Cornerstones of Financial Accounting Canadian 1st Edition Rich Solutions Manual

Cornerstones of Financial Accounting
Canadian 1st Edition Rich Solutions

Manual
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CURRENT AND CONTINGENT
8 LIABILITIES
DISCUSSION QUESTIONS
1. Liabilities are probable future sacrifices of economic benefits. These sacrifices arise from the
present obligations of an entity to transfer assets or provide services to another entity in the
future as a result of past transactions or events.
2. In theory, a liability should include the amount of future interest to be paid. For example,
a $200 payable due in 45 days is not really a $200 liability today because theoretically a
portion of that $200 payment made 45 days in the future will represent interest for the 45 days.
However, in liabilities that will be retired within three months (e.g., standard Accounts Payable),
the time value of money is ignored because it is deemed immaterial. In these cases, the
liability is recorded at the amount to be paid in the future.
3. Most liabilities are recognized when goods or services are received or money is borrowed.
4. Current liabilities are obligations that require the firm to pay cash or another current asset,
create a new current liability, or provide goods or services within the longer of one year and one
operating cycle. Some common examples of current liabilities include unearned sales revenue,
accounts payable, short-term notes payable, current portion of long-term debt, accrued
liabilities, and other payables.
5. Common ways in which to order current liabilities on the statement of financial position include
(1) from largest to smallest,
(2) in the order in which they will be paid (order of liquidity)
6. An account payable arises when a business purchases goods or services on credit. Unlike an
account payable, a note payable typically arises when a business borrows money or purchases
goods or services from a company that requires a formal agreement or contract. This formal
agreement or contract is what distinguishes a note payable from an account payable.
Additionally, notes payable typically bear interest, while accounts payable generally have
no interest.
7. An account payable is typically created through purchasing goods or services on credit.
8. Accrued liabilities represent the completed portion of activities in process at the end of the
period. They are recognized through adjusting entries. Some common examples include wages
payable, taxes payable, property taxes payable, and interest payable.
9. A note payable is typically created by borrowing money from a bank or purchasing goods or
services from a company that requires a formal agreement or contract.
10. Interest is typically ignored when creating an account payable because the payable is usually
due within 30 to 60 days. The amount of interest that would be associated with the payable is
minimal and is ignored as immaterial.
Copyright © 2014 by Nelson Education Ltd.

CHAPTER 8: Current Liabilities
11. Interest expense is computed by multiplying the principal amount of the loan times the annual
interest rate times the period of time (usually expressed as a fraction of a year).
12. The current portion of long-term debt is the amount of long-term debt principal that is due within
the next year. At the end of each accounting period, the long-term debt that is due during the
next year is reclassified as a current liability. In some cases, long-term debt that is due within
the next year will be paid with the proceeds of a new long-term debt issue, creating a new long-
term, not current, liability. When such refinancing is expected, the maturing obligation is not
transferred to current liabilities but remains classified as long-term debt.
13. Payroll taxes paid by employees through a deduction from their gross pay include federal and
provincial taxes, as well as Canada Pension and Employment Insurance. Payroll taxes
paid by employers also include Canada Pension and Employment Insurance matched by
government regulation to employee contributions to Canada Pension and Employment Insurance.
14. Both unearned revenues and customer deposits arise when the entity receives resources from
customers in advance of the performance of services or the delivery of goods. Since the
customer has "performed" by paying ahead of time, the seller has incurred a liability either to
produce the goods or services or refund the customer's advance payment.
15. A contingent liability is an obligation whose amount, timing, or recipient depends on future
events. For example, a firm may be contingently liable for damages under a lawsuit that has yet
to be decided by the courts. When the courts reach a decision, the liability will be known, but
until then it is contingent on that decision.
16. A contingency is recognized as a liability when it is both (1) probable and (2) reasonably
estimable.
17. The matching concept requires that all of the expenses associated with a revenue be recorded in
the period in which the related revenue is recorded. One of the expenses associated with the sale
of merchandise is the warranty cost that is expected to be incurred during the warranty period.
To the extent that warranty costs have not been incurred when the period ends, a liability must
be recorded to permit proper matching.
18. The current ratio is an appropriate measure of short-term liquidity if all of the current assets are
easily converted into cash. This means that accounts receivable are likely to be collected and
any inventory is likely to be sold. The quick ratio and the cash ratio exclude inventory because
it may be harder to liquidate. The quick ratio is appropriate when accounts receivable are highly
likely to be collected. In some cases, accounts receivable are not liquid, and in these cases, the
cash ratio provides a more appropriate measure of short-term liquidity.
19. The current, quick, and cash ratios all involve all or parts of current assets divided by current
liabilities. The current ratio includes all current assets, including inventory, divided by current
liabilities. The quick ratio includes cash, marketable securities, and accounts receivable in the
numerator and current liabilities in the denominator. The cash ratio includes only cash and
marketable securities divided by current liabilities. The cash ratio provides the most conservative
measure of short-term liquidity because it includes only highly liquid assets in the numerator.
20. Operating cash flow looks at the ability of cash generated from operating activities to meet
current obligations, whereas the current, quick, and cash ratios look at the status of the current
liabilities as they stand at a particular point in time.
8-2
Copyright © 2014 by Nelson Education Limited
MULTIPLE-CHOICE EXERCISES
8-1. d
8-2. c
8-3. a $200,000 × 10% × 3/12 = $5,000
Journal
Date Account and Explanation Debit Credit
Dec. 31 Interest Expense 5,000
Interest Payable 5,000
(Record accrual of interest expense)
8-4. d Interest: $200,000 × 10% = $20,000 per year

