ACCT 374 – CHAPTER 12 – FINANCIAL LIABILITIES AND PROVISIONS

Example

Oakland Ltd were completed during the accounting year just ended 31 December 2005. Interest rates
reflect market rates unless indicated.

a. On 1 June, the company borrowed $55,000 in cash from the bank on a demand basis. The interest
rate was 6% to be paid on the anniversary date of the loan.
b. Merchandise was purchased on account; a $30,000, one year, 7% interest bearing note, dated 1
April 2005, was given to the supplier. Interest is paid when the amount is due on 1 April 2006.
c. Merchandised was purchased on account; a 2 yr., $16,000, 1% note dated 1 February 2005 was
given to the supplier. Interest is due annually on 1 February. The going interest rate for this term
and risk was 7%. Use the gross method to record the note payable.
d. A supplier delivered goods on account costing US$20,000. The exchange rate was US$1 = Cdn$0.98
at that time.
e. Oakland has been sued by a customer for $500,000. The legal team confidently believes that there is
an 80% chance that Oakland will successfully defend itself
f. New legislative requirements came into force at the beginning of this year regarding environmental
remediation. Oakland believes it will have to pay $80,000 in eight years’ time when the company
vacates leased premises. The going interest rate for this term and risk was 7%.
g. Payroll records showed the following. Amounts are unpaid:

Employee
Gross Wages Income Tax EI CPP Union Dues
$120,000 $32,000 $6,100 $5,500 $2,500

h. The employer portion of EI and CPP are recorded

i. Remittances were income tax, $31,350; EI, $10,250; CPP,$9,720; Union dues, $1,480
j. Cash dividends declared but not yet paid were $22,500
k. Accrue appropriate interest at 31 December, and adjust the foreign-denominated payable to the
year end rate, US$1 = Cdn$0.96

Solution
a. Bank demand loan

DR Cash 55,000
CR Note Payable, 6% 55,000

b. Purchased merchandise (1 April 2005)

DR Inventory 30,000
CR Note Payable, 7% 30,000

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c. Purchased merchandise (1 February 2005)

DR Inventory 14,264
DR Discount on notes payable 1,736
CR Note Payable, 1%; yield 7% 16,000
$16,000 (P/F, 7%, 2) + $160 (P/A,7%,2) = 14,264

d. US – denominated liability

DR Inventory 19,600
CR Accounts Payable (20,000 x $0.98) 19,600

e. No entry. Small population and most likely outcome is no payout. Disclosure if amount is material.

f. Decommissioning Obligation

DR Leased premises or other asset 46,561

CR Decommissioning obligation 46,561
$80,000 (P/F,7%,8) = $46,561

g. To record salaries and employee deductions

DR Salary Expense 120,000

CR Employee income taxes payable 32,000
CR EI Payable 6,100
CR CPP Payable 5,500
CR Union Dues Payable 2,500
CR Cash 73,900

h. To record payroll expenses payable by the employer

DR Salary Expense 14,040

CR CPP Payable 5,500
CR EI Payable 8,540

i. To record remittance of payroll deductions

DR Employee income taxes payable 31,350

DR EI Payable 10,250

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 DR CPP Payable 9,720
DR Union Dues Payable 1,480
CR Cash 52,800

j. Cash Dividends declared but not yet paid

DR Retained Earnings 22,500

CR Cash Dividends payable 22,500

k. Year End Adjustments

DR Interest Expense 1,925

CR Interest Payable 1,925
$55,000 x 0.06 x 7/12
DR Interest Expense 1,575
CR Interest Payable 1,575
$30,000 x 0.07 x 9/12
DR Interest Expense 915
CR Discount on Note Payable 768
CR Interest Payable ($160 x 11/12) 147
$14,264 x 0.07 x 11/12
DR Accounts Payable 400
CR Exchange Gain 400
$20,000 x 0.96 = 19,200 vs 19,600 recorded
DR Interest Expense 3,259
CR Decommissioning Obligation 3,259
$46,561 x 0.07

REQUIREMENT 2 – LIST OF LIABILITIES AT YEAR END

Note Payable $55,000

Accounts Payable 19,200
Interest Payable ($1,575 + $1,925 + $147) 3,647
Employee Income Tax Payable 650
EI Payable 4,390
CPP Payable 1,280
Union Dues Payable 1,020
Cash Dividends Payable 22,500
Note Payable ($16,000 – ($1,736 - $768)) 15,032
Note Payable, 7% 30,000
Decommissioning Obligation ($46,561 + $3,259) 49,820