Multiple-Choice Exercise 8-1

Liabilities are recognized:

a.in exchange for goods
b.in exchange for services
c.in exchange for borrowing money
d.All of these choices are correct.

Multiple-Choice Exercise 8-2

When reporting liabilities on a statement of financial position, in theory, what measurement should be
used?
a.Future value of the future outflow
b.Future value of the present outflow
c.Present value of the future outflow
d.Present value of the present outflow

Multiple-Choice Exercise 8-3

Kinsella Seed borrowed $200,000 on October 1, 2022, at 10% interest. The interest and principal are
due on October 1, 2023. What journal entry should be recorded on December 31, 2022?
a.Debit Interest Expense 5,000; credit Interest Payable 5,000.
b.Debit Interest Receivable 20,000; credit Interest Expense 20,000.
c.Debit Interest Payable 5,000; credit Interest Expense 5,000.
d.No entry is necessary.

Multiple-Choice Exercise 8-4

Kinsella Seed borrowed $200,000 on October 1, 2022, at 10% interest. The interest and principal are
due on October 1, 2023. What journal entry should be made with respect to the interest payment on
October 1, 2023?
a.Debit Cash 20,000; credit Interest Expense 15,000; credit Interest Payable 5,000.
b.Debit Interest Expense 15,000; credit Cash 15,000.
c.Debit Interest Expense 20,000; credit Cash 20,000.
d.Debit Interest Expense 15,000; debit Interest Payable 5,000; credit Cash 20,000.

Multiple-Choice Exercise 8-5

Which of the following is not a current liability?
a.Accounts payable
b.Sales tax payable
c.Unearned revenue
d.Bonds payable due in five years

Multiple-Choice Exercise 8-6

Which of the following is not an example of an accrued liability?
a.Wages payable
b.Interest payable
c.Accounts payable
d.Property taxes payable

Multiple-Choice Exercise 8-7

Labrador Inc. sold 350 oil drums to Tesla Manufacturing for $75 each. In addition to the $75 sale price
per drum, there is a $1 per drum federal tax and a 7% provincial sales tax. What journal entry should
be made to record this sale?
a.Debit Accounts Receivable 28,438; credit Sales Revenue 28,438.
b.Debit Accounts Receivable 26,250; credit Sales Revenue 26,250.
c.Debit Accounts Receivable 28,438; credit Federal Sales Taxes Payable 350; credit Provincial Sales Taxes
Payable 1,838; credit Sales Revenue 26,250.
d.Debit Accounts Receivable 26,250; debit Taxes Expense 2,188; credit Federal Sales Taxes Payable 350;
credit Provincial Sales Taxes Payable 1,838; credit Sales Revenue 26,250.
 Multiple-Choice Exercise 8-8
All of the following represent taxes commonly collected by businesses except:
a.Employment Insurance taxes
b.Federal sales taxes
c.Provincial sales taxes
d.Harmonized sales taxes

Multiple-Choice Exercise 8-9

Payroll taxes typically include all of the following except:
a.Health care plan deductions
b.Employment Insurance contributions
c.Canada Pension Plan contributions
d.Federal excise taxes

Multiple-Choice Exercise 8-10

When a credit is made to the income taxes payable account related to taxes withheld from an
employee, the corresponding debit is made to:
a.Cash
b.Taxes Expense
c.Taxes Payable
d.Wages Expense

Multiple-Choice Exercise 8-11

When should a contingent liability be recognized?
a.When the contingent liability is probable.
b.When a reasonable estimation can be made.
c.Neither "when the contingent liability is probable" nor "when a reasonable estimation can be made" are
correct.
d.Both "when the contingent liability is probable" and "when a reasonable estimation can be made" are
correct.

Multiple-Choice Exercise 8-12

Which of the following is true?
a.A contingent liability should always be disclosed in the financial statements.
b.A contingent liability should always be recorded within the financial statements.
c.A company can choose to record a contingent liability within its financial statements or disclose the
liability in the financial statements.
d.No journal entry or disclosure is necessary if the possibility of a contingent liability is remote.