Interest Expense:
2012: $200,000 × 10% × 3/12 = $5,000
2013: $200,000 × 10% × 9/12 = $15,000
Journal
Oct. 1 Interest Expense 15,000
Cash 20,000
(Record payment of note and interest)
8-5. b
8-6. c
8-7. c
Journal
Accounts Receivable 28,438
Sales Revenue* 26,250
Federal Sales Taxes Payable** 350
Provincial Sales Taxes Payable*** 1,838
(Record sale)
* 350 × $75 = $26,250

** 350 × $1 = $350
*** 26,250 × 7% = $1,838
8-3
8-8. a
8-9. d
8-10. d
8-11. d
8-12. d
8-13. c
8-14. c
8-15. b
8-16. b
8-17. a
8-18. b
8-4
CORNERSTONE EXERCISES
CE 8-19
Journal
Jun. 30 Cash 250,000
Notes Payable 250,000
(Record issuance of note payable)
CE 8-20
Journal
1. Jun. 1 Cash 400,000
(Record issuance of note payable)
2. Sept. 1 Notes Payable 400,000

Interest Expense* 7,000
Cash 407,000
* $400,000 × 7.0% × 3/12 = $7,000
CE 8-21
Journal
Dec. 31 Interest Expense* 5,000
(Record accrual of interest expense)
* $150,000 × 8% × 5/12 = $5,000
CE 8-22
Journal
Cash
* $75,000 × 5% × 10/12 = $3,125
8-5
CE 8-23
Journal
Apr. 2 Wages Payable 6,000
Wages Expense 4,000
Cash 10,000
(Record payment of wages)
CE 8-24
Journal
Accounts Receivable 80,000
Federal Taxes Payable 500
Provincial Sales Taxes Payable* 4,500
Sales Revenue 75,000
(Record sale)
* $75,000 x 6% = $4,500
CE 8-25
Journal
Dec. 31 Cash 4,746
Provincial Sales Taxes Payable* 336
GST Payable** 210
Sales Revenue*** 4,200
(Record sale)
* ($70 x 60) x 8% = $336

** ($70 x 60) x 5% = $210
** $70 x 60 = $4,200
8-6
CE 8-26
1. Net pay recorded by Hernandez: $449,000
2. Journal
Wage Expense 500,000
Canada Pension Plan payable 31,000
Employment Insurance payable 5,000
Charitable contributions payable 5,000
Union dues payable 10,000
Cash 449,000
(Record wages and liabilities)
Journal
Canada Pension Plan expense 31,000
Employment Insurance expense 7,000
Canada Pension Plan payable 31,000
Employment Insurance payable 7,000
(Record employer payroll taxes)
8-7
CE 8-27
Journal
Wages Expense 10,000
Income Taxes Payable 1,200
Canada Pension Plan Taxes Payable (Employee) 100
Employment Insurance Payable (Employee) 30
Cash*** 8,670
Employment Insurance Expense (Employer) 42

Canada Pension Plan Taxes Expense (Employer) 100
Employment Insurance Payable (Employer) 42
Canada Pension Plan Taxes Payable (Employer) 100
* $30 x 1.4 =$42
CE 8-28
Journal
Canada Pension Plan Taxes Expense 3,000
Employment Insurance Expense 1,400
Canada Pension Plan Taxes Payable (Employer) 3,000
Employment Insurance Payable (Employer) 1,400
8-8
CE 8-29
Journal
1. 2014 Property Tax Expense 10,000
Property Taxes Payable 10,000
(Record property tax liability}
2. Property Tax Payable 7,500

Cash 7,500
(Record property tax payment)
CE 8-32
The balance of property tax payable is ($20,000 x 5/12) - $4,000 = $4,333.
8-9
CE 8-31
Journal
1. Cash 700
Unearned Sales Revenue 700
(Record payment received for services not
yet performed)
2. Unearned Sales Revenue* 35

Sales Revenue 35
(Record revenue)
* $700 – 20 = $35
CE 8-32
Journal
1. Cash 300,000
Unearned Rent Revenue 300,000
(Record cash received for rent paid in advance)
2. Unearned Rent Revenue 50,000

Rent Revenue 50,000
(Record revenue)
8-10
CE 8-33
1. 300 water heaters × $850 × 1% = $2,550 warranty liability
Journal
Dec. 31 Warranty Expense 2,550
Warranty Liability 2,550
(Record warranty expense)
CE 8-34
The warranty expense for the balloons sold in 2014 should be $37,500 (50
balloons × $25,000 × 3%). This amount is added to the $40,000 beginning
balance in the warranty liability account. Throughout the year, the warranty
liability account was debited for $15,000 of actual claims, leaving the ending
balance in the warranty liability account to be $62,500.
Warranty Liability
Beginning balance 40,000
Claims incu 15,000
Warranty expense* 37,500
Ending balance 62,500
* $25,000 × 50 units × 3% = $37,500
8-11
CE 8-35
Current Assets
1. Current Ratio =
Current Liabilities
$300,000 + $650,000 + $800,000 + $100,000

=
$500,000 + $150,000
$1,850,000
=
$650,000
= 2.85
Cash + Marketable Securities + Accounts Receivable

