Expense approach to warranty. Adjusting entry for corporate income tax.. Entry for asset retirement obligation. Entry for asset retirement obligation accretion. Determine amount to accrue as a loss contingency. Revenue approach to warranty. Calculate warranty liability expense approach. Determine amount to accrue as a gain contingency. Calculate liability for unredeemed coupons. Calculate quick acid-test ratio. Calculate current ratio. Calculate days payables outstanding. Calculate net pay.
Description a Knowledge of accounts payable. Determine current and long-term portions of debt. Determine accrued interest payable. Calculate accrued salaries payable. Calculate unearned service contract revenue. Calculate liability from unredeemed trading stamps. Accrual of payroll taxes. Determine range of loss accrual. Calculate asset retirement obligation.
E Payroll entries. E Compensated absences. E Sales taxes. E Asset retirement obligation. E Contingent liabilities. E Premiums.
P Refinancing of short-term debt. P Premiums. P Warranties. P Common types of current liabilities. P Employee related liabilities. P Asset retirement obligation. P Unredeemed coupons. P Contingences. The IASB current proposed definition of a liability is a.
It exists in the present time. There is certainty about the amount of future outflows. The obligation is enforceable on the obligor entity. It represents an economic burden or obligation. An economic obligation is a.
These are day notes, renewable for another day period. These notes should be classified on the balance sheet of Lance Corp as a. Which of the following statements is NOT true about recognition and subsequent accounting for financial liabilities?
They are initially recognized at their fair value. After acquisition, they continue to be accounted for at fair value. After acquisition, they are generally accounted for at amortized cost. Short term liabilities, such as accounts payable, are usually recorded at their maturity value. Regarding zero-interest-bearing notes, a. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 5 7. Which of the following should NOT be included in the current liabilities section of the balance sheet?
Trade accounts payable. Short-term zero-interest-bearing notes payable. A liability due on demand callable debt. Current portion of long term debt to be retired by non-current assets. Which of the following is a current liability? Preferred dividends in arrears. Stock dividends distributable. Preferred cash dividends payable.
Stock splits. Stock dividends distributable should be classified on the a. Which of the following may be classified as a current liability? Accounts receivable credit balances. Losses expected to be incurred within the next twelve months in excess of the company's insurance coverage. Accounting for GST includes a. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 6 The purchaser includes any PST paid in the cost of the goods or services.
A company may exclude a short-term obligation from current liabilities if, at balance sheet date, the entity expects to refinance under an existing agreement for at least a year, and the decision is solely at its discretion.
Cash dividends should be recorded as a liability when they are declared by the board of directors. Under the cash basis method, warranty costs are charged to expense as they are paid. Federal income taxes withheld from employees' payroll cheques should never be recorded as a liability. Corporation income taxes payable a. Which of the following are included in an employer's payroll costs? EI contributions, union dues, and employee income tax deducted.
Accumulating rights to benefits for employees a. Are often mandated by provincial labour law. Are rights that accrue with employee service. All of these statements are correct. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a.
Unauthorized copying, distribution, or transmission of this page is strictly prohibited 7 Non-accumulating rights to benefits, such as parental leave, are generally accounted for by a. The full accrual method. The event accrual method. The cash method.
Financial statement note disclosure only. Which of the following may be used as a basis for calculating bonuses or profit sharing amounts? Under IFRS, a provision is a. At the time of recognition of an asset retirement obligation, the present value should be a. An asset retirement obligation should be recognized when a. Under private enterprise standards, it is recognized as interest expense.
Under private enterprise standards, it is recognized as an operating expense but not as interest expense. Under IFRS, it is recognized as a borrowing cost. The amount should be calculated using the same discount interest rate as was used to calculate the initial present value of the ARO. Using the revenue approach to account for product guarantees and warranty obligations a. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 8 Using the expense approach, the warranty is provided with the product or service for free.
Where warranty costs are immaterial or when the warranty period is quite short, the warranty costs may be accounted for using the cash basis. Using the revenue approach, the warranty is a separate deliverable from the related product or service.
The revenue approach must be used for income tax purposes. The current commonly used accounting treatment for premiums and coupons requires that the costs should a. Under private enterprise standards, a contingent liability is recognized if a. Under current IFRS requirements, a contingent liability is recognized if a.
Which of the following may be accrued as a contingent liability? Threat of expropriation of assets. Pending or threatened litigation.
Guarantees of indebtedness of others. All of the above. Only conditional obligations are recorded. Liabilities must have measurement certainty. A conditional obligation related to an unconditional obligation is not recognized. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 9 Which of the following commitments would NOT require disclosure in the financial statement notes? Major property, plant and equipment expenditures.