Multiple-Choice Exercise 8-13

Arcand Advisers is being sued by a former customer. Arcand's lawyers say that it is possible, but not
probable, that the company will lose the lawsuit and that the trial should last approximately 18 more
months. Should Arcand lose, it will most likely have to pay approximately $750,000. How should this
lawsuit be reported on the financial statements?
a.Current liability of $750,000 and expense of $750,000
b.Long-term liability of $750,000 and expense of $750,000
c.No effect on the statement of financial position or statement of earnings, but disclosed in the notes to
the financial statements
d.No disclosure is required

Multiple-Choice Exercise 8-14

Warranty expense is:
a.recorded as it is incurred
b.capitalized as a warranty asset
c.recorded in the period of sale
d.None of these choices are correct.
 Multiple-Choice Exercise 8-15
To record warranties, the adjusting entry would be:
a.a debit to Warranty Liability and a credit to Cash
b.a debit to Warranty Expense and a credit to Warranty Liability
c.a debit to Warranty Expense and a debit to Cash
d.a debit to Warranty Liability and a credit to Warranty Expense

Multiple-Choice Exercise 8-16

How is the current ratio calculated?
a.Cash flows from operating activities/Current liabilities
b.Current assets/Current liabilities
c.(Cash + Marketable securities)/Current liabilities
d.(Cash + Marketable securities + Accounts receivable)/Current liabilities

Multiple-Choice Exercise 8-17

How is the cash ratio calculated?
a.(Cash + Marketable securities)/Current liabilities
b.Current assets/Current liabilities
c.Cash flows from operating activities/Current liabilities
d.(Cash + Marketable securities + Accounts receivable)/Current liabilities

Multiple-Choice Exercise 8-18

Which of the following transactions would cause the current ratio to increase (assuming the current
ratio is currently greater than 1)?
a.Receiving money from a customer related to an account receivable
b.Paying off a payable for cash
c.Purchasing inventory on credit
d.Purchasing property, plant, and equipment

Cornerstone Exercise 8-24

Sales Tax
Trudeau's Antique Hot Rods recently sold a 1957 Chevy for $75,000 on account. The provincial sales
tax is 6%, and there is a $500-per-car federal tax.
Required:
Prepare the journal entry to record the sale. For those boxes in which no entry is required, leave the
box blank.
Accounts Receivable 80,000 -
Federal Taxes Payable - 4,500
Provincial Sales Taxes Payable - 500
Sales Revenue - 75,000
(Record sale)

Cornerstone Exercise 8-23

Accrued Wages
Skiles Company's weekly payroll amounts to $10,000 and payday is every Friday. Employees work five
days per week, Monday through Friday. The appropriate journal entry was recorded at the end of the
accounting period, Wednesday, August 31, 2022.
Required:
What journal entry is made on Friday, September 2, 2022? For those boxes in which no entry is
required, leave the box blank.
Sept.
Wages Payable 6,000 -
2
Wages Expense 4,000 -
Cash - 10,000
(Record payment of
wages)
Cornerstone Exercise 8-30
Property Taxes
Kellman Jerkirer Inc. has a December 31 year-end. The local municipality billed the entire 2022
property taxes of $20,000 on April 1, 2022. Kellman paid $4,000 of the 2022 property taxes on May
31, 2022.
Required:
Calculate the balance of the property tax payable or prepaid property tax account as at May 31, 2022.
$16,000

Cornerstone Exercise 8-29

Property Taxes
Lassoo Engineering Ltd. has a December 31 year-end. The company incurred property taxes of
$10,000 for 2022. At year-end the company paid $7,500 to the municipal government for 2022
property taxes.
Required:
Prepare the journal entries at December 31 to record property tax expense for 2022 and the payment
of 2022 property taxes.
(1)
Property Tax Expense 10,000
2022
Property Tax Payable 10,000
(Record property tax
liability)

(2)
Property Tax Payable 7,500
2022
Cash 7,500
(Record property tax
payment)

Cornerstone Exercise 8-28

Payroll Taxes
During October, Seger Insurance employees earned $100,000 in wages. The employer's share of
Canada Pension Plan contributions was $3,000 and employer Employment Insurance premiums were
$1,400.
Required:
Prepare the necessary journal entry for Seger to record the employer portion of these payroll taxes.
For those boxes in which no entry is required, leave the box blank.
Canada Pension Plan Taxes
3,000 -
Expense
Employment Insurance
1,400 -
Expense
Canada Pension Plan
Taxes Payable - 3,000
(Employer)
Employment Insurance
- 1,400
Payable (Employer)
(Record employer payroll
taxes)

