,000 × 6%)............. 6,000
Cash.................................................
a. Beta Corp. – issued at a discount price 94 with coupon rate 4%:

2021
Jan. 1 Cash ($100,000 × .94)............................... 94,000
Bonds Payable.................................
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%:
2021
Jan. 1 Cash ($100,000 × 1.05)............................... 105,000
Bonds Payable...................................
b.
Dec. 31 Interest Expense ($105,000 × 6%).............. 6,300
Bonds Payable ($7,000 – $6,300)............... 700
Cash ($100,000 × 7%).......................

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, 2021:
Able Limited:
Bond issue January 1, 2021 $100,000
No premium or discount Dec. 31, 2021 $100,000
Beta Corp:
Plus amortization of bond discount 1,640
Balance Dec. 31, 2021 $95,640
Charles Inc.:
Less amortization of bond premium 700
Balance Dec. 31, 2021 $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 1/21 $111,587 $1,611,587

Jan. 1/22 $52,500 $48,348 $4,152 107,435 1,607,435
July 1/22 52,500 48,223 4,277 103,158 1,603,158
Jan. 1/23 52,500 48,095 4,405 98,753 1,598,753
2021
b. July 1 Cash........................................................ 1,611,587
Bonds Payable.............................. 1,611,587
2021
c. Dec. 31 Interest Expense...................................... 48,348
Bonds Payable........................................ 4,152
Interest Payable.............................
d.
GLOBAL SATELLITES CORPORATION
December 31, 2021
Current liabilities
Interest payable
Bonds payable, due 2031

*PROBLEM 10.10A (CONTINUED)
2022
e. Jan. 1 Interest Payable..................................... 52,500
Cash.............................................
July 1 Interest Expense...................................... 48,223

Bonds Payable........................................ 4,277
Cash.............................................
2021
f. Nov. 30 Interest Expense ($48,348 x 5/6)............ 40,290
Bonds Payable ($4,152 x 5/6)................. 3,460
Interest Payable ($52,500 x 5/6). 43,750
2022
g. Jan. 1 Interest Payable..................................... 43,750
Interest Expense ($48,348 - $40,290)8,058
Bonds Payable ($4,152 - $3,460).......... 692
Cash.............................................
LO 3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005CM: Reporting and
Finance

*PROBLEM 10.11A
a. 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
Note to the instructor: Rounding discrepancies may arise depending on 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.
b. Carrying amount December 31, 2021:

($1,500,000 × 0.57029) (n = 19, i = 3%) $ 855,435
($1,500,000 × 3.5% × 14.32380) (n = 29, i = 3%) 752,000
Carrying amount of the bonds $1,607,435
c. The amounts arrived in a. and b. above are different because the amortization and
interest payment periods have reduced by one six-month period in part b. Since the
amortization period is shorter by one period, the present value of the future cash
flows is lower in b. Interest expense has been accrued in the six-month period
between July 1, 2021 and December 31, 2021 and so the account affected besides
the Bond Payable account is the Interest Expense account.

*PROBLEM 10.11A (CONTINUED)

d. Key inputs: Future value (FV) = $1,500,000

($1,500,000 × 0.45639) (n = 20, i = 4%) $ 684,585
($1,500,000 × 3.5% × 13.59033) (n = 20, i = 4%) 713,492
Present value (issue price) of the bonds $1,398,077
The difference in the amount calculated in a. of $1,611,587 and the amount

calculated in d. of $1,398,077 is due the difference in the market rate of interest.
All other variables as key inputs in the calculation remain the same. In the case of
a., the market rate per year was 6% which was lower than the rate paid by the bond
of 7%, causing the bond to be issued at a premium. In the case of d., the market
rate per year was 8% which was higher than the rate paid by the bond of 7%,
causing the bond to be issued at a discount.
LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005CM: Reporting and Finance


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth 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

5. Companies are required by law to contribute to the CPP and EI programs.

Solutions Manual 10-3 Chapter 10

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

If the outcome is not probable or if the amount cannot be reasonably estimated,

A short-term note payable involves a more formal arrangement than an account

Solutions Manual 10-4 Chapter 10

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

Solutions Manual 10-5 Chapter 10

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

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

Solutions Manual 10-6 Chapter 10

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

Solutions Manual 10-7 Chapter 10

Solutions Manual 10-8 Chapter 10

Solutions Manual 10-9 Chapter 10

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10.1

BRIEF EXERCISE 10.2

Solutions Manual 10-10 Chapter 10

BRIEF EXERCISE 10.3

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

(c) Sept. 15 Employee Income Tax Payable....................................... 6,258

BRIEF EXERCISE 10.4

Solutions Manual 10-11 Chapter 10

BRIEF EXERCISE 10.5

BRIEF EXERCISE 10.6

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

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

Solutions Manual 10-12 Chapter 10

Solutions Manual 10-13 Chapter 10

BRIEF EXERCISE 10.7

(a) July 1 Loan Receivable.............................................................. 60,000

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

(c) Oct. 1 Cash ............................................................................... 60,000

Solutions Manual 10-14 Chapter 10

BRIEF EXERCISE 10.8

Solutions Manual 10-15 Chapter 10

BRIEF EXERCISE 10.9

Blended principal and interest payment

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

Solutions Manual 10-16 Chapter 10

BRIEF EXERCISE 10.10

BRIEF EXERCISE 10.11

(a) Current ratio

(b) Debt to total $866

Solutions Manual 10-17 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 10-18 Chapter 10

*BRIEF EXERCISE 10.14

Solutions Manual 10-19 Chapter 10

*BRIEF EXERCISE 10.15

(a) Key inputs: Future value (FV) = $500,000

Present value of $500,000 received in 10 periods

(b) Key inputs: Future value (FV) = $500,000

Present value of $500,000 received in 10 periods