2. Quick Ratio =
Current Liabilities
$300,000 + $100,000 + $650,000

=
$500,000 + $150,000
$1,050,000
=
$650,000
= 1.62
Cash + Marketable Securities

3. Cash Ratio =
Current Liabilities
$300,000 + $100,000
=
$650,000
$400,000
=
$650,000
= 0.62
4. GWA's current ratio appears adequate. However, it really depends on how liquid
GWA's inventory and accounts receivable are. If the inventory is slow moving or
difficult to sell (e.g., large ticket items in a recession), then the quick ratio may be
a better indicator of liquidity. The quick ratio is well below 2, but still appears
adequate for GWA to meet its short-term obligations if the accounts receivable
are collectible. If, on the other hand, accounts receivable may be difficult to
collect, the cash ratio is best. If this were the case, then GWA has serious liquidity
issues and there should be great concern regarding its ability to meet short-term
obligations.
8-12
CE 8-36
Current Assets
1. Current Ratio =
Current Liabilities
$3,125,000 + $3,150,000 + $4,200,000 + $1,850,000

=
$3,500,000 + $1,800,000
$12,325,000
=
$5,300,000
= 2.33
Cash + Marketable Securities + Accounts Receivable

2. Quick Ratio =
Current Liabilities
$3,125,000 + $1,850,000 + $3,150,000

=
$3,500,000 + $1,800,000
$8,125,000
=
$5,300,000
= 1.53
Cash + Marketable Securities

3. Cash Ratio =
Current Liabilities
$3,125,000 + $1,850,000
=
$3,500,000 + $1,800,000
$4,975,000
=
$5,300,000
= 0.94
4. DER's current ratio appears adequate. However, it really depends on how liquid
DER's inventory and accounts receivable are. If the inventory is slow moving or
difficult to sell (e.g., large ticket items in a recession), then the quick ratio may
be a better indicator of liquidity. The quick ratio is well below 2, but still appears
adequate for DER to meet its short-term obligations if the accounts receivable
are collectible. If, on the other hand, accounts receivable may be difficult to
collect, the cash ratio is best. If this were the case, then DER has some liquidity
issues and there should be concern regarding its ability to meet short-term
obligations.
8-13
EXERCISES
E 8-37
Journal
1. May 18 Inventory 400,000
Accounts Payable 400,000
(Record purchase of inventory on credit)
2. Jun. 30 Accounts Payable 400,000

Cash 400,000
(Record payment to supplier)
E 8-38
Journal
Feb. 15 Inventory 800,000
(Record purchase of inventory on credit)
Mar. 31 Accounts Payable 800,000

(Record issuance of note to cover unpaid
account payable)
Sept. 30 Notes Payable 800,000

Cash 840,000
* $800,000 × 10% × 6/12 = $40,000
E 8-39
Journal
Dec. 31 Property Taxes Expense* 3,000
Property Taxes Payable 3,000
(Record accrued property taxes)
* $9,000 × 4/12 = $3,000
8-14
E 8-40
Journal
Dec. 31 Income Taxes Expense* 140,000
Income Taxes Payable 140,000
(Record accrued income taxes)
Feb. 28 Income Taxes Payable 140,000

Cash 140,000
(Record payment of income taxes)
* $400,000 × 35% = $140,000
E 8-41
Journal
Dec. 31 Wages Expense* 2,500
Wages Payable 2,500
(Record accrued wages)
* $5,000 × 3/6 = $2,500
E 8-42
Journal
Dec. 31 Wages Expense 20,000
Wages Payable* 20,000
Jan. 8 Wages Payable 20,000

Wages Expense 30,000
Cash 50,000
(Record payment of wages)
* $50,000 × (4 days - 10 days) = $20,000
E 8-43
The wages payable account would have 4 days of payroll accrued at $12,000
per day totalling $48,000.
8-15
E 8-44
Journal
a. Purchases 30,000
(Record purchase of inventory on account)
b. Wages Expense 10,000

Income Taxes Payable (Employee) 1,200
Canada Pension Plan Taxes Payable (Employee) 620
Employment Insurance Payable (Employee) 145
Wages Payable 8,035
c. Income Tax Expense 42,850

Income Tax Payable 42,850
d. Accounts Receivable 1,262

Provincial Sales Taxes Payable 48
Sales Revenue 1,214
(Record sale)
e. Canada Pension Plan Taxes Expense 620

Employment Insurance Expense 203
Canada Pension Plan Taxes Payable (Employer) 620
Employment Insurance Payable (Employer) 203
f. Cash 25,000
(Record issuance of note)
8-16
E 8-45
Journal
a. Purchases 80,000
b. Wages Expense 40,000

Canada Pension Plan Payable (Employee) 580
Wages Payable 26,420
c. Income Tax Expense 113,615

d. Accounts Receivable 3,636

Sales Revenue 3,456
(Record sale)
e. Canada Pension Plan Expense 580

Canada Pension Plan Payable (Employer) 580
f. Cash 155,000
8-17
E 8-46
a. A legally enforceable claim against the business to be paid in three months

should be reported as a current liability.
b. A guarantee given by a seller to a purchaser to repair or replace defective

goods during the first six months following a sale should be reported as a
warranty liability, a current liability.
c. An amount payable to a bank in 10 years should be reported as a long-term

notes payable.
d. An amount to be paid next year on a long-term note payable should be

reported as a current liability.
E 8-47
Journal
a. Advertising Expense 2,680
(Record purchase of advertising)
b. Office Supplies 250

