Seminar #9

Seminar #9

Liabilities
Mikes Mechanical Services Inc. provides various repair services to individuals and
businesses. MMS is 100% owned by Mike Lantaine who also manages the company.
Once a job is complete, Mike prepares an invoice for parts and labour and presents it to
the customer on site. Customers have 3 weeks to pay. The year end for the company
is December 31.
A. The government requires MMS to remit all GST collected, net of GST paid on
expenses. Every month MMS pays $500 in installments (paid all 12 months). Using the
following information, prepare journal entries for 2014 to record the transactions and
determine how much GST MMS owes at the end of 2014:
GST owing at December 31, 2013
GST paid relating to 2013 in 2014 (due to
a clerical error, more was paid than needed.
The extra was to be applied to 2014)
Sales subject to GST during 2014
Expenses on which GST was paid
Purchase of a truck, includes GST

$2,300
2,500
230,000
38,000
47,250

Journal entries:
Dr. GST payable
2500
Cr. Cash
2500
To record payment of 2013 GST owing.
Dr. Cash/Accts rec
Cr. Revenue
Cr. GST payable
To record sales with 5% GST on them

241500
230000
11500

Dr. Expenses
36190
Dr. GST payable
1810
Cr. Cash/Accts payable
38000
To record expenses incurred and 5% GST
Dr. PPE (Truck)
Dr. GST payable
Cr. Cash
To record purchase of truck

45000
2250
47250

Seminar #9

Dr. GST payable

6000
Cr. Cash
6000
To record installments paid during the year

Final GST owing: 1150

(Credits will be negatives; debits positives. Could also draw T-account)

B. MMS is required to withhold taxes from employees and remit those to the
government by the 15th of the following month. Mike sends the correct amount every
month and so at the year end, he only owes amounts withheld for December payroll
expenses.
During December, he paid employees gross wages of $10,000. Withheld from
employee cheques was income tax of $2,900; CPP $230; and EI $140. All amounts
are tracked in one account payroll withholdings due. Since Mikes employees all
belong to the local union, he also had to withhold union dues of $50/month from
each of his 2 employees. These are recorded in a separate account.
Prepare the journal entries to record December payroll. Assume MMS, as the
employer, has to pay CPP equal to the employees amount and EI at 1.4 times the
employee rate.
Dr. Wages

10000

Cr. Payroll withholdings due

3270

Cr. Due to union

100

Cr. Cash

6630

Dr. Wages or benefit expense426

Cr. Payroll withholdings due

426

Seminar #9
C. On May 1, Mike acquired a new piece of equipment for $150,000. He paid a down
payment of $25,000 and took a five year, 7% loan payable for the balance. Monthly
blended payments of $2,890 are required on the first of each month.
Prepare a loan amortization table for the first 3 months.
Interest Period

Cash Pmt

1
2
3

2890
2890
2890

Int. Exp

Red. of Principle

729
717
704

2161
2173
2186

Prepare the journal entries required on May 1, May 31 and June 1

May 1
Dr
Cr
Cr

Equipment
Cash
Long term debt (or note payable)

150000
25000
125000

May 31
Dr
Interest Expense
Cr
Interest Payable

729
729

June 1
Dr
Interest Payable

729

Dr

2161

Long-Term debt
Cr

Cash

2890

Principle Bal
125000
122839
120666
118480

Seminar #9
Time Value of Money
Example 1:
A friend has notified you of a vacant piece of land that is available for purchase for
$90,000. Based on some extensive research, you are confident that the land will be
worth $97,000 one year from now. The timing is perfect as your $90,000 term deposit
at the bank has just matured. Current interest on a one year term deposit is 10%.
What should you do with your $90,000?
(1+0.1) * $90000 = $99,000
I would rather invest it in the bank because it nets me a $2000 higher return than if I
were to purchase a piece of land.
Future value (FV) = (1+ i) * PV (present value)
Example 2:
You are planning to take a year long trip around Europe and Asia beginning in one year.
You estimate that you will need to have $25,000 saved at the start of your trip. If
interest rates are currently 8%, how much do you need to invest today to have $25,000
one year from now?
PV = 25000 / (1+0.08) = 23,148
I would need $23,148 invested today to have $25,000 one year from now.
PV = FV / (1+i)
Those formulas work if we are only looking ahead one year. If there are multiple years,
then we start to see the effects of compounding
Example 3:
If you saved $1,000 today and invested it at 10% interest, you would have $1,100 at the
end of year 1. What would you have at the end of year 2?
$1100 x 1.1 = $1210
At the end of year 3?
$1210 x 1.1 = $1331
You can see that each year, the earnings grow by more than they did in the previous
year because the amount being invested grows and so earns more interest. This is the
power of compounding (and why it important to save for retirement early in life!)
Example 4:

Seminar #9
Assume you are a personal financial planner. Joe comes to see you for some advice.
He recently inherited a large sum of money. Joe is currently 55. He will receive a full
pension from his employer when he turns 65. However, now that he has received this
money, he would like to retire immediately. He would like to set aside enough from the
inheritance that he can take out $50,000 per year from ages 55 65 and have fun with
the rest. Assume investments are earning 7% interest.
How much does he need to set aside today to receive the cash flows that he
needs/wants for the next 10 years?
7.023562 x $50,000 = $351,178 needs to be invested today
$50,000 x 10 years = $500 000

Seminar #9
We can prove that our number is correct with the following table:

351,17
9

Initial investment
Year 1

24,58
3

(50,0
00)

325,76
2

Year 2

22,80
3

(50,0
00)

298,56
5

Year 3

20,90
0

(50,0
00)

269,46
4

Year 4

18,86
3

(50,0
00)

238,32
7

Year 5

16,68
3

(50,0
00)

205,01
0

Year 6

14,35
1

(50,0
00)

169,36
0

Year 7

11,85
5

Year 8

9,185

Year 9

6,328

131,21
6
90,40
1
46,72
9

Year 10

3,271

(50,0
00)
(50,0
00)
(50,0
00)
(50,0
00)

(0)

Seminar #9
Although slightly different, bond pricing has many similarities to this example in that we
are determining what a stream of future cash flows are worth today based on current
interest or investment rates. Bonds payable
Grand Ventures Inc. has decided to issue $5 million in bonds to finance an expansion of
its business into Calgary. The bonds have an annual interest rate of 7% and pay
interest on June 30 and December 31. The bonds mature on December 31, 2017.
Grand Ventures issued the bonds on January 1, 2013 and were able to raise
$4,797,228 on the issue. (8% yield)
1) Explain why the company did not receive the full $5 million for the issue:
The company did not issue the full $5 million because the coupon interest rate for the
bonds were likely a little lower than the market effective interest rate. This means that
the bonds would pay out less interest than what the investors demanded or wanted. As
a result, the value of the bonds would be lower.
2) Assume the market rate was 6%, calculate the amount Grand Ventures would have
been able to receive.
0.74409 x $5,000,000 = $3,720,450
8.53020 x $175,000 = $1,492,785
Grand Ventures would have been able to receive $5,213,235

Seminar #9
3) Grand Ventures has a December 31 year end. Use the assumptions presented in 2)
above and prepare all journal entries required for 2013. Grand Ventures amortizes
bond premiums and discounts using the effective interest method.
Jan 1, 2013
DR Cash
5213235
CR Bonds Payable
5213235
Jun 30, 2013
DR Interest Expense
DR Bonds Payable
CR Cash

156397
18603
175000

Dec 31, 2013

DR Interest Expense
DR Bonds Payable
CR Cash

155839
19161
175000

4) Prepare the bond presentation as it might appear on the balance sheet at December
31, 2013.
GRAND VENTURES INC.
Statement of Financial Position
December 31, 2013
Non-current liabilities
Bonds payable

5175471

Seminar #9
Appendix 1 present value tables

Seminar #9
Appendix 2 Bond amortization tables
Assumption 1 bond was issued at a discount

Effective
interest
(8%)

Paid
Interest
(7% of $5M)

Amort
of bond
discount

01-Jan-13
30-Jun-13
31-Dec-13
30-Jun-14
31-Dec-14
30-Jun-15
31-Dec-15
30-Jun-16
31-Dec-16
30-Jun-17
31-Dec-17
Total

191,88
9
192,56
5
193,26
7
193,99
8
194,75
8
195,54
8
196,37
0
197,22
5
198,114
199,03
8

17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000

1,952,772

1,750,000

16,889
17,565
18,267
18,998
19,758
20,548
21,370
22,225
23,114
24,038

Bond
value
4,797,2
28
4,814,1
17
4,831,6
82
4,849,9
49
4,868,9
47
4,888,7
05
4,909,2
53
4,930,6
23
4,952,8
48
4,975,9
62
5,000,0
01

202,773

Notice that the total interest expense equals the total cash interest paid + the
total bond discount. This is the total cost of the bond.

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Seminar #9
Assumption 2 bond was issued at a premium
Effective
interest
(6%)

Paid
Interest
(7% of $5M)

Amort
of bond
premium

01-Jan-13
30-Jun-13
31-Dec-13
30-Jun-14
31-Dec-14
30-Jun-15
31-Dec-15
30-Jun-16
31-Dec-16
30-Jun-17
31-Dec-17
Total

156,39
8
155,84
0
155,26
5
154,67
3
154,06
3
153,43
5
152,78
8
152,12
1
151,43
5
150,72
8

17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000
17
5,000

1,536,645

1,750,000

(18,602)
(19,160)
(19,735)
(20,327)
(20,937)
(21,565)
(22,212)
(22,879)
(23,565)
(24,272)

Bond
value
5,213,2
55
5,194,6
53
5,175,4
92
5,155,7
57
5,135,4
30
5,114,4
93
5,092,9
27
5,070,7
15
5,047,8
37
5,024,2
72
5,000,0
00

(213,355)

Notice again that the total interest expense equals the total cash interest paid
- the total bond premium (the premium offsets, or reduces the overall interest
cost). This is the total cost of the bond.

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