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Chapter 11
Current Liabilities and Payroll
Questions
1. A current liability is one that is payable within the coming year or within the company’s
normal operating cycle if longer than a year. All other liabilities are long-term.
A contingent liability is a potential liability that depends on a future event arising out of past
events. The future event will determine the amount and existence of the liability. A contingent
liability may or may not become an actual obligation.
2. The company reports current liabilities for the short-term note payable of $50,000 and for
interest payable of $1,000 ($50,000 ᅲ 0.04 ᅲ 6/12).
3. Retailers act as collecting agents for the federal government. Stores charge their customers
GST, but the GST belongs to the federal government. The store has a liability to pay the federal
government (Receiver General) the amount of tax collected less applicable input tax credits.
4. Current portion of long-term debt is the amount of the principal of long-term debt due within
one year. Because this amount is due within one year, it is reported as a current liability on the
balance sheet.
5. An accrued expense is an expense that has been incurred, but has not been paid. Because the
expense has been incurred but not paid, it must be accrued, thus it is a liability.
6. Accounts payable and short-term notes payable are both current liabilities, that is, both are due
and payable within one year or within the company’s operating cycle.
Differences:
Accounts payable are amounts owed for products or services that are purchased on open account.
Short-term notes payable are a form of financing.
Accounts payable have no interest obligation (however, if paid late, interest or late payment
charges could be incurred); short-term notes payable have a defined rate of interest due over the
term of the note.
7. At the beginning of the school term, tuition collected in advance is a liability of the school
because it is an unearned revenue. At the end of the term, the tuition is a revenue because the
tuition has been earned.
8. A customer deposit is a liability because the company has not provided service for the deposit
and must refund that cash to its customers under certain conditions. The security deposit
collected by telephone and other utility companies is an example.
9. The company’s warranty expense for the year is $50,000, the estimate based on the current
year’s sales. The matching objective demands that this expense be matched against the period’s
revenues.
10. A contingent liability of a definite amount arises from guaranteeing the note payable or loan
of another business. A contingent liability of indefinite amount arises from pending lawsuits in
which the business is the defendant and for which a loss is either unlikely or not estimable.
11. The two basic categories of current liabilities are:
– current liabilities of known amount
Accounts payable Accrued expenses
Sales tax payable Payroll liabilities
GST payable Salary, commission and bonus
Short-term notes payable payable
Current portion of long-term Unearned revenues
debt
– current liabilities that must be estimated
Estimated warranty payable
Estimated vacation pay liability
Income tax payable
12. Service businesses sell their employees’ services, so employment compensation is their
major expense of doing business, just as cost of goods sold is the largest expense in
merchandising.
13. The compensation of the factory supervisor is the company’s payroll expense. The company
would debit the salary to Salary Expense. The compensation of the outside consultant would be
debited to Consulting Expense.
14. Two elements of an employer’s payroll expense in addition to salaries, wages, commissions,
and overtime pay are employee government benefits expense and fringe benefits.
15. The amount of income tax withheld from employee paycheques depends on the employee’s
gross pay, the amount of nonrefundable tax credits claimed on the Personal Tax Credit Form
(TD1) and the tax rate set by CRA.
16. Canada Pension Plan is a pension plan administered by the federal government. The Quebec
Pension Plan is administered by the Quebec government. The governments collect contributions
from employees and employers to fund the plan. The funds are used to pay retirement pensions,
disability pensions, and death benefits to eligible Canadians and Quebec residents.
17. Required deductions: Income tax, Canada (or Quebec) Pension, and Employment Insurance
Optional deductions: Charitable donations, Canada Savings Bonds, Employee savings plans, and
Employee Benefits premiums
18. Three employee benefit expenses are Canada (or Quebec) Pension, Employment Insurance,
Workers’ Compensation and, where applicable, Provincial Payroll taxes regarding health and
education.
19. The employee and employer both pay Employment Insurance premiums; the employer’s
share is 1.4 times the employee’s share. The purpose of the Employment Insurance Fund is to
provide assistance to the contributors (employees) to the fund who cannot work for a variety of
reasons.
20. The payroll register, a special journal resembling the cash payments journal or cheque
register, lists the employees and the amounts needed to record salary or wage expense for the pay
period. It also serves as a cheque register for payroll by listing each payroll cheque number.
The earnings record for each employee provides the business with the information needed for
filing employee withholdings and benefits returns with the federal and provincial governments.