Accounts Payable 250
(Record purchase of supplies)
c. Commissions Expense 1,100

Commissions Payable 1,100
(Record sales commission)
d. Utilities Expense 6,500

(Record utilities expense)
e. Repairs and Maintenance Expense 420

Accounts Payable 420
(Record vehicle repair)
8-18
E 8-48
Journal
Dec. 31 Wages Expense a 3,000
Wages Payable 3,000
31 Income Tax Expense b 280,000

31 Interest Expensec 7,000

(Record accrued interest)
31 Wages Expensed 15,000

(Record accrued bonus)
a
$5,000 × 3/5 = $3,000
b
$800,000 × 35% = $280,000
c
$280,000 × 6% × 5/12 = $7,000
d
($800,000 – $650,000) × 10% = $15,000
8-19
E 8-49
Journal
Dec. 31 Wages Expense* 54,000
31 Interest Expense** 24,500

31 Income Tax Expense*** 270,000

* $180,000 × 3/10 = $54,000

** $350,000 × 12% × 7/12 = $24,500
*** $900,000 × 30% = $270,000
E 8-50
Journal
Cash 151,200
Provincial Sales Taxes Payable* 9,450
GST Payable** 6,750
Sales Revenue 135,000
(Record sale)
* $135,000 × 0.07 = $9,450

** $135,000 × 0.05 = $6,750
8-20
E 8-51
1. Journal
Jan. 31 Salaries Expense 237,480.00
Wages Expense 585,000.00
Cash* 692,880.00
Canada Pension Plan Payable (Employee) 15,300.00
Employment Insurance Payable (Employee) 5,800.00
Income Taxes Payable (Employee) 108,500.00
(Record salaries, wages, and liabilities)
31 Canada Pension Plan Expense** 15,300.00

Employment Insurance Expense*** 8,120.00
Canada Pension Plan Payable (Employer)** 15,300.00
Employment Insurance Payable (Employer)*** 8,120.00
* $237,480.00 + $585,000.00 – $15,300.00 – $5,800.00 – $108,500.00 = $692,880.00
2. The employees' gross pay is $822,480 ($237,480 + $585,000). Bas pays additional
taxes of $23,420.00 ($15,300.00 + $8,120). This is 2.85% of gross pay
($23,420.00 / $822,480).
3. Net pay $692,880.00

Total payroll expense ($822,480 + $23,420.00) 845,900.00
Net pay as a percentage of total payroll expense 81.91%
8-21
E 8-52
1. Journal
Dec. 1 Cash* 9,000
Unearned Sales Revenue 9,000
(Record receipt of payment for services
not yet performed)
* $1,500 × 6 months = $9,000
2. Journal
Dec. 31 Unearned Sales Revenue 1,500
Sales Revenue* 1,500
(Record recognition of revenue)
* $1,500 × 1 month = $1,500
3. Unearned sales revenue in the amount of $7,500 (see T-account below) would
appear among Irvine Pest Control's current liabilities. A prepaid asset in the
amount of $7,500 would appear among Garden Grove's current assets.
Unearned Sales Revenue

From part (2) From part (1) 9,000
1,500
Ending balance 7,500
E 8-53
Warranty coverage qualifies as a contingent liability for the company providing
the warranty. That is, the company will incur a cost in the future if the products
covered by the warranty are defective. Companies must record a liability and a
corresponding expense if such contingent warranty payments are probable
and reasonably estimable . For most companies, the amount of warranty payments
is probable and reasonably estimable based on past experience.
8-22
E 8-56
Journal
Other Expense 3,000,000
Lawsuit Payable 3,000,000
(Record contingent liability)
E 8-55
1. a
2. a
3. a
4. c
5. a
6. b
7. b
8. c
9. c
10. a
8-23
E 8-54
1. Televisions
Expected claims = [2,500 units × (2 + 100)] = 50 units
Expected cost = (50 units × $45)............................ $2,250
DVDs
Expected claims = [360 units × (5 * 100)] = 18 units
Expected cost = (18 units × $15)............................ 270
Speakers
Expected claims = [700 units × (1 + 100)] = 7 units
Expected cost = (7 units × $25).............................. 175
Total expected cost................................................................ $2,695
Journal
Dec. 31 Warranty Expense 2,695
(Record warranty expense)
2. The warranty itself is an existing condition that involves uncertainty as to

a possible cost that will be resolved in the future. Warranty liabilities
are contingent liabilities. Contingent liabilities must be recognized
when they are (1) probable and (2) reasonably estimable. Merleau's past
experience suggests that warranty claims are probable and provides a
basis for making a reasonable estimate.
8-24
E 8-57
1. a. Current ratio: $19,171,000,000 * ÷ $8,514,000,000 = 2.25
b. Quick ratio: $12,711,000,000 ** ÷ $8,514,000,000 = 1.49
c. Cash ratio: $10,002,000,000 *** ÷ $8,514,000,000 = 1.17
d. Operating cash flow ratio: $10,620,000,000 ÷ $8,514,000,000 = 1.25
*$6,598,000,000 + $3,404,000,000 + $2,709,000,000 + $4,314,000,000 + $2,146,000,000 =

$19,171,000,000
**$6,598,000,000 + $3,404,000,000 + $2,709,000,000 = $12,711,000,000