Payments under non-cancellable operating leases. Large purchases of materials in the normal course of business. Commitments involving significant risk. The numerator of the acid-test ratio consists of a. The denominator of the days payable outstanding ratio consists of a.
What are the current International Financial Reporting Standards regarding customer loyalty programs such as frequent flyer points? They are recognized only in the financial statement notes. They are recognized only when customers redeem their points. They are not explicitly addressed. The current proceeds are to be split between the original transaction and the award credits as unearned revenue. Item Ans. Binnie Corp. The adjusting entry prepared on December 31, in connection with this note will include a a.
Assuming the company has a December 31 year end and does not use reversing entries, the journal entry to record payment of this note on April 1, will include a a. From the above information only, the total short-term debt of Hull Corp as of the December 31, balance sheet date is a.
On December 31, , Street Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 11 Diamond Co. For the month of May, Diamond Co. Based on the above information, what is the total debit to Accounts Receivable for the month of May? What amount will be debited to the Office Supplies account as a result of this transaction?
The payment was credited to Accounting Revenue. Thirty percent of the work was performed in December , with the rest to be done in January , at which time the customer will be billed. The required adjusting entry at December 31, year end is a.
What amount should Angela record as employer payroll tax expense for October? The journal entry to record this payment will include a a. Unauthorized copying, distribution, or transmission of this page is strictly prohibited 12 Use the following information for questions 46 and My Account. Log Out. Log In. Full Version. Due to planned maintenance, your school has disabled school system log-ins at this time.
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Reacquisition price Debtor : Note Payable Gain on Disposition of Machine Gain on Debt Restructuring Heartland Bank Creditor : Machine Interest Receivable Heartland Bank Creditor : Trading Securities Strickland Inc. In this case, the creditor is the same and so is the currency and therefore the test to establish whether there is a settlement or not revolves around the cash flows.
No gain is recorded by Troubled. This is considered a modification of terms. Note disclosure is required. December 31, Note Payable The payment entry at maturity is: January 1, Note Payable December 31, Bad Debt Expense Interest receipt entry for Green Bank is: December 31, Cash The receipt entry at maturity is: January 1, Cash Interest payment entries for Troubled Inc.
This is not considered a modification of terms. December 31, Cash Notes Payable Gain on Property Disposition Note:The company would also need to disclose interest rates for each liability, collateral if any, covenants and any other significant details in the debt agreements. Current liability since the operating cycle of the winery is 5 years.
Current liability amount actually held in trust. Probably noncurrent, although if operating cycle is greater than one year and current assets are reported based on this longer period, this item would be classified as current.
Interest payable is a current liability and the note payable is noncurrent liability. Current liability. Noncurrent liability. No differences.
Gain on repurchase of debt—Classify as unusual item on income statement with other revenues and gains. Mortgage payable—Classify one-third as current liability and the remainder as long-term liability on balance sheet.
Debenture bonds—Classify as long-term liability on balance sheet. Notes payable—Classify as long-term liability on balance sheet. Income bonds payable—Classify as long-term liability on balance sheet. Specifically, the classification of bonds, determination of cash received with bond issue costs and accrued interest, and disclosure requirements. Purpose—to provide the student with the opportunity to interpret a bond amortization schedule.
This problem requires both an understanding of the function of such a schedule and the relevance of each of the individual numbers. The student is to prepare journal entries to reflect the information given in the bond amortization schedule.
Purpose—to provide the student with an understanding of how to make the journal entry to record the issuance of bonds. In addition, a portion of the bonds are retired and therefore a bond amortization schedule has to be prepared. Student must also deal with accounting for the costs of issuing a bond. Purpose—to provide the student with an understanding of the relevant journal entries which are necessitated for a bond issuance.
This problem involves two independent bond issuances with the assumption that one is sold at a discount and the other at a premium, both utilizing the effective interest method. This comprehensive problem requires preparing journal entries for the issuance of bonds, related interest payments and amortization with the construction of amortization tables where applicable , and the retirement of part of the bonds.
Problem Time minutes Purpose—to provide the student with an understanding of the relevant journal entries, for a bond issuance and bond retirement. This problem requires preparing journal entries, assuming the straight-line method, for the issuance of bonds, related interest payments and amortization, and the retirement of part of the bonds.
Journal entries are required for each of these transactions. Problem Time minutes Purpose—to provide the student the same opportunity as those given in Problem except that the effective interest method will be used. The student will be required to calculate the effective interest rate on the bond using either a financial calculator or Excel function.