The earnings record also holds the information needed to prepare the statement of remuneration
paid, Form T4, given to each employee at the end of the year.
A special payroll bank account is sometimes used to disburse paycheques to employees.
Payroll cheques are used to pay employees. A paycheque is like any other cheque except that its
attachment lists the employee’s gross pay, payroll deductions, and net pay. Note that many
employers pay their employees through EFT (electronic funds transfer) and instead supply
employees with a pay statement that provides the same information as the payroll cheque stub
would have.
21. Employment insurance premiums are determined annually by the federal government.
Assuming a rate of 1.83% on earnings up to $45,900, the maximum employment insurance
premium this employee can pay is $839.97. The employer will contribute 1.4 times this amount
or $1,175.96.
22. The two principal types of internal controls over payroll are controls for efficiency and
controls for safeguarding payroll disbursements. Good internal controls for efficiency save time
and money in reconciling the bank account. These controls include following established policies
for hiring and terminating employees and complying with government regulations. Controls that
safeguard cash minimize fraud and ensure that the correct amount of cash is paid to the
appropriate employees.
23. Some companies use a special payroll bank account to keep the payroll cheques separate
from the day-to-day business cheques. It may be easier to complete two bank reconciliations that
are less complicated than one complicated bank reconciliation. Any payroll issues may also be
highlighted in a separate payroll bank-account reconciliation.
24. Three internal controls designed to safeguard payroll cash are (1) the separation of the
responsibility for hiring and terminating employees from the responsibility for distributing
paycheques; (2) ensuring paycheques are issued to the actual employee payee on the cheque; 3)
establishing a formal time-keeping system to ensure that employees actually worked the number
of hours claimed. The requirement that each employee wear an identification badge that bears his
or her picture and the designation of an employee from the home office as the occasional
distributor of paycheques are controls that help ensure that cash is paid only to bona fide
employees.
Starters
(10 min.) S 11-1
Req. 1
General Journal
DATE
2013 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
a. Dec. 31 Interest Expense ($32,000 0.05 6/12) 800
Interest Payable 800
Accrued interest expense at year end.
2014
b. June 30 Note Payable, Short-Term 32,000
Interest Payable 800
Interest Expense ($32,000 ᅲ 0.05 ᅲ 6/12) 800
Cash 33,600
Paid note and interest at maturity.
(5-10 min.) S 11-2
Mission Corp.
Balance Sheet (partial)
December 31, 2013
ASSETS LIABILITIES
Current liabilities:
Note payable, short-term $32,000
Interest payable 800
Mission Corp.
Income Sheet (partial)
For the Year Ended December 31, 2013
Revenues:
Expenses:
Interest expense $800
(10 min.) S 11-3
Req. 1
General Journal
DATE 2014 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Jan. 31 Cash ($600,000 0.30) 180,000
Notes Receivable ($600,000 – $180,000) 420,000
Sales Revenue 600,000
To record sales.
c.
Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Employee Benefits Expense 86.77
Canada Pension Plan Payable (S 11-7) 57.17
Employment Insurance Payable (S 11-7) 29.60
To record employer’s payroll expenses.
EI Payable is calculated as $21.14 x 1.4 = $29.60.
Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Mar. 15 Employment Insurance Payable 50.74
Canada Pension Plan Payable 114.34
Employee Income Tax Payable 231.00
Cash 396.08
To record remittance to CRA.
EI Payable = $21.14 + $29.60 = $50.74
CPP Payable = $57.17 + $57.17 = $114.34
(10 min.) S 11-9Mar5937
2014
June 1 Note Payable, Short-term 86,000
Interest Payable 3,010
Interest Expense ($86,000 ᅲ 0.06 ᅲ 5/12) 2,150
Cash [$86,000 + ($86,000 ᅲ 0.06)] 91,160
(5-15 min.) E 11-2
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
June 30 Cash 128,800
Sales Revenue 115,000
Sales Tax Payable ($115,000 ᅲ 0.07) 8,050
GST Payable ($115,000 ᅲ 0.05) 5,750
$325,000 – x = 2.00
$192,500 – x
325,000 – x = 2.00(192,500 – x)
325,000 = x + 385,000 – 2.00 x
-x = -60,000
x = 60,000
Req. 1 (5-10 min.) E 11-6
General Journal
DATE
2014 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Jan. 2 Cash 60,000
Retainer Fees 60,000
Received retainer fees in advance.
