TR12-1A Provision-Measurement (LO 12-2)
Consider the following two cases:
Case 2 A company has four legal claims outstanding, each for $100,000. There is a 10% chance that
one claim will be paid out, a 60% chance that two will be paid out, a 5% chance for three, and a 15%
chance for four payouts.
Case 3 A company has four legal claims outstanding, each for $100,000. There is a 30% chance that
one claim will be paid out, a 20% chance that two will be paid out, a 20% chance for three, and a 20%
chance for four payouts.
Required:
1. For each case, decide if some payout is likely or not likely and calculate the expected value.
Explanation:
1.
Case 1:
Expected value = ($100,000 × 10%) + ($200,000 × 10%) + ($300,000 × 5%) + ($400,000 × 5%) = $65,000.
Still less than one payout.
Case 2:
Expected value = ($100,000 × 10%) + ($200,000 × 60%) + ($300,000 × 5%) + ($400,000 × 15%) = $205,000.
Very close to most likely outcome.
Case 3:
Expected value = ($100,000 × 30%) + ($200,000 × 20%) + ($300,000 × 20%) + ($400,000 × 20%) =
$210,000.
NOT close to most likely outcome.
A12-1 Common Financial Liabilities (LO 12-3)
Technology Management Limited engaged in various transactions during the month of September:
a. Bought $2,600 of office supplies on account.
b. Borrowed $15,000 for the Dominion Bank at the beginning of the month and agreed to pay the loan
back in one year, plus interest at 12%. This is the market interest rate.
c. Bought inventory for resale with an invoice price of $71,500 on account.
d. The September utilities bill for $1,300 arrived but is not due until October.
e. Declared a cash dividend of $2 per preferred share and $0.50 per common share, payable 16
October. There are 4,000 preferred shares and 10,000 common shares outstanding.
f. Returned goods with an invoice price of $17,600 to the supplier in (c).
g. Paid the supplier in (c) 50% the net amount owing.
h. Accrued interest on the bank loan at the end of the month.
i. Accrued monthly rent of $1,200 for September, to be paid in October.
Required:
1. Journalize each of the above transactions in general journal form. Use a general accounts payable
account in journal entries except for loans, interest, and dividends payable. (If no entry is required
for a transaction/event, select "No journal entry required" in the first account field. Do not
round intermediate calculations.)
Explanation:
1.
g. Cash = ($71,500 − $17,600) × 50% = $26,950
h. Interest expense = ($15,000 × 12% ) × 1/12 = $150
Note: Utilities and rent may be in separate payable accounts, or in accounts payable. Both approaches
are acceptable but the question had asked for one account payable account to be used.
2. List the liability accounts and amounts that result from your entries in requirement 1.
Explanation
2.
See note above; utilities and rent may be in separate payables accounts. Dividends payable may be two
accounts, one for common and one for preferred.
A12-5 Common Financial Liabilities and Foreign Currency (LO 12-3)
Data regarding Viran Corp. in March 20X9:
Selected opening balances:
GST payable $ 31400 (cr.)
CPP payable 1950 (cr.)
EI payable 2600 (cr.)
Income tax deductions payable 8160 (cr.)
a. Cash sales for the period, $490,000 plus 5% GST.
b. Monthly payroll, $58,500; less EI, $1,900; CPP, $1,100; income tax, $6,100. The employer portion of
payroll taxes was also recorded. Employer portion of EI is 1.4 times employee portion.
c. Inventory purchases on account, $760,000 plus 5% GST.
d. Cash sales, $1,570,000, plus 5% GST.
e. Sales to U.S. customer on account, US$88,000. There was no GST on the sale. The U.S. dollar was
worth Cdn$1.03 on this date.
f. The U.S. customer paid US$70,000 on account, when the U.S. dollar was worth $1.07. The remaining
amount will be paid in June.
g. GST owing was remitted.
h. Sixty percent of the amount owing to suppliers in (c) was paid.
i. At the end of the month, the U.S. exchange rate was Cdn$1.06.
Required:
1. Journalize all transactions listed above. (If no entry is required for a transaction/event, select "No
journal entry required" in the first account field.)