Brief Exercise 8-37

Accounts Payable
On May 18, Stanton Electronics purchased, on credit, 1,000 TV sets for $400 each. Stanton plans to
resell these TVs in its store. Stanton paid the supplier on June 30.
Required:
Prepare the necessary journal entry (or entries) on May 18 and June 30.
1.
May Inventory 400,000
18
Accounts Payable 400,000
(Record purchase of
inventory on credit)

2.
June Accounts Payable 400,000
30
Cash 400,000
(Record payment to
supplier)

Brief Exercise 8-38

Accounts and Notes Payable
On February 15, Barbour Industries buys $800,000 of inventory on credit. On March 31, Barbour
approaches its supplier because it cannot pay the $800,000. The supplier agrees to roll the amount
into a note due on September 30 with 10% interest.
Required:
Prepare the necessary journal entries from February 15 through payment on September 30. For those
boxes in which no entry is required, leave the box blank.
Feb.
Inventory 800,000
15
Accounts Payable 800,000
(Record purchase of
inventory on credit)

Mar.
Accounts Payable 800,000
31
Notes Payable 800,000
(Record issuance of note
to cover unpaid account
payable)

Sept.
Notes Payable 800,000 -
30
Interest Expense 40,000 -
Cash - 840,000
(Record payment of note
and interest)

Brief Exercise 8-39

Issuing Notes Payable
On September 30, Bello International borrows $320,000 from Chase Bank with a nine-month, 8%
note.
Required:
What journal entry is made at Bello's year-end, December 31?
Dec.
Interest Expense 6,400
31
 Interest Payable 6,400
(Record accrued
interest expense)

Brief Exercise 8-57

Liquidity Ratios
JRL's financial statements contain the following information:

Cash $400,000
Marketable securities 115,000
Accounts receivable 800,000
Inventory 950,000
Accounts payable 575,000
Accrued expenses 180,000
Long-term debt 900,000
Cost of goods sold 1,000,000
Required:
Assume the accounts payable balance is all trade payables and opening and closing balances are the
same. Round your answers to two decimal places.
1. What is its current ratio?
3
2. What is its quick ratio?
1.74
3. What is its cash ratio?
0.68
4. What is the trade payable turnover ratio?
1.74
5. Discuss JRL's liquidity using these ratios.
JRL’s current ratio depends on how liquid JRL's inventory and accounts receivable are. If
the marketable securities is slow moving, then the quick ratio may be a better indicator of liquidity.
If accounts receivable may be difficult to collect, the cash ratio is best indicator of liquidity.

Brief Exercise 8-56

Warranties
Wally's Party Warehouse provides wholesale party equipment and materials to party shops. In 2022,
Wally's sold 30 bounce houses at $30,000 each. The bounce houses carry a three-year warranty for
defects. Wally estimates that repair costs will average 2% of the total selling price. The estimated
warranty liability at the beginning of the year was $26,000. Claims of $19,000 were actually incurred
during the year to honour warranties.
Required:
What was the balance in the Estimated Warranty Liability account at the end of the year?
25,000

Brief Exercise 8-58

Liquidity Ratios
SJM's financial statements contain the following information:

Cash $2,725,000
Marketable securities 1,725,000
Accounts receivable 3,050,000
Inventory 3,950,000
Accounts payable 3,275,000
Accrued expenses 1,700,000
Long-term debt 9,100,000
Cost of goods sold 4,250,000
Required:
Assume the accounts payable balance is all trade payables and opening and closing balances are the
same. Round your answers to two decimal places.
1. What is the current ratio?
2.30
2. What is the quick ratio?
1.51
3. What is the cash ratio?
0.89
4. What is the trade payable turnover ratio?
1.30
5. Discuss SJM's liquidity using these ratios.
SJM’s current ratio depends on how liquid SJMs cash and marketable securities are. If
the marketable securities is slow moving, then the quick ratio may be a better indicator of liquidity.
If accounts receivable may be difficult to collect, the cash ratio is best indicator of liquidity.

Brief Exercise 8-49

Sales and Excise Tax
Betty's Antique Shop, a shop specializing in antiques from the 19th century, recently sold a chair from
the Civil War era for $60,000 on account. The harmonized sales tax is 13%.
Required:
Provide the journal entry to record the sale. For those boxes in which no entry is required, leave the
box blank.
Accounts Receivable 67,800 -
Harmonized Sales Tax
- 7,800
Payable
Sales Revenue - 60,000
(Record sale)