Ch 9 Current Liabilities

Question 1

Breakage Income

Answer 1

represents the estimated value of gift cards that is not expected to be redeemed by customers and is determined in proportion to the pattern of rights exercised by the customer

Question 2

common current liabilities

Answer 2

1) bank indebtedness (or line of credit)
2) short-term loans
3) current portion of long-term debt

Question 3

Current liabilities are recorded at their _______ value
a) present value
b) face value

Answer 3

b) face value since the difference between fair value and the present value is so small it’s immaterial

Question 4

Bank indebtedness

Answer 4

the first current liability you will see on a B/S.
It’s the amount borrowed on the established line of credit with the bank and that will be repaid with the subsequent cash deposits that the company makes to the account.
When a company runs out of cash in the account, they can still keep writing checks by using that line of credit much like a set-up overdraft facility on personal bank accounts.

Question 5

Revolving credit facilities

Answer 5

An agreement a company enters into with its bank, enabling it to borrow up to a negotiated limit. The company can use the credit facility as needed and repay it as funds are available.

Question 6

Standby fees

Answer 6

fees (interest charged) that a company has for just having a line of credit even if the company doesn’t use the line of credit. The line of credit is usually secured by receivables and inventory, so the limit on the line of credit is dependant on those assets and will fluctuate with them.

Question 7

Blended instalment payments

Answer 7

partial payments of a loan (principal and interest)

Question 8

Current portion of long term debt

Answer 8

A part of a long term debt that must be repaid this year, since they meet the definition of a current liability, they will be presented on B/S as such

Question 9

Journal entry for current portion of a long term debt
(how to move it to current portion - reclassification entry)

Answer 9

Long term loan payable XXX
Current portion of long term debt XXX

Question 10

Current liabilities arising from trade with suppliers

Answer 10

known as trade receivable or trade account receivables
aka “free debt” as there is no interest rate if paid in time (usually 30-60 days but it varies dependant on industry), there are also sometimes discounts for early repayments of these

Question 11

Current liabilities arising from trade with customers

Answer 11

1) deferred revenue
2) gift card liability
3) customer loyalty provision
4) provision for warranty claims

Question 12

Provision

Answer 12

means that the liability was estimated

Question 13

partially executed contract

Answer 13

a customer has paid a downpayment/deposit/retainer or just some part of a good or service that has not been delivered yet. That creates a partially executed contract that will create deferred or unearned revenue liability on a B/S. It’s inappropriate to record those as revenue beef they have been earned

Question 14

deferred revenue journal entry

Answer 14

Cash XXX
Deferred Revenue XXX

Question 15

after earning the revenue journal entry (gym membership example)

Answer 15

Deferred Revenue XXX
Membership Revenue XXX

Question 16

Initial purchase of gift card journal entry

Answer 16

Cash XXX
Deferred revenue (or gift card liability) XXX

Question 17

Usage of gift card (redemption)

Answer 17

Deferred revenue (or gift card liability) XXX
Sales Revenue XXX
COGS XXX
Inventory XXX

Question 18

2 types of warranty

Answer 18

assurance warranty
service warranty

Question 19

Assurance warranty

Answer 19

aka basic warranty that states that the product will work as expected and will not break (assurance that it doesn’t have any defects)

Question 20

Service warranty

Answer 20

aka extended warranty that can be purchased separately from the good; allows you to come back and have the good fixed or replaced

Question 21

Service type of warranty

Answer 21

recognized as a performance liability and sales of it will be recognized as deferred revenue until it’s used

Question 22

Which type of warranty does not result in separate performance obligations?

Answer 22

Assurance type of warranty

Question 23

Since assurance type of warranty can incur costs after the sale, a ___________ is recorded along with a _____________

Answer 23

1) warranty expense
2) warranty provision liability

Question 24

The journal entry for warranty provision for assurance type of warranty

Answer 24

Warranty expense XXX
Warranty Provision XXX

Question 25

recording of warranty expense and warranty provision on financial statements

Answer 25

Warranty expense is recorded as an expense at the time of the sale and it doesn't matter how long the actual warranty is. At the same time the warranty provision account will be created. The part of the warranty provision for the current year will be recorded as a current liability and the rest as a non current liability. no expense will be incurred when the a customer will come to use the assurance type of warranty, the warranty provision will be used instead.