***$6,598,000,000 + $3,404,000,000 = $10,002,000,000
2. The current ratio appears to be strong because as a general rule of thumb,

a current ratio over 2 is considered good. Even the more conservative quick
and cash ratios appear to be good because they are greater than 1, which
means that the company's liquid current assets are greater than its current
liabilities. The operating cash flow ratio of 1.25 indicates that the cash that
the company is generating is sufficient to meet the current liabilities that the
company owes.
3. The simplest way to raise their current ratio to 2.3 would be to use some of
the almost $6.6 billion in cash and equivalents to pay off some of their current
liabilities. This will lower their current assets, but it will also lower their
current liabilities by the same amount. And, because the current liabilities are
less than the current assets, this reduction in current liabilities will represent a
greater percentage reduction.
To decide the amount of the payment, the following equation must be solved
for x:
[($19,171 – x) x ÷ ($8,514 – x)] = 2.3

$19,171 – x = 2.3 ($8,514 – x)
$19,171 – x = $19,582.2 – 2.3x
$19,171 + 1.3x = $19,582.20
1.3x = $19,582.2 – $19,171
1.3x = $411.20
x = $316.31
That is, Intel must use $316,310,000 of cash to pay down the current liabilities
by the same amount to achieve a current ratio of 2.3 by December 31.
8-25
PROBLEM SET A
P 8-58A
1. Journal
a. Feb. 16 Supplies 16,000
(Record purchase of supplies on account)
b. Feb. 26 Accounts Payable 4,000

Cash* 4,000
(Record partial payment of supplier)
c. Mar. 31 Accounts Payable 12,000

portion of account payable)
d. April 30 Cash 300,000

e. June 4 Inventory 78,000

f. June 24 Accounts Payable 78,000

Cash 78,000
g. Aug. 19 Cash 22,000

(Record receipt of deposit for services not
yet performed)
* $16,000 × 25% = $4,000
8-26
P 8-58A (Contd)
Journal
h. Dec. 15 Accounts Receivable 198,000
Service Revenue 220,000
2. Journal
Interest Payable* 16,900
* ($12,000 × 10% × 9/12) + ($300,000 × 8% × 8/12) = $16,900
8-27
P 8-59A
1. Canada Pension Plan: $315,000 × 0.062 = $19,530.00
Employment Insurance: $315,000 × 0.0145 = $4,567.50
Federal unemployment: $295,312.50 × 0.008 = $2,362.50
State unemployment: $295,312.50 × 0.012 = $3,543.75
Net pay = $315,000 – $79,900 – $19,530.00 – $4,567.50 = $211,002.50
Journal
Sept. 30 Wages Expense 315,000.00
Income Tax Payable Employee 79,900.00
Canada Pension Plan Payable 15,592.50
(Employee)
Employment Insurance Payable 3,150.00
(Employee)
Cash 216,357.50
30 Canada Pension Plan Expense 15,592.50

Employment Insurance Expense 4,410.00
Canada Pension Plan Payable (Employer)* 15,592.50
Employment Insurance Payable (Employer)* 4,410.00
* $315,000.00 × 4.95% = $15,592.50

** $315,000.00 × 1.4% = $4,410.00
8-28
P 8-60A
1. Journal
2014
Oct. 1 Cash 600,000
2. Journal
* $600,000 × 8% × 3/12 = $12,000
3. Among the current liabilities:

Short-term notes payable............................................., $600,000
Interest payable........................................................... 12,000
4. Journal
2015
May 1 Notes Payable 600,000
Cash 628,000
* $600,000 × 8% × 4/12 = $16,000
8-29
P 8-61A
1. Journal
2014
Dec. 1 Inventory 80,000
2. No journal entry necessary.
3. Journal
2015
Mar. 1 Accounts Payable 80,000
account payable)
4. Journal
Jul. 1 Notes Payable 80,000
Cash 81,600
* $80,000 × 6% × 4/12 = $1,600
8-30
P 8-62A
1. Electricity charges........................................................ $2,435,000

Provincial excise tax:
Flat fee of $3.00 per customer"..................... $60,000
b 48,700 108,700
2% of total billing ...........................................
Federal excise tax:
Flat fee of $0.50 per customer c..................... 10,000
d 2,435 12,435
0.1% of total billing ........................................
Total bill......................................................................... $2,556,135
a
$3.00 × 20,000 customers = $60,000
b
$2,435,000 × 0.02 = $48,700
c
$0.50 × 20,000 customers = $10,000
d
$2,435,000 × 0.001 = $2,435
2. Journal
Accounts Receivable 2,556,135
Sales Revenue 2,435,000
Excise Taxes Payable (State) 108,700
Excise Taxes Payable (Federal) 12,435
(Record sale)
3. Journal
Cash 2,556,135
Accounts Receivable 2,566,135
(Record collection of receivables)
4. Journal
Provincial Excise Taxes Payable 108,700
Federal Excise Taxes Payable 12,435
Cash 108,700
(Record payment)
8-31
P 8-63A
1. Journal
Nov. 20 Cash* 187,500
(Record receipt of deposit for merchandise
not yet delivered)
* 750 units × $250 = $187,500
Current Liability:
Unearned Sales Revenue........................................... $50,000
Noncurrent Liability:
The portion of customer deposits pertaining to next year's deliveries ($50,000 =