Retainer Fees
Jan. 31, 2014 5,000 Jan. 2, 2014 60,000
Bal. 55,000
Income statement:
Loss from damage claim (Note X) $300,000
Balance sheet:
Liability for damage claim (Note X) $300,000
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Loss from Damage Claim 300,000
Liability for Damage Claim 300,000
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Dec. 31 Income Tax Expense 16,000
Income Tax Payable 16,000
To record the monthly estimate or installment
2014
Jan. 15 Income Tax Payable 16,000
Cash 16,000
($10,000 x 11 = $110,000; $126,000 – $110,000 = $16,000)
(10-15 min.) E 11-12
Gross pay: $1,875 + ($50,000 ᅲ 0.07) $5,375.00
Deductions:
Charitable contribution $ 50.00
Dental insurance 49.15
Income tax ($5,375.00 ᅲ 0.20) 1,075.00
Employment Insurance premium ($5,375.00 ᅲ 0.0183) 98.36
Canada Pension Plan [($5,375.00 – $291.67*) ᅲ 0.0495] 251.62 1,524.13
Net Pay $3,850.87
* Basic exemption 12 = $3,500 12 = $291.67
Deductions:
Withheld income tax ($446.25 ᅲ 0.25) 111.56
CPP contributions [($446.25 – $67.31*) ᅲ 0.0495] 18.76
EI premiums ($446.25 ᅲ 0.0183) 8.17
RRSP contribution 10.00
Total deductions 148.49
Net pay $297.76
* $3,500 52 = $67.31
Req. b (employers’ payroll entry)
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Wages Expense $446.25
Canada Pension Plan Expense* 18.76
Employment Insurance Expense* 11.44
($8.17 ᅲ 1.4)
Employee Income Tax Payable 111.56
CPP Payable ($18.76 + $18.76) 37.52
EI Payable ($8.17 + $11.44) 19.61
RRSP Contribution Payable 10.00
Wages Payable 297.76
Deduction:
Withheld federal income tax $138.55
Withheld provincial income tax 99.70
CPP contributions [($2,000-$291.67*) ᅲ 0.0495] 84.56
EI premiums ($2,000 ᅲ 0.0183) 36.60
Total deductions 359.41
Net pay $1.640.59
*$3,500 12 = $291.67
Req. 2 (employers’ payroll entry)
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Salary Expense 2,000.00
Canada Pension Plan Expense* 84.56
Employment Insurance Expense* ($36.60 ᅲ 1.4) 51.24
Employee Income Taxes Payable ($138.55 + $99.70) 238.25
CPP Payable ($84.56 + $84.56) 169.12
EI Payable ($36.60 + $51.24) 87.84
Wages Payable 1,640.59
* Could also debit Employee Benefits Expense
Req. 1 (15-30 min.) E 11-17
Current ratio reported by the corporation =
Billions
2014 2013
Total current assets = $24.50 = 2.10 $22.92 = 1.52
Total current liabilities $11.66 $15.12
$11.66 + $7.00
It appears that the corporation needed to refinance and reclassify the current liabilities as long-
term in order to keep the current ratio from going down in 2014 compared to 2013. This might
have caused the company to appear to be (and perhaps really be) incapable of meeting its current
obligations.
$78 + $3 – X = $26
X = $55 million
During 2014, Vallarta Company paid off notes payable of $55 million.
Req. 2
Accrued Payrolls and Benefits
Dec. 31, 2013 Balance 298
2014 Payments 250 2014 Expense X
Dec. 31, 2014 Balance 270
Ethical Issue
It is not unethical to commit a company to a high level of debt. Lenders and other creditors are
hurt most directly by a company that cannot pay its debts. Presumably trade creditors and other
lenders protect their own interests and can refuse to sell goods on credit or make loans as they
please. As long as the borrower is honest, discloses all liabilities appropriately, and meets the
requirements imposed by creditors, by shareholders, and by taxing and other legal authorities,
then the borrower’s behaviour can be considered ethical.
Taking on too much debt is risky because interest and principal must be paid according to the
terms of the agreement-during bad times as well as good. Again, it is the creditor’s responsibility
to evaluate a debtor’s ability to pay liabilities. Lenders that advance too much credit to a losing
business are said to “throw good money after bad.”