The preparation of a partial effective interest table is also required. Purpose—to provide the student with an opportunity to become familiar with the exchange of notes for cash or property, goods, or services. This problem requires the preparation of the necessary journal entries concerning the exchange of a non-interest-bearing long-term note for a computer software system, and the necessary adjusting entries relative to amortization.
The student should construct the relevant schedule of note discount amortization to support the respective entries. Purpose—to provide the student with an opportunity to become familiar with the exchange of a note, which is payable in equal instalments, for machinery.
This problem requires the preparation of the necessary journal entries concerning the exchange and the annual payments and interest. A schedule of note discount amortization should be constructed to support the respective entries. Purpose—to provide the student with the opportunity to contrast the terms of a long-term note given in exchange for the purchase of land.
The discussion of risk and financial statement disclosure is included as part of the required for this question. Journal entries and adjusting journal entries and balance sheet disclosure must also be prepared under both alternatives.
This is a comprehensive question. Purpose—to provide the student with an understanding of how interest rates can be used to deceive a customer. The problem is challenging because for the first year of this transaction, the interest expense exceeds the payments and so the excess is added to the principal balance. Purpose—to provide the student with an understanding of the relevant journal entries which are necessitated when there is a bond issuance and bond retirement.
This problem also provides an opportunity for the student to learn the income statement treatment of the loss from retirement and the footnote disclosure required. Purpose—to provide the student with a loan impairment situation that requires entries by both the debtor and the creditor and an analysis of the loss on impairment.
Purpose—to provide the student with four independent and different restructured debt situations where losses or gains must be computed and journal entries recorded on the books of the creditor and the debtor. Purpose—to provide the student with a situation where troubled debt is sold to another creditor. The student must prepare entries on the books of both creditors and debtors after computing any gains or losses. Czeslaw Inc. Since three bonds reported by Czeslaw Inc. The interest allocation and bond discount amortization are based upon the effective interest method; this is evident from the increasing interest charge.
Interest Payable January 1, Interest Payment Interest Payable The applicable Excel formula follows:. Entry for accrued interest Interest Expense The total costs would be ultimately charged to income.
The only difference would be that the charge would be completely expensed in the year the bond was issued as opposed to spread over the ten-year term of the bond. A more accurate result is obtained compared to using factors from tables as there are a limited number of decimal places in the tables. Bonds Payable April 1, Bonds Payable Gain on Retirement of Bonds If Pfaff were to follow IFRS, then the effective interest method must be used to amortize any discounts or premiums.
The entry to record extinguishment of the bonds is: Bonds Payable The loss on extinguishment of the bonds is: Reacquisition price Less: carrying amount of bonds Loss. December 31, Computer Software System December 31, Depreciation Expense From the perspective of the lender, an instalment note provides for a reduced risk of collection when compared to an interest-bearing note. PROBLEM The value of the land should be recorded at the present value of the future cash flows of the note given in exchange for the land.
The asking price for the land is higher than the real purchase price. There is some flexibility to negotiate a reduction in the asking price for the land for sale by Silverman Corporation. The relevant interest rate to impute on the note is the interest rate to MacDonnell who is the borrower in this case. A mortgage note involves the registering of a charge against the property, in this case land, whereas a promissory note alone offers no reduction of risk to Silverman Corporation.
Should MacDougall fail to pay the note within the terms, Silverman Corporation can obtain recourse through the court and obtain the asset, or the proceeds from the resale of the asset, as satisfaction for the outstanding principal and interest owing on the mortgage note.
A promissory note alone does not offer this potential relief to the creditor and is therefore a higher credit risk to Silverman Corporation. Using present value tables:. June 1, Land June 1, Interest Expense Silverman Corporation would insist on the instalment note in order to secure stronger cash inflows during the term of the note and to reduce the risk of having to collect the note principal in the case of a default by MacDougall. The new sales gimmick may bring people into the showroom the first time but will drive them away once they learn of the amount of their year 2 and year 3 payments.
One should question the ethics of a dealer using this tactic. Income from operations Loss from liquidation of debt Note 1 Income before taxes Income taxes Net income. Note 1. Batonica Limited Debtor : Cash The note can be considered to be impaired only when it is measurable and likely that, based on current information and events, Northern Savings Bank will be unable to collect all amounts due both principal and interest according to the contractual terms of the loan.
Perkins Inc. Bad Debt Expense Losses are now calculated based upon the discounted present value of future cash flows; thus, this fairly approximates the economic loss to the lender. This may not fairly state the economic benefits derived by the debtor as a result of the restructuring. Note Payable Present value of new debt is calculated as follows: Using present value tables:. Loss on Sale of Note Note Receivable This would not be a troubled debt restructuring. Gain on Restructured Debt Gain on Investment Note to instructor: This problem indicates that symmetry may not always be achieved between the debtor and creditor and that the debtor may have a restructuring but the creditor, if changed, may not.