200 units x $250) should be classified as a current liability on the statement of financial
position at the end of 2013; the remainder ($137,500) should be classified as a
noncurrent liability.
2. Journal
2014
Cash* 150,000
Sales Revenue** 200,000
Cost of Goods Sold*** 45,000

Inventory 45,000
(Record delivery of merchandise)
* (200 units × $1,000) – $50,000 = $150,000

** 200 units × $1,000 = $200,000
*** 200 units × $225 = $45,000
Current Liability:
Unearned Sales Revenue............................................ $75,000
Unearned Sales Revenue............................................ $62,500
The remaining balance in Unearned Sales Revenue is $137,500 (the original

$187,500 less the $50,000 recognized during 2014). Of this remaining amount,
$75,000 (300 units × $250) pertains to next year's deliveries and would be
reported as a current liability on the statement of financial position at the end
of 2012, while the remainder, $62,500, would be classified as a long-term liability.
8-32
P 8-63A (Contd)
3. Journal
2015
Unearned Sales Revenuea 75,000
Cashb 225,000
Sales Revenuec 300,000
Cost of Goods Soldd 67,500

Inventory 67,500
(Record cost of merchandise sold)
a
300 units × $250 = $75,000
b
(300 units × $1,000) – $75,000 = $225,000
c
300 units × $1,000 = $300,000
d
300 units × $225 = $67,500
8-33
P 8-64A
1. Warranty expense for 2014 is the expected number of warranty claims

times the expected cost of each claim.
Expected number of warranty claims:

6,350 repairs × 0.03 claims per repair = 191
Warranty expense:
191 expected claims × $300 per claim = $57,300
2. Journal
Cash 63,000
(Record warranty claims)
3. The December 31, 2014, balance in Warranty Liability is:
Warranty Liability
Claims 63,000 Balance, 1/1/14 50,000
Warranty expense 57,300
Balance, 12/31/14 44,300
The balance decreased because more claims were paid than were added
to the liability through warranty expense.
8-34
P 8-65A
1. Current Ratio = Current Assets ÷ Current Liabili
2014 = $67,959 ÷ $38,809

= 1.75
2013 = $39,690 ÷ $22,518

= 1.76
2. (Cash + Marketable Securities + Accounts Receivable) ÷

Quick Ratio = Current Liabilities
2014 = ($1,274 + $0 + $30,071) ÷ $38,80

= 0.81
2013 = ($6,450 + $0 + $16,548) ÷ $22,51

= 1.02
3. Cash Ratio = (Cash + Marketable Securities) ÷ Current Liabilities
2014 = ($1,274 + $0) ÷ $38,809

= 0.03
2013 = ($6,450 + $0) ÷ $22,518

= 0.29
4. Operating Cash Flow = Cash Flow from Operating Activities ÷ Current Liabilities
2014 = $12,829 ÷ $38,809

= 0.33
2013 = $14,874 ÷ $22,518

= 0.66
5. DER's liquidity appears to hold constant when one looks only at the current
ratio. However, under further scrutiny, it is apparent (using the quick ratio, cash
ratio, and operating cash flow ratio) that this result is due to the significantly
higher amounts of receivables and inventories in 2014 as compared to 2013.
Because the receivables and inventories may not be easily converted to cash,
the liquidity of DER may be worsening.
8-35
PROBLEM SET B
P 8-58B
1. Journal
a. Jan. 26 Supplies 25,000
(Record purchase of supplies on account)
b. Feb. 26 Accounts Payable 10,000

Cash* 10,000
(Record partial payment of supplier)
c. Feb. 28 Accounts Payable 15,000

portion of account payable)
d. July 31 Cash 300,000

e. Aug. 2 Inventory 150,000

f. Sept. 28 Accounts Payable 150,000

Cash 150,000
g. Oct. 4 Cash 40,000

(Record receipt of deposit for services not yet
performed)
* $25,000 × 40% = $10,000
8-36
P 8-58B (Contd)
Journal
h. Dec. 15 Accounts Receivable 360,000
Service Revenue 400,000
2. Journal
Interest Payable* 12,250
* ($15,000 × 8% × 10/12) + ($300,000 × 9% × 5/12) = $12,250
8-37
P 8-59B
1. Canada Pension Plan: $1,250,000 x 0.0495 = $61,875

Employment Insurance: $1,250,000 x 0.0145 = $12,500
Net pay = $1,250,000 - $180,600 - $12,500 - $18,125 = $995,025
Journal
Mar. 31 Wages Expense 1,250,000
Canada Pension Plan Payable (Employee) 61,875
Employment Insurance Payable (Employee) 12,500
Cash 973,775
31 Canada Pension Plan Expense 61,875

Employment Insurance Expense 17,500
Canada Pension Plan Payable (Employer)* 61,875
Employment Insurance Payable (Employer)* 17,500
* $1,250,000 × 4.95% = $61,875

** $1,250,000 × 1.4% = $17,500
8-38
P 8-60B
1. Journal
2014
Nov. 1 Cash 275,000
2. Journal
* $275,000 × 6% × 2/12 = $2,750
3. Among the current liabilities:

Short-term notes payable................................... $275,000
Interest payable................................................... 2,750
4. Journal
2015
May 31 Notes Payable 275,000
Cash 284,625
* $275,000 × 6% × 5/12 = $6,875
8-39
P 8-61B
1. Journal
2014
Nov. 1 Inventory 770,000
2. No journal entry necessary.
3. Journal
2015
Feb. 1 Accounts Payable 770,000
account payable)
4. Journal
2015
Sept. 1 Notes Payable 770,000
Cash 823,900
* $770,000 × 12% × 7/12 = $53,900
8-40
P 8-62B
1. Electricity charges................... $393,000.00