2. List the accounts and amounts that would appear on the 31 March statement of financial position.
Explanation:
1.
b-1.EI payable = $1,900 × 1.4 = $2,660
c. GST payable = $760,000 × 5% = $38,000
d. GST payable = $1,570,000 × 5% = $78,500
e. Accounts receivable = $88,000 × $1.03 = $90,640
f. Cash = $70,000 × $1.07 = $74,900
Accounts receivable = $70,000 × $1.03 = $72,100
g. Cash = $31,400 + $24,500 + $78,500 − $38,000 = $96,400
h. Cash = 60% of $798,000 = $478,800
i. Foreign exchange gains and losses = $88,000 − $70,000 = $18,000 still owing. Recorded at $1.03;
now worth $1.06; ($18,000 × $.03) = $540
2.
Accounts receivable = $90,640 − $72,100 + $540 = $19,080
Accounts payable = $798,000 − $478,800 = $319,200
CPP payable = $1,950 + $1,100 + $1,100 = $4,150
EI payable = $2,600 + $1,900 + $2,660 = $7,160
Employee income tax payable = $8,160 + $6,100 = $14,260
A12-11 Provisions-Compensated Absences (LO 12-5)
Tunacliff Mowers allows each employee to earn 15 fully paid vacation days each year. Unused vacation
time can be carried over to the next year; if not taken during the next year, it is lost. By the end of 20X5,
all but 3 of the 30 employees had taken their earned vacation time; these 3 carried over to 20X6 a total of
20 vacation days. These 20 days represented total 20X5 salary of $6,000. During 20X6, each of these
three used their 20X5 vacation carryover; none of them had received a pay rate change from 20X5 to the
time they used their carryover. Total cash wages paid: 20X5, $700,000; 20X6, $740,000.
Required:
1. Give the entries for Tunacliff related to vacations during 20X5 and 20X6. Disregard payroll taxes. (If
no entry is required for a transaction/event, select "No journal entry required" in the first
account field.)
2-a. Compute the total amount of wage expense for 20X5 and 20X6.
Explanation:
2-a.
Total wage expense:
20X5 = $700,000 + $6,000 = $706,000
20X6 = $740,000 − $6,000 = $734,000
2-b. How would the vacation time carried over from 20X5 affect the 20X5 statement of financial position?
2-c. How would the vacation time carried over from 20X5 affect the Retained earnings.
A12-13 Provisions-Warranty (LO 12-3)
Consumer Corp. sells dishwashers and washing machines that come with a two-year unlimited warranty
on parts and labour for repairs. The warranty is intended to assure customers that the appliances will
operate as advertised. The warranty is expected to cost 1% of sales in the first year and 6% of sales in
the second year, for a total of 7%. The provision for warranty has a credit balance of $145,000 at the
beginning of 20X5. The following events and decisions relate to the warranty:
20X5 Sales revenue of $4,600,000 was generated from products covered by the warranty. Both the sale
and the warranty provision must be recorded.
20X5 Warranty work consumed parts inventory with a cost of $9,000, and labour of $22,000.
20X6 Sales revenue from products covered by the warranty were $6,100,000. Both the sale and the
warranty provision must be recorded.
20X6 Warranty work consumed parts inventory with a cost of $126,000, and labour of $289,000
20X6 Year-end review indicated that the percentage used as an estimate for warranty work in 20X5 and
20X6 should have been a total of 9.5% of sales, rather than 7%.
20X6 Because of a specific prevalent defect to a seal discovered during repairs in 20X6, the company
announced that it would cover repairs for this specific defect for a third year for all sales of product
made in 20X5 and 20X6. The cost of this work was estimated to be 1.5% of sales. This is in excess
of the percentage increase described above. Products were re-engineered to eliminate the defect
starting in 20X7.
Required:
1. Prepare journal entries for the events listed above. Because of uncertainty of estimates, no
discounting is to be applied. Assume all sales are in cash. (If no entry is required for a
transaction/event, select "No journal entry required" in the first account field.)
Explanation:
1.
