Chapter 8

Liabilities
Exercises
(5-15 min.) E 8-16
Req. 1

DATE

Journal
ACCOUNT TITLES AND EXPLANATION

DEBIT

Warranty Expense ($150,000 0.06)................................

Estimated Warranty Payable........................................

9,000

Estimated Warranty Payable.............................................

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

9,400

CREDIT

9,000

9,400

Req. 2
INCOME STATEMENT
Sales revenue......................................................................................
Warranty expense...............................................................................

$150,000
9,000

BALANCE SHEET
Current liabilities
Estimated warranty payable
($8,000 + $9,000 $9,400).......................................................

7,600

Req. 3
Estimated warranty payable, a current liability, will cause a companys current ratio to
decrease.

(10-15 min.) E 8-17

Journal
DATE

552

ACCOUNT TITLES AND EXPLANATION

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

Copyright 2012 Pearson Canada Inc.

DEBIT

CREDIT

Aug.

Dec.

31 Cash........................................................................................
Unearned Subscription Revenue.....................................
HST Payable ($1,500 0.13)............................................

1,695

31 HST Payable............................................................................
Cash...................................................................................

195

31 Unearned Subscription Revenue..........................................

Subscription Revenue ($1,500 4/12)

500

1,500
195

195

500

BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($1,500 $500)..............................................

$1,000

(10 min.) E 8-18

INCOME STATEMENT
Expenses:
Payroll expense...........................................................................................
Payroll tax expense ($150,000 0.06)........................................................

$150,000
9,000

BALANCE SHEET
Current liabilities:
(Payroll payable) ($7,600 $1,200).............................................................
Employee benefits and withholdings payable
($1,200 + $1,000)....................................................................................

6,400
2,200

(5-10 min.) E 8-19

Req. 1
Interest to
accrue at
Dec. 31, 2011

Final payment
on July 1, 2012

$60,000 0.05 5/12

$1,250

Req. 2

553

$60,000 + ($60,000 0.05)

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$63,000

Req. 3
Interest expense for:
2011 =
2012 =

$60,000 0.05 5/12

$60,000 0.05 7/12

=
=

$1,250
$1,750

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

554

(10-20 min.) E 8-21

Req. 1
Accounts payable are amounts owed to suppliers for products or services that have been
purchased on account.
Accrued expenses are expenses that the company has incurred but not paid. They are
liabilities for expenses such as interest and income taxes.
Employee compensation and benefits are amounts owed to employees for salaries,
withholding taxes and other payroll-related expenses such as health benefits.
Current portion of long-term debt is next years payment on the companys long-term debt
and on finance leases.
Long-term debt is the amount of long-term notes and bonds payable that the company
expects to pay after the coming year.
Post-retirement benefits are the companys liabilities for providing benefits mainly
pensions and health care to retirees.
The other liabilities are a catch-all group of liabilities that do not fit one of the more specific
categories. The other liabilities are long-term, as shown by the fact that they are not listed
among the current liabilities. An example would be finance lease payments due after the
next fiscal year.

Req. 2
Total assets = $299 million, the sum of total liabilities and
shareholders equity
Debt ratio

Total liabilities ($299 million $73 million)*

Total assets ($299 million)

A debt ratio of 76% is high.

____
*Or, $59 + $115 + $31 + $21 =
555

$226

= 0.76

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= 0.76

$299

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

556

(5-10 min.) E 8-22

Req. 1
The company should report this situation in a note to the financial statements. The note
should convey essentially the same message as given in Note G.

Req. 2
The company would report:
INCOME STATEMENT
Estimated loss (or expense)......................................................

$2,000,000

BALANCE SHEET
Estimated liability.......................................................................

$2,000,000

Note G Same as above.

DATE

Journal
ACCOUNT TITLES AND EXPLANATION
Estimated Loss (or Expense)...............................
Estimated Liability...........................................

DEBIT
2,000,000

CREDIT

2,000,000

(15-20 min.) E 8-23

Premium Golf Equipment
Balance Sheet (partial)
December 31, 2011
Current liabilities:
a. Estimated warranty payable
[$30,000 + ($3,000,000 0.03) $60,000]................................................
b. Current portion of long-term note payable..................................................
Interest payable ($150,000 0.05 1/12).....................................................
c. Unearned sales revenue ($125,000 $100,000)..........................................
d. Employee withholdings and company CPP & EI
557

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

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$ 60,000
30,000
625
25,000
25,000

Employee Benefits Payable..........................................................................

Total current liabilities..............................................................................
Long-term liabilities:
Note payable ($150,000 $30,000)..........................................................

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

9,000
$149,625
$120,000

558

Problems
Group A
(15-20 min.) P 8-54A
a. Sales tax payable ($110,000 0.07)..................................................................

$ 7,700

b. Note payable, short-term...................................................................................