Provincial excise tax:
Flat fee of $3.50 per customer^ $10,500.00
b 7,860.00 18,360.00
2% of total billing ..................
Federal excise tax:
Flat fee of $0.50 per customer c $ 1,500.00
0.15% of total billingd............... 589.50 2,089.50
Total bill................................. $413,449.50
a
$3.50 × 3,000 customers = $10,500.00
b
$393,000 × 0.02 = $7,860.00
c
$0.50 × 3,000 customers = $1,500.00
d
$393,000 × 0.0015 = $589.50
2. Journal
Accounts Receivable 413,449.50
Sales Revenue 393,000.00
Excise Taxes Payable (State) 18,360.00
Excise Taxes Payable (Federal) 2,089.50
(Record sale)
3. Journal
Cash 413,449.50
Accounts Receivable 413,449.50
(Record collection of receivables)
4. Journal
Provincial Excise Taxes Payable 18,360.00
Federal Excise Taxes Payable 2,089.50
Cash 20,449.50
(Record payment)
8-41
P 8-63B
1. Journal
Nov. 20 Cash* 260,000
(Record receipt of deposit for merchandise
not yet delivered)
* 1,000 units × $260 = $260,000
Current Liability:
The portion of customer deposits pertaining to next year's deliveries ($90,000 =

350 units × $260) should be classified as a current liability on the statement of financial
position at the end of 2013; the remainder ($169,000) should be classified as a noncurrent
liability.
2. Journal
2014
Cash* 364,000
Sales Revenue** 455,000
Cost of Goods Sold*** 175,000

Inventory 175,000
(Record delivery of merchandise)
* (350 units × $1,300) – $91,000 = $364,000

** 350 units × $1,300 = $455,000
*** 350 units × $500 = $175,000
Current Liability:
The remaining balance in Unearned Sales Revenue is $169,000 (the original
$260,000 less the $91,000 recognized during 2014). Of this remaining amount,
$104,000 (400 units × $260) pertains to next year's deliveries and would be
reported as a current liability on the statement of financial position at the end
of 2014, while $65,000 would be classified as a long-term liability.
8-42
P 8-61B (Contd)
3. Journal
2015
Unearned Sales Revenuea 104,000
Cashb 416,000
Sales Revenuec 520,000
Cost of Goods Soldd 200,000

Inventory 200,000
(Record cost of merchandise sold)
a
400 units × $260 = $104,000
b
(400 units × $1,300) – $104,000 = $416,000
c
400 units × $1,300 = $520,000
d
400 units × $500 = $200,000
8-43
P 8-64B
1. Warranty expense for 2014 is the expected number of warranty claims

times the expected cost of each claim.
Expected number of warranty claims:

4,500 repairs x 0.09 claims per repair =
Warranty expense:
405 expected claims x $250 per claim
2. Journal
Cash 110,000
(Record warranty claims)
3. The December 31, 2014, balance in Warranty Liability is:
Warranty Liability
Balance, 1/1/14 25,000
Claims paid 110,000 Warranty expense 101,250
Balance, 12/31/14 16,250
The balance decreased because more claims were paid than were added
to the liability through warranty expense.
8-44
P 8-65B
1. Current Ratio = Current Assets ÷ Current Liabilities
2014 = $135,918 ÷ $77,618

= 1.75
2013 = $79,380 ÷ $45,036

= 1.76
(Cash + Marketable Securities + Accounts Receivable) ÷

Quick Ratio = Current Liabilities
2014 = ($2,548 + $0 + $60,142) ÷ $77,618

= 0.81
2013 = ($12,900 + $0 + $33,096) ÷ $45,036

1.02
3. Cash Ratio = (Cash + Marketable Securities) ÷ Current Liabilities
2014 = ($2,548 + $0) ÷ $77,618

= 0.03
2013 = ($12,900 + $0) ÷ $45,036

= 0.29
4. Operating Cash Flow Cash Flow from Operating Activities ÷ Current Liabilities
=
Ratio
2014 = $25,658 ÷ $77,618

= 0.33
2013 = $29,748 ÷ $45,036

= 0.66
5. Niagara Water Slide's liquidity appears to hold constant when one looks only
at the current ratio. However, under further scrutiny, it is apparent (using the
quick ratio, cash ratio, and operating cash flow ratio) that the improvement in
liquidity is only due to the significantly higher amounts of receivables and
inventories in 2014 as compared to 2013. Because the receivables and
inventories may not be easily converted to cash, the liquidity of Niagara
Water Slide may be worsening.
8-45
CASES
Case 8-67
1. To the extent that the warranty liability is current (and it will be current for
any warranty work estimated to be performed in the next year), current
liabilities will be lowered. The current ratio is calculated as:
Current Assets ÷ Current Liabilities
This means that lowering the warranty liability will increase the
current ratio.
2. Jim should tell his boss that ethically they are to provide the best estimate
of the warranty liability they can. This means that the estimate should
reflect their "true" obligation as accurately as possible and the estimate
should be made without bias.
Doing as the boss suggests would make the financial statements