Problems
Group A
(30-40 min.) P 11-1A
General Journal
DATE
2013 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Jan. 3 Machine 350,000
GST Recoverable 17,500
Note Payable, Short-term 367,500
28 Cash 3,000,000
Note Payable, Long-term 3,000,000
2014
Feb. 28 Note Payable, Long-term 300,000
Interest Payable 75,452
Interest Expense ($3,000,000 ᅲ 0.03 – $75,452) 14,548
Cash 390,000
Gross pay:
Salary earnings ($7,500 ᅲ 12) $90,000.00
Bonus ($90,000 ᅲ 0.10) 9,000.00
Gross pay $99,000.00
Deductions:
Withheld income tax [($2,398 ᅲ 12) + $4,512] 33,288.00
Canada Pension Plan 2,306.70
Employment Insurance 839.97
United Way contribution ($37.50 ᅲ 12) 450.00
RRSP Contribution ($55 ᅲ 12) 660.00
Total deductions 37,544.67
Net pay $ 61,455.33
(continued) P 11-5A
Req. 3 (liability section of June 30 balance sheet) Shell Storage Units
Shell Storage Units
Balance Sheet
June 30, 2014
LIABILITIES
Current liabilities:
Notes payable, short-term $ 20,000
Accounts payable 235,620
Current portion of long-term debt payable 50,000
Interest payable 6,650
Salaries payable 4,963
Employee income tax payable 1,365
Employer payroll costs payable 820
Employee insurance benefits payable 991
Estimated vacation pay liability 21,210
Sales tax and GST payable 5,972
Unearned rent revenue 12,000
Total current liabilities 359,591
Long-term liabilities:
Long-term debt payable 200,000
Total liabilities $559,591
Contingent liabilities (Note X)
Note X-At June 30, 2014, the company was the defendant in a lawsuit that could result in a
$200,000 liability. The outcome is uncertain, but the company expects to win the case.
Req. 1 and 3 (payroll register) (20-30 min.) P 11-6A
Payroll Register
GROSS PAY DEDUCTIONS NET PAY ACCOUNT DEBITED
EMPLOYEE NAME HRS STRAIGHT-TIME OVER-TIME TOTAL INCOME TAX CANADA
PENSION PLAN EMPLOYMENT
INS. UNITED WAY TOTAL AMT. RETIREMENT PROGRAM OFFICE SALARIES
EXPENSE SALES SALARIES EXPENSE
Molly Dodge 43 $1,200 $135 $1,335 $474.10 $ 0.00 $ 0.00 $25.00 $499.10 $ 835.90 106.80
$1,335.00
Tally Allard 40 520 520 67.60 22.41 9.52 2.00 101.53 418.47 41.60 520.00
George White 49 400 135 535 63.70 23.15 9.79 2.00 98.64 436.36 42.80 535.00
Luigi Valenti 42 800 60 860 352.00 39.24 0.00 5.00 396.24 463.76 68.80 860.00
Total $2,920 $330 $3,250 $957.40 $84.80 $19.31 $34.00 $1,095.51 $2,154.49 $260.00
$1,055.00 $2,195.00
Computations:
Dodge:
Straight-time hourly pay: 40 ᅲ $30 = $1,200
Overtime: 3 ᅲ $30 ᅲ 1.5 = $135
Allard:
Straight-time hourly pay: 40 ᅲ $13 = $520
White:
Straight-time hourly pay: 40 ᅲ $10 = $400
Overtime: 9 ᅲ $10 ᅲ 1.5 = $135
Valenti:
Straight-time hourly pay: 40 ᅲ $20 = $800
Overtime: 2 ᅲ $20 ᅲ 1.5 = $60
Req. 2 (entry to record weekly payroll) (continued) P 11-6A
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Sept. 21 Office Salaries Expense 1,055.00
Sales Salaries Expense 2,195.00
Employee Income Taxes Payable 957.40
CPP Payable 84.80
Employment Insurance Payable 19.31
Employee United Way Payable 34.00
Cash 2,154.49
Req. 3 (entry to record employer’s payroll information)
General Journal
DATE ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Sept. 21 Employee Benefits Expense 111.83
CPP Payable 84.80
Employment Insurance Payable
($19.31ᅲ 1.4) 27.03
Req. 4
Dodge’s accumulated earnings exceed the maximum ($50,100 for CPP), and presumably the
maximum Canada Pension Plan deduction of $2,306.70 has already been made. Dodge and
Valenti have no EI deducted because their accumulated earnings exceed the maximum $45,900
and presumably the maximum deduction of $839.97 has already been made.