Interest payable ($90,000 0.07 2/12)............................................................

$90,000
1,050

c. Unearned service revenue ($1,800 2/6)..........................................................

d. Estimated warranty payable

($11,300 + $31,000 $34,700).......................................................................

$ 7,600

e. Portion of long-term note payable due

within one year..............................................................................................
Interest payable ($100,000 0.06).....................................................................

$20,000
6,000

600

(30-40 min.) P 8-55A

Journal
ACCOUNT TITLES AND EXPLANATION

DATE
2011
Mar.
3 Inventory.............................................................................
Note Payable, Short-term.............................................

DEBIT
40,000

40,000

Apr.

30 Cash....................................................................................
Note Payable, Short-term.............................................
Note Payable, Long-term..............................................

50,000

Sept.

3 Note Payable, Short-term..................................................

Interest Expense ($40,000 0.05 6/12)
Cash...............................................................................

40,000
1,000

31 Warranty Expense ($190,000 0.02)................................

Estimated Warranty Payable........................................

3,800

Dec.

559

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

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CREDIT

25,000
25,000

41,000

3,800

31 Interest Expense ($50,000 0.09 8/12)

Interest Payable............................................................
2012
Apr.
30 Note Payable, Short-term..................................................
Interest Payable.................................................................
Interest Expense ($50,000 0.09 4/12)
Cash...............................................................................

3,000

3,000

25,000
3,000
1,500

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

29,500

560

Problems
Group B
(15-20 min.) P 8-63B
a. Provincial portion HST tax payable
($50,000 0.08)................................................................................................
Federal Portion HST payable ($50,000 0.05)..............................................

$ 4,000
$ 2,500

b. Unearned rent revenue ($6,000 2/3)............................................................

$ 4,000

c. Note payable, short-term.................................................................................

Interest payable ($12,000 0.09 3/12).........................................................

$12,000
270

d. Estimated warranty payable

($12,400 + $22,300 $24,600)....................................................................

$10,100

e. Portion of long-term note payable due

within one year............................................................................................
Interest payable ($100,000 0.05 5/12).......................................................

$20,000
2,083

(30-40 min.) P 8-64B

Journal
ACCOUNT TITLES AND EXPLANATION

DATE
2011
Jan.
9 Store Fixtures.................................................................
Note Payable, Short-term..........................................
June

July

Dec.
561

DEBIT
50,000

30 Cash................................................................................
Note Payable, Short-term..........................................
Note Payable, Long-term...........................................

200,000

9 Note Payable, Short-term...............................................

Interest Expense ($50,000 0.08 6/12)
Cash............................................................................

50,000
2,000

31 Warranty Expense ($600,000 0.03)

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual
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CREDIT

50,000

50,000
150,000

18,000

52,000

Estimated Warranty Payable.....................................

Dec.

18,000

31 Interest Expense
($200,000 0.09 6/12)..................................................
Interest Payable.........................................................

9,000

2012
June
30 Note Payable, Short-term...............................................
Interest Payable..............................................................
Interest Expense ($200,000 0.09 6/12)
Cash [$50,000 + ($200,000 0.09)].

50,000
9,000
9,000

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

9,000

68,000

562

(15-30 min.) P 8-70B

Finance Lease general understanding

Req. 1
Using a discount rate of 7% and annual lease payments of $38,000, the present value of the
annual lease payments would be ($38,000 x 7.024 [Exhibit B-7, Appendix B]) $266,912.
Therefore, following IAS 17, the entry to record the lease the Caterpillar track excavator
would be:
Jan 2, 2011
Leased Caterpillar Track Excavator

266,912

Finance Lease Liability

266,912

To record acquisition of a Caterpillar 325DL Track Excavator using a finance lease with
a 10-year term using a discount rate of 7% and annual payments of $38,000.

Req. 2
Leased Caterpillar Track Excavator would be a non-current asset with Property, Plant, and
Equipment. Finance Lease Liability would be classified as a long-term liability.

Req. 3
The annual depreciation expense would be $26,691 ($266,912/10).
December 31, 2011
Depreciation expense

26,691

Accumulated depreciation

26,691

To record depreciation expense for 2011.

Req. 4
Argus would calculate the lease interest as follows:
Lease obligation at January 2, 2011
Interest expense $266,912 x 7%

563

$266,912
$18,684

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

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December 31, 2011

Lease Interest Expense

18,684

Lease interest payable

18,684

To record lease interest expense for 2011.

Chapter 8 Liabilities
Copyright 2012 Pearson Canada Inc.

564

Req. 5
Argus would record the payment of the lease installment as follows:
January 2, 2012
Lease Interest payable

18,684

Finance Lease Liability

19,316

Cash
To record lease payment.

565

Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

Copyright 2012 Pearson Canada Inc.

38,000