Question 26

assurance type of warranty can result in a number of different outcomes such as:

Answer 26

1) product replacement 2) product repair (which may include both parts and labour) 3) product returned; 4) cash refund provided 5) product returned; 6) store credit or gift card provided 7) warranty period expires without any claims

Question 27

Journal entry for the assurance type of warranty

Answer 27

Warranty Provision XXX      Inventory   XXX ⟶ If product replaced or  Inventory and/or Wage Expense   XXX ⟶ If product repaired or  Cash   XXX ⟶ If refund provided* or  Deferred Revenue   XXX ⟶ If store credit provided or  Miscellaneous Revenue   XXX ⟶ If warranty period expired *This assumes that the product returned cannot be sold to another customer.

Question 28

For service-type warranties, the warranty expense is recorded ________________________ While there is no warranty provision recorded for service-type warranties, there is ___________________________________________________

Answer 28

1) in the period in which warranty claims are made. 2) a liability for the deferred warranty revenue for the warranty-related performance obligations that remain outstanding.

Question 29

why are the expenses and revenues related to the same sale are recorded at the same time?

Answer 29

In this way, the statement of income provides a better indication of the profitability of that period’s operations.

Question 30

Benefits

Answer 30

Medical pay, vacation pay, etc. must be recognized as an expense when hit is incurred but there should also be a corresponding liability.

Question 31

Source deductions

Answer 31

Amounts withheld from employee wages and remitted to the government by the employer to pay for such things as income taxes, Employment Insurance, and government pension premiums.

Question 32

Gross wages

Answer 32

the wages earned by the employee

Question 33

Net wages

Answer 33

wages that will be paid to the employee

Question 34

Employee Entry

Answer 34

Wage expense XXX Employee Income Taxes payable XXX CPP Payable XXX EI Payable XXX Wages payable (or cash if paid at this time). XXX

Question 35

Employer Entry

Answer 35

This entry accounts for the employer's share of CPP and EI Wages expense XXX CPP (same as the employee's share) XXX EI (1.4 times the employee's share) XXX

Question 36

payment of wages entry

Answer 36

Wages payable XXX Cash XXX

Question 37

Remittance

Answer 37

The payment of employee source deductions, together with the employer’s share, to the federal or other government.

Question 38

Remittance entry

Answer 38

Employee Income Taxes Payable XXX CPP (both the employee's and employer's shares) XXX EI (both the employee's and employer's shares) XXX Cash XXX

Question 39

when are the companies supposed to remit the amounts owed?

Answer 39

Most companies are required to remit the amounts owed related to their source deductions by the 15th of the month following the month in which they were withheld from employees. Large employers make their remittances weekly.

Question 40

Corporate tax return

Answer 40

An annual filing required of corporations by the federal government to determine the amount of corporate income tax owed. Synonym for T2.

Question 41

Income taxes payable

Answer 41

presented as income taxes payable and is a current liability income tax must be payed within the 2 months before the war end and the corporate tax return must be done in the 6 months after the year end income taxes payable is different from deferred income taxes

Question 42

Journal entry for declaring dividends

Answer 42

Dividends Declared XXX Dividends Payable XXX

Question 43

Accounts payable turnover ratio

Answer 43

measures the number of times per year that a company settles its trade payables (credit purchases)/(average accounts payable)

Question 44

Accounts payable payment period

Answer 44

the average number of days a company takes to pay its trade payables 365/(Accounts payable turnover ratio)

Question 45

finding cost of goods sold using inventory

Answer 45

Beginning Inventory + Purchases - Ending Inventory ________________________ COGS

Question 46

Finding purchases using cogs and inventory

Answer 46

COGS - Beginning Inventory + Ending Inventory _________________________ Purchases