Req. 5
$3,250 ᅲ0.04 = $130.00
*d. Provincial sales tax and GST payable ($80,000 ᅲ 1.05 ᅲ 0.10) + ($80,000
ᅲ 0.05) $12,400
5.
May 4 Salaries payable 33,603
Sales salaries (4/5 x 167,000) 133,600
Jobsite salaries(4/5 x 27,000) 21,600
Office salaries(4/5 x 58,000) 46,400
Income Tax payable(4/5 x 49,686) 39,749
CPP payable(4/5 x 12,900) 10,320
EI payable(4/5 x 3,800) 3,040
RRSP contribution payable(4/5 x 7,600) 6,080
Blue Cross Insurance payable(4/5 x 10,000) 8,000
Cash or Salaries payable 168,014
6.
May 4 Employee Benefits Expense 14,576
CPP Payable 10,320
EI Payable ($3,040 ᅲ 1.4) 4,256
To record employer’s portion of the benefits
7.
May 15 Income Tax payable (49,686 + 9,937) 59,623
CPP payable (12,900 x 2) + (2,580 x 2) 30,960
EI payable (3,800 + 5,320 + 760 + 1,064) 10,944
Cash 101,527
To record the April 2012 remittance to CRA.
28 Cash 15,594
Accounts Receivable 88,366
Warranty Expense 3,680
Sales 92,000
HST Payable 11,960
Estimated Warranty Payable 3,680
Mar. 7 HST Payable 11,960
HST Recoverable 4,750
Cash 7,210
31 Cash 9,944
Accounts Receivable 89,496
Warranty Expense 3,520
Sales 88,000
HST Payable 11,440
Estimated Warranty Payable 3,520
Problems
Group B
(30-40 min.) P 11-1B
General Journal
DATE
2013 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Mar. 3 Equipment 66,000
GST Recoverable 3,300
Note Payable, Short-term 69,300
30 Inventory 25,000
GST Recoverable 1,250
Note Payable, Short-term 26,250
Deductions:
Withheld income tax [($1,762.28 ᅲ 12) + $4,095.11] 25,242.47
Canada Pension Plan 2,306.70
Employment Insurance 839.97
Charitable donations ($6,500 ᅲ 0.015 ᅲ 12) 1,170.00
Life insurance ($68 ᅲ 12) 816.00
Total deductions 30,375.14
Net pay $63,224.86
GST Payable
Property Tax Payable Unearned Service
Revenue
Bal. 4,900 Bal. 9,284 (f) 6,000 Bal. 18,000
Bal. 12,000
Long-term Debt Payable
(b) 60,000 Bal. 300,000
Bal. 240,000
(a) ($74,000 ᅲ 0.05) ᅲ 11/12 = $3,392
(b) ($300,000 ᅲ 0.055) ᅲ 4/12 = $5,500
(e) ($240,000 ᅲ 0.06) = $14,400
(continued) P 11-5B
Req. 3 (liability section of June 30 balance sheet) Uptown Hardware
Uptown Hardware
Balance Sheet
June 30, 2014
LIABILITIES
Current liabilities:
Notes payable, short-term $ 74,000
Accounts payable 355,680
Current portion of long-term debt payable 60,000
Interest payable 8,892
Salaries payable 16,690
Employee withholdings payable 4,756
Employer payroll costs payable 2,788
Employee Insurance benefits payable 300
Estimated vacation pay liability 22,296
GST payable 4,900
Property tax payable 9,284
Unearned service revenue 12,000
Total current liabilities 571,586
Long-term liabilities:
Long-term debt payable 240,000
Total liabilities $811,586
Contingent liabilities (Note Y)
Req. 4
Note Y: At June 30, 2014, the company was the defendant in a lawsuit that could result in a
$100,000 liability. The outcome is uncertain, but the company expects to win the case.