potentially misleading to investors and creditors such as the bank.
3. Jim's first course of action is to try to reason with his boss. If this fails, he
should raise the issue to his boss's boss. Ultimately, if Jim is unable to
resolve this issue in an ethical way within the department, he will have to
consider other options. The publicly traded company likely has a
hotline available to Jim that he can call to discuss his concerns
surrounding the accounting change that his boss asked him to make.
This hotline will be monitored by upper management and the board of
directors. If he decides to "blow the whistle" on his boss's request,
he will have whistleblower protection to ensure that retaliation is not
taken against him.
8-46
Case 8-67
1. Journal
Jan. 1 Cash 35,000
The loan increased current assets and current liabilities by the same amount;
therefore, it did not change the excess of current assets over current liabilities.
2. Journal
Inventory 35,000
Cash 35,000
(Record purchase of inventory)
The inventory purchase increased and decreased current assets by the same
amount; therefore, it did not change either the amount of current assets or the
excess of current assets over current liabilities.
3. Rocky Mountain could borrow another $23,000 ($58,000 - $35,000 loan = $23,000
excess) under the restriction, provided that use of the proceeds in conjunction
with other transactions during January do not violate the restriction. Although
investment in inventory does not affect the excess of current assets over current
liabilities, investing in equipment reduces the excess of current assets over
current liabilities and, therefore, might violate the restriction.
8-47
Case 8-68
1. Journal
a. Feb. 29 Inventory 5,325
(Record purchase of inventory)
b. Feb. 1 Equipment 8,000

Notes payable 8,000
(Record issue of note for equipment
purchase)
29 Interest Expense* 67
Interest Payable 67
c. Cash 3,745
(Record unearned revenue and sales taxes)
* $8,000 × 0.1 × 1/12 = $67
8-48
Case 8-68 (Contd)
2. The current ratio for Front Row Entertainment before the additional information
is 1.52* ($67,760 ÷ $44,615). The current ratio after the additional information is
1.25** ($78,302 ÷ $62,557).
$12,480 + $3,900 + $20,380 + $31,000

*Current Ratio Before =
$8,640 + $375 + $1,200 + $26,100 + $8,300
$67,760
=
$44,615
= 1.52
$67,760 + $5,325 + $3,745

=
$44,615 + $5,325 + $8,000 + $67 + $3,745
$76,830
=
$61,752
= 1.24
3. Because a judgment against Front Row Entertainment was judged to be remote,

there is no need for either recording a liability or disclosing the lawsuit in the
footnotes to the financial statements.
8-49

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Cornerstones of Financial Accounting

Canadian 1st Edition Rich Solutions

7. An account payable is typically created through purchasing goods or services on credit.

Copyright © 2014 by Nelson Education Ltd.

8-4. d Interest: $200,000 × 10% = $20,000 per year

* 350 × $75 = $26,250

2. Sept. 1 Notes Payable 400,000

* $150,000 × 8% × 5/12 = $5,000

* $75,000 × 5% × 10/12 = $3,125

* ($70 x 60) x 8% = $336

Employment Insurance Expense (Employer) 42

* $30 x 1.4 =$42

2. Property Tax Payable 7,500

The balance of property tax payable is ($20,000 x 5/12) - $4,000 = $4,333.

2. Unearned Sales Revenue* 35

2. Unearned Rent Revenue 50,000

* $25,000 × 50 units × 3% = $37,500

$300,000 + $650,000 + $800,000 + $100,000

Cash + Marketable Securities + Accounts Receivable

$300,000 + $100,000 + $650,000

Cash + Marketable Securities

$3,125,000 + $3,150,000 + $4,200,000 + $1,850,000

Cash + Marketable Securities + Accounts Receivable

$3,125,000 + $1,850,000 + $3,150,000

Cash + Marketable Securities

2. Jun. 30 Accounts Payable 400,000

Mar. 31 Accounts Payable 800,000

Sept. 30 Notes Payable 800,000

* $800,000 × 10% × 6/12 = $40,000

* $9,000 × 4/12 = $3,000

Feb. 28 Income Taxes Payable 140,000

* $400,000 × 35% = $140,000

* $5,000 × 3/6 = $2,500

Jan. 8 Wages Payable 20,000

* $50,000 × (4 days - 10 days) = $20,000

b. Wages Expense 10,000

c. Income Tax Expense 42,850

d. Accounts Receivable 1,262

e. Canada Pension Plan Taxes Expense 620

b. Wages Expense 40,000

c. Income Tax Expense 113,615

d. Accounts Receivable 3,636

e. Canada Pension Plan Expense 580

a. A legally enforceable claim against the business to be paid in three months

b. A guarantee given by a seller to a purchaser to repair or replace defective

c. An amount payable to a bank in 10 years should be reported as a long-term

d. An amount to be paid next year on a long-term note payable should be

b. Office Supplies 250

c. Commissions Expense 1,100

d. Utilities Expense 6,500

e. Repairs and Maintenance Expense 420

31 Income Tax Expense b 280,000

31 Interest Expensec 7,000

31 Wages Expensed 15,000

31 Interest Expense** 24,500

31 Income Tax Expense*** 270,000

* $180,000 × 3/10 = $54,000

* $135,000 × 0.07 = $9,450

31 Canada Pension Plan Expense** 15,300.00

* $237,480.00 + $585,000.00 – $15,300.00 – $5,800.00 – $108,500.00 = $692,880.00

3. Net pay $692,880.00

* $1,500 × 6 months = $9,000

* $1,500 × 1 month = $1,500

Unearned Sales Revenue