20X5 & 20X6
Warranty expense (7% of sales) = $322,000 (20X5) and $427,000 (20X6)
20X6
Warranty expense:
9.5% − 7% of total 20X5 and 20X6 sales = $267,500
1.5% of total 20X5 and 20X6 sales = $160,500
2 Calculate the balance of the provision for warranty at 31 December 20X5 and 20X6.
Explanation
2.
31 December 20X5:
Provision for warranty = ($145,000 + $322,000 − $31,000) = $436,000
31 December 20X6:
Provision for warranty = ($436,000 + $427,000 − $415,000 + $267,500 + $160,500) = $876,000
A12-15 Discounting-No-Interest Note (LO 12-6)
Bay Lake Mining Ltd. purchases earth-moving equipment on 1 August 20X6 and signs a three-year note
with the supplier, agreeing to pay $425,000 on 31 July 20X9. There is no interest in the note. The
equipment purchased does not have a readily determinable market value. ( PV of $1, PVA of
$1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1-a. Does Bay Lake Mining Ltd. actually have a no-interest loan?
No
1-b. Not available in connect.
2 Calculate the present value of the note payable, using an interest rate of 6%. (Round time value
. factor to 5 decimal places and final answer to the nearest dollar amount.)
2.
Present value:
$425,000 (P/F, 6%, 3) = $425,000 × (0.83962) = $356,839
3 Not available in connect.
.
4. Prepare a table that shows the balance of the note payable and interest expense over the life of the
note. (Round your final answers to the nearest dollar amount.)
5 Provide all entries for the note for 20X6 and 20X7. Record adjusting entries at the end of the fiscal year
. and on the anniversary date of the loan. Use the gross method. (If no entry is required for a
transaction/event, select "No journal entry required" in the first account field. Round your
intermediate calculations and final answers to the nearest dollar amount.)
5.
31 December 20X6:
Interest expense ($21,410 × 5/12) = $8,921
31 July 20X7:
Interest expense ($21,410 × 7/12) = $12,489
31 December 20X7:
Interest expense ($22,695 × 5/12) = $9,456
6. Show the note payable (accounts and amounts) as it would be included on the statement of
financial position at 31 December 20X6 and 20X7. (Round your intermediate calculations and
final answers to the nearest dollar amount.)
6.
31 December 20X6:
Less: Discount ($68,161 − $8,921) = $(59,240)
31 December 20X7:
Less: Discount ($59,240 − $12,489 − $9,456) = $(37,295)
Explanation:
2.
Present value:
$425,000 (P/F, 6%, 3) = $425,000 × (0.83962) = $356,839
5.
31 December 20X6:
Interest expense ($21,410 × 5/12) = $8,921
31 July 20X7:
Interest expense ($21,410 × 7/12) = $12,489
31 December 20X7:
Interest expense ($22,695 × 5/12) = $9,456
6.
31 December 20X6:
Less: Discount ($68,161 − $8,921) = $(59,240)
31 December 20X7:
Less: Discount ($59,240 − $12,489 − $9,456) = $(37,295)
A12-17 Discounting-Low-Interest Note (LO 12-6)
On 1 January 20X9, a borrower signed a long-term note, face amount, $800,000; time to maturity, four
years; stated rate of interest, 4%. The effective rate of interest of 6% determined the cash received by
the borrower. The principal of the note will be paid at maturity; stated interest is due at the end of each
year. (PV of $1, PVA of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required:
1. Compute the cash received by the borrower. (Round time value factor to 5 decimal places. Round
your intermediate calculations and final answer to the nearest dollar amount.)
1.
Principal $ 633,672
Interest 110,884
$744,556
2. Give the required entries for the borrower for each of the four years. Use the effective-interest
method. (If no entry is required for a transaction/event, select "No journal entry required" in the
first account field. Round your intermediate calculations and final answers to the nearest
dollar amount.)
2.
31 December 20X9:
Interest expense = $744,556 × .06 = $44,673
31 December 20X10:
Interest expense = ($744,556 + $12,673 = $757,229) × .06 = $45,434
31 December 20X11:
Interest expense = ($757,229 + $13,434 = $770,663) × .06 = $46,240
31 December 20X12:
Interest expense = ($770,663 + $14,240 = $784,903) × .06 = $47,097 (rounded up by $3).