(20-30 min.) P 11-6B
Req. 1 and 3 (payroll register)
Payroll Register
GROSS PAY DEDUCTIONS NET PAY ACCOUNT DEBITED
EMPLOYEE NAME HRS STRAIGHT-TIME OVER-TIME TOTAL INCOME TAX CANADA
PENSION PLAN EMPLOY-MENT
INS. UNITED WAY TOTAL AMOUNT CHQ. NO. OFFICE SALARIES EXPENSE SALES
SALARIES EXPENSE
Bourdon 45 $ 440.00 $ 82.50 $ 522.50 $ 62.85 $22.53 $ 9.56 $ 16.00 $ 110.94 $ 411.56 178
$522.50
Wells 50 500.00 187.50 687.50 73.25 30.70 12.58 16.00 132.53 554.97 179 $ 687.50
Boyd 49 850.00 286.88 1,136.88 184.10 0.00 0.00 40.00 224.10 912.78 180 1,136.88
Lamont 40 380.00 380.00 42.60 15.48 6.95 4.00 69.03 310.97 181 380.00
Total $2,170.00 $556.88 $2,726.88 $362.80 $68.71 $29.09 $76.00 $536.60 $2,190.28 $902.50
$1,824.38
Computations:
Bourdon:
Straight-time pay: $440/40 = $11
Overtime: 5 ᅲ $11 ᅲ 1.5 = $82.50
Wells:
Straight-time pay: $500/40 = $12.50
Overtime: 10 ᅲ $12.50 ᅲ 1.5 = $187.50
Boyd:
Straight-time pay: $850/40 = $21.25
Overtime: 9 ᅲ $21.25 ᅲ 1.5 = $286.88
Req. 2 (entry to record weekly payroll) (continued) P 11-6B
General Journal
DATE
2012 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Dec. 18 Office Salaries Expense 902.50
Sales Salaries Expense 1,824.38
Employee Income Tax Payable 362.80
CPP Payable 68.71
Employment Insurance Payable 29.09
Employee United Way Charities Payable 76.00
Cash 2,190.28
Req. 3 (entry to record employer’s payroll information)
General Journal
DATE
2012 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
Dec. 18 Employee Benefits Expense 109.44
CPP Payable 68.71
Employment Insurance Payable
($29.09 ᅲ1.4) 40.73
Req. 4
Boyd has no Canada Pension Plan or Employment Insurance deducted because the maximum
pensionable ($50,100) and insurable earnings ($45,900) have been reached; Boyd’s earnings to
date are $56,380.
(continued) P 11-8B
General Journal
DATE
2012 ACCOUNT TITLES AND EXPLANATIONS POST. REF. DEBIT CREDIT
4.
Apr. 30
Employee Benefits Expense 7,288
CPP Payable 5,160
EI Payable ($1,520 ᅲ 1.4) 2,128
To accrue employer’s portion of the benefits use 1/5 of the standard weekly payroll.
5.
May 4 Salaries payable 67,206
Sales salaries expense (4/5 x 334,000) 267,200
Jobsite salaries expense(4/5 x 54,000) 43,200
Office salaries expense(4/5 x 116,000) 92,800
Income Tax payable (4/5 x 99,372) 79,498
CPP payable (4/5 x 25,800) 20,640
EI payable (4/5 x 7,600) 6,080
RRSP contribution payable (4/5 x 15,200) 12,160
Blue Cross Insurance payable (4/5 x 20,000) 16,000
Cash or Salaries payable 336,028
6.
May 4 Employee Benefits Expense 29,152
CPP Payable 20,640
EI Payable ($6,080 ᅲ 1.4) 8,512
To record employer’s portion of the benefits.
7.
May 15 Income Tax payable (99,372 + 19,874) 119,246
CPP payable (25,800 x 2) + (5,160 x 2) 61,920
EI payable (7,600 + 10,640 + 1,520 + 2,128) 21,888
Cash 203,054
To record remittance to CRA.
28 Cash 36,725
Accounts Receivable 330,525
Warranty Expense 6,500
Sales 325,000
HST Payable 42,250
Estimated Warranty Payable 6,500
31 Cash 71,190
Accounts Receivable 284,760
Warranty Expense 12,600
Sales 315,000
HST Payable 40,950
Estimated Warranty Payable 12,600
Challenge Problems
(10-20 min.) P 11-1C
The student should recognize that the effect of failing to record a liability at year end results in
the understatement of a liability and the understatement of either an asset, or, more likely, an
expense. In the case of an unrecorded expense, net income will be overstated.
Understatement of a liability results in the company appearing more solvent than it may be; most
times the current ratio will be overstated even if an asset were omitted. Understatement of an
expense makes the company appear to be more profitable than it may be.
(15-25 min.) P 11-2C
1. The cost of the frequent flyer ticket when there are unsold seats would be the cost of
processing the ticket and baggage and any snack cost. The cost of the frequent flyer ticket when
a paying passenger is bumped would be the ticket revenue forgone.
The airline should probably record the lesser amount unless all or most of their flights are fully
booked. There is no hard-and-fast rule in the case where no reasonable estimate can be made
based on past history.