Mazza Corp. Tsang Corp. Purpose—to provide the student with some familiarity with the economic theory that relates to the accounting for a bond issue. The student is required to discuss the conceptual merits for each of the three different balance sheet presentations for the same bond issue as well as the merits of utilizing the nominal rate versus the effective rate at date of issue in the computation of the carrying value of the obligations arising from a bond issue.
Purpose—to provide the student with an understanding of the various accounts which are generated in a bond issue and their proper classifications on the balance sheet. Included in this case, is non-market rate bonds related to government loans, and debt exchanged for assets. Justification must be provided for the treatment accorded these accounts in relation to the specifics of this case. Part I: Purpose—to provide the student with an understanding of the significance of the difference between the effective interest method of amortization and the straight-line method of amortization.
Part II: Purpose—to provide the student with some familiarity with the various methods of accounting for gains and losses from the early extinguishment of debt, and of the justifications for each of the different methods.
Purpose—to provide students the opportunity to research issues regarding using credit risk adjusted discount rates in measuring liabilities. This is a common balance sheet presentation and has the advantage of being familiar to users of financial statements. It represents the fair market value of the bond obligations given. Thus, this is in keeping with the generally accepted accounting practice of using exchange prices as a primary source of data.
This presentation indicates the dual nature of the bond obligations. The amounts presented on the balance sheet are the present values of each of the future obligations discounted at the initial effective rate of interest. The proper emphasis is placed upon the accrual concept, that is, that interest accrues through the passage of time. The emphasis upon premiums and discounts is eliminated, and this might be useful supplemental information at the time of issuance of the bonds.
This presentation shows the total liability, which is incurred in a bond issue, but it ignores the time value of money. This would be a fair presentation of the bond obligations only if the effective interest rate were zero.
WA Continued When an entity issues interest-bearing bonds, it normally accepts two types of obligations: 1 to pay interest at regular intervals and 2 to pay the principal at maturity. The amount that the investors should be willing to pay for these future cash flows depends upon the interest rate that they are willing to accept on their investment s in this security which in turns, depends on the current market conditions when the bonds are issued and the prevailing rates for similar risk investments.
WA Continued Even when bonds are issued at their maturity value, the price paid is equal to the maturity value because the coupon rate is equal to the effective rate. Here the effective rate of interest is less than the coupon rate, so the price of the bonds is greater than the maturity value. If the effective rate of interest was greater than the coupon rate, the bonds would sell for less than the maturity value.
The use of the coupon rate for discounting bond obligations would give the face value of the bond at January 1, , and at any interest-payment due thereafter. Although the coupon rate is readily available while the effective rate must be computed, the coupon rate may be set arbitrarily at the discretion of management so that there would be little or no support for accepting it as the appropriate discount rate. WA Continued 2. The effective interest rate at January 1, , is the market rate to Branagh Limited for long-term borrowing.
This rate gives a discounted value for the bond obligations, which is the amount that could be invested at January 1, , at the market rate of interest.
This investment would provide the sums needed to pay the recurring interest obligation plus the principal at maturity. Thus, the effective interest rate is objectively determined and verifiable. The market or yield rate of interest at the date of issue should be used throughout the life of the bond because it reflects the interest obligation which the issuer accepted at the time of issue. The resulting value at the date of issue was the current value at that time and is similar to historical cost.
Also, this yield rate is objectively determined in an exchange transaction. The continued use of the issue-date yield rate results in a failure to reflect whether the burden is too high or too low in terms of the changes that may have taken place in the interest rate. When the current yield rate is lower than the rate at the issue date or than at the previous valuation date the liabilities for principal and interest would increase.
When the current yield is higher than the rate at the issue date or at the previous valuation date the liabilities would decrease. Thus, holding gains and losses could be determined. If the debt is held until maturity, the total of the interest expense and the holding gains and losses under this method would equal the total interest expense using the yield rate at issue date. Machine purchased as an instalment sale. In this case, this is a debt instrument exchanged for the machine.
The fair value of the debt must be determined discounting the cash flows required on the debt at the appropriate rate to reflect the credit risk of Thompson. Because this is a private company, with no credit rating, we would not be able to observe market risk assessment rates for this company. We have used unobservable data that is particular to this company only, which would be level 3 in the fair value hierarchy.
If we use 7. This is an observable market rate for similar assets. As such, this input is a level 2 fair value hierarchy.
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