2. The airline should be able to estimate the potential usage based on its own experience and that
of the industry. The matching principle requires that some expense should be charged against
revenue when the original ticket is sold because the airline knows that there will be some usage
of the frequent flyer miles. The issue is how much to charge at the time of sale.
Decision Problem
(10-15 min.) Decision Problem
Req. 1
The efficiency weakness is the use of a single payroll bank account. The business can correct this
weakness by using two bank accounts, one for day-to-day business transactions and one for
payroll only. This would allow two, simpler reconciliations to be done instead of one rather
complicated reconciliation.
In addition, matching signatures from the cheques to the signatures on the TD1 Forms is
cumbersome and a task that is completed after the cheque is cashed. Terminated employees may
still have a TD1 Form on file and once the cheque is cashed, it is hard to recover the funds.
Tiwannee could also use direct deposit and rely the on the financial institution to verify the
employee.
Req. 2
A supervisor can enter a fictitious employee on a weekly time sheet, submit the time sheet to the
company, and receive and keep the pay cheque. The supervisor may forge a TD1 form with a
fake signature and use that same signature to endorse the cheque.
Also, a supervisor can keep submitting hours worked for a terminated employee. The supervisor
can take the paycheque made payable to that employee and keep it for personal use.
Req. 3
To safeguard the company against frauds identified in Requirement 2, Neil Tiwannee (or a home
office employee) should make unscheduled visits to construction sites and distribute payroll
cheques. If a pay cheque is payable to an employee not present to receive it, Neil Tiwannee can
hold the cheque for pickup at the office or ask other workers if the absent person has been
working on that job. If the workers say no, Neil Tiwannee will have uncovered a possible fraud.
As discussed earlier,Tiwannee could also use direct deposit and rely the on the financial
institution to verify the employee.
Note: The separation of hiring and terminating employees from the duty of distributing pay
cheques would safeguard the company against fraud. However, this separation of duties is not
customary in the construction business because it is more economical for the supervisors to
manage all the hiring and termination of crews and to distribute pay cheques on the job site than
for all the workers to come to the home office to fill in employment forms and to receive their
pay.
Req. 1
Gildan’s current liabilities at October 2, 2011 and 2010 (all amounts in thousands):
Req. 2
The Company’s joint venture, CanAm, has a revolving line of credit in the amount of $4.0
million. Borrowings are due on demand and bear interest at LIBOR plus 2.0%, with a minimum
interest rate of 4.0%, resulting in an initial rate of 4.0% per annum. The line of credit is secured
by a first ranking security interest on the assets of CanAm. There were no amounts drawn under
the line of credit at October 2, 2011 and October 3, 2010.
Req. 3
Guarantees- The Company, and some of its subsidiaries, have granted corporate guarantees,
irrevocable standby letters of credit and surety bonds, to third parties to indemnify them in the
event the Company and some of its subsidiaries do not perform their contractual obligations.
Req. 4 (continued) Financial Statement Case 1
None of these commitments requires an amount to recorded as a liability. For example “On
August 3, 2010, the Company announced that it had entered into an agreement to settle all claims
raised in these class action lawsuits, subject to final approval from the courts, on behalf of all
persons who acquired the Company’s common shares between August 2, 2007 and April 29,
2008 (the “Class Members”). Final court approval of the settlement was obtained from each of
the courts in February and March 2011 and all of the actions have been dismissed on terms
including releases from Class Members of the claims against the Company and the named senior
officers. The settlement agreement provided for a total settlement amount of $22.5 million,
which has been entirely funded by the Company’s insurers. Therefore no provision has been
recorded in the consolidated financial statements and no amounts have been disbursed by the
Company in respect of the settlement.”
Req. 5
“The Company, and some of its subsidiaries, have granted corporate guarantees, irrevocable
standby letters of credit and surety bonds, to third parties to indemnify them in the event the
Company and some of its subsidiaries do not perform their contractual obligations. As at October
2, 2011, the maximum potential liability under these guarantees was $15.1 million (2010 – $21.8
million), of which $5.0 million (2010 – $5.1 million) was for surety bonds and $10.1 million
(2010 – $16.7 million) was for corporate guarantees and standby letters of credit. The surety
bonds are automatically renewed on an annual basis, the corporate guarantees and standby letters
of credit mature at various dates in fiscal 2012.
As at October 2, 2011, the Company has recorded no liability with respect to these guarantees, as
the Company does not expect to make any payments for the aforementioned items. Management
has determined that the fair value of the non-contingent obligations requiring performance under
the guarantees in the event that specified triggering events or conditions occur approximates the
cost of obtaining the standby letters of credit and surety bonds.”
(25-35 min.) Financial Statement Case 2
Req. 1
Req. 2
The current portion of any long-term debt is calculated by totaling the amount of the debt
principal payable within the next year. Interest payable related to the debt is recorded in a
separate account. The current portion of these lease payments is likely calculated using the same
method.
Req. 3
Rainmaker’s long term obligations and other indebtedness at December 31, 2011 and 2010 is;
Dec. 31 Dec. 31 Jan 1
2011 2010 2010
The Company leases certain of its operating equipment and computer software underfinance
lease as well as operating leases. The Company’s obligations under finance leases are secured by
the lessor’s title to the leased assets. The other liability is made up of a compensation plan
whereby it agrees to pay certain executives and directors the cash equivalent of shares of the
Company upon the termination of their respective employment agreement. During 2011 cash
payments of $116,766 (2010 – NIL) were paid representing all the outstanding deferred
compensation liabilities remaining under this plan.
Contingent liabilities
The Company and a subsidiary have been named in a suit filed in the New York Supreme Court
naming various companies, in relation to alleged profit participation rights on the film Escape
from Planet Earth, as well as other claims unrelated to the Company. The Company had obtained
an indemnification agreement from the copyright owner and distributor of the film covering
claims arising from the work by the Company and its subsidiary on the film. The copyright
owner and distributor of the film is defending the suit on behalf of all of the defendants.
Accordingly, the Company believes there will be no material liability or material adverse effects
on operations of the Company or its subsidiaries.
The Company has been served with a Writ with respect to contamination at a property where a
predecessor company formerly leased operating space from the property owner, Sun Life
Assurance Company of Canada. A Writ has been filed in the British Columbia Supreme Court by
Sun Life naming various parties, including Rainmaker Entertainment Inc., as defendants. Sun
Life is seeking unspecified damages from the named defendants. The Company continues to
evaluate the matter to determine the risk of potential liability associated with this claim. A
reasonable estimate of potential liability cannot be determined at this time.
?
(15-25 min.)IFRS Mini-Case
The first situation for Merit Resources and the situation for Harris Distribution are identical in
that both will represent a contingent gain. Under IFRS, Merit has more flexibility than Harris
will have under ASPE. The CICA Handbook for ASPE is very strict and states that contingent
gains shall not be accrued in financial statements. This stipulation is in place because we do not
want to recognize a gain that may never be realized. In this case, the government has indicated
that there will be an expropriation but an agreement has not yet been reached and Harris has not
yet been compensated.Consequently, Harris cannot recognize the gain.
In Merit’s case, the IFRS standard provides more flexibility. IAS 37.31 states that contingent
assets thatwould lead to a contingent gain (think about the journal entry), shall not be recognized.
The section goes on to state that contingent assets usually arise from unplanned or other
unexpected events that give rise to the possibility of an inflow of economic benefits to the entity.
In Merit’s case, the proposed expropriation by the government was unexpected. However, it
appears the outcome is still uncertain so the contingent asset and the corresponding gain should
not be recognized.The section further goes on to state that when the realization of income (the
gain) is virtually certain, the related asset is no longer considered contingent and recognition is
appropriate. Referring to Merit, it may be able to make the case that the discussions with the
government have reached a point where there is virtual certainty that the $3,000,000 gain will be
attained. If so, the gain should be recognized. This option is not available under ASPE.
The second situation for Merit represents a possible contingent liability. Under IFRS, a
contingent liability is a possible obligation that arises from a past event or events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity. In the Merit example, the lawsuit arises
from a past event (the supposed breach of contract). The future event that is not wholly
controllable by Merit is the outcome of the judicial process. It would appear that a contingent
liability exists.
The question then becomes: How should this contingent liability be recognized in the financial
statements of Merit? IFRS 37 states that a contingent liability should not be recognized.
However, if it appears that if there is the probability of an outflow of resources embodying
economic benefits to settle the obligation, a provision should be made. In Merit’s case, then, if it
is more likely than not that the lawsuit will not be settled in their favour and a reasonable
estimate of the payment can be made, the liability should be recognized.
Comprehensive Problem
Comprehensive Problem for Part 2
Req. 1