Ch.10 - Reporting and Analyzing Liabilities

Question 1

What are liabilities?

Answer 1

They are obligations from past transactions that results in a transfer of economic resource.

Question 2

Examples of Current Liabilities

Answer 2

• Bank indebtedness
• A/P & accrued liabilities (salaries, interest)
• Refund liability
• Deferred revenue
• GST
• Notes Payable
• Current portion of long-term liabilities

Question 3

Examples of Non-Current Liabilities

Answer 3

• Bank loans, notes payable, mortgages payable
• Bonds payable
• Lease liabilities
• Pension liabilities

Question 4

What is GST?

Answer 4

They are collected at each sale on behalf of Canada Revenue Agency (CRA)
- The frequency can range from weekly to annualy

Ex.
April 2 Cash $105
Sales $100
GST Payable $5

April 30 GST Payable $5
Cash $5

Question 5

What are the mandatory payroll employee deductions?

Answer 5

• Canada Pension Plan (CPP)
• Employment Insurance (EI)
• Federal and Provincial Income Taxes

Question 5

What are the three types of liabilities related to employee salaries and wages?

Answer 5

1. Salary or wages owed to employees (gross pay)
2. Employee payroll deductions withheld from employees’ gross pay (net pay)
3. Employer payroll obligations

Question 6

Net Pay Formula

Answer 6

aka. Take home pay

Net Pay = Gross Pay - Payroll Deductions

Question 7

What are voluntary payroll employee deductions?

Answer 7

• Benefits (health, pension)
• Union dues
• Charitable donations

Question 8

Employee Obligations

Answer 8

For CPP and EI: employer’s share –> CPP 1:1 / EI 1:4:1

Workers’ compensation (WCB)

Employee benefits:
- Compensated absences
- Employer sponsored health plan
-Employer sponsored pension

They are typically remitted once a month of smaller companies (~15th) and twice of companies (~10th and 2th)

Question 9

Journal Entries: Employee Deductions

Answer 9

DR. Salaries Expense
CR. CPP payable
CR. EI tax payable
CR. United way payable
CR. Union dues payable
CR. Cash

Question 10

Journal Entries: Employer Obligations

Answer 10

Dr. Employee Benefits Expense
CR. CPP payable
CR. EI tax payable
CR. WCB payable
CR. Health insurance benefit payable

Question 11

Indebtedness to a creator by issuance of a note payable of a bank loan

Answer 11

Principal: original amount borrowed
Interest: calculated on principal

Question 12

What are the two types of interest-bearing liabilities?

Answer 12

1. Single principal payment on maturity (ex. notes payable)
2. Principal installment payments (ex. bank loans, mortgages payable)

Question 13

Liabilities with Principal due at maturity (J/E): Recording Notes Payable

Answer 13

Inventory Purchase:
Inventory xxx
Notes payable xxx

A/P xxx
Notes payable xxx

Cash xxx
Notes payable xxx

Question 14

Liabilities with Principal due at maturity (J/E): Accrued Interest Expense

Answer 14

Need to examine: frequency of interest payments & frequency of adjusted J/E

Interest expense xxx
Interest payable xxx

OR

Interest expense xxx
Cash xxx

Question 15

Liabilities with Principal due at maturity (J/E): Payment of Notes Payable

Answer 15

Notes payable xxx
Interest payable xxx
Interest expense xxx
Cash xxx

OR

Notes payable xxx
Interest expense xxx
Cash xxx

Question 16

What are liabilities with instalment paymens?

Answer 16

They are normally with non-current liabilities with obligations to be paid after one year or more (bank loans, mortgages)

A series of periodic payments which consists of:
- Interest on unpaid balance of loan at beginning of period
- A repayment of portion of loan principal
- Most installments are equal periodic amount

Question 17

Interest Formula (for liabilities)

Answer 17

Interest = (principal) (annual interest rate) (time in years)

Question 18

What are bonds?

Answer 18

They are a form of interest-bearing notes payable. Large amount is divided into smaller denominations to attract investors.

• Promises to repay specified amount at fixed future date, and to pay periodic interest payments.
• Most of them gave fixed interest rate
• They may be secured or unsecured
• Redeemable bonds can also be retired before maturity

Question 19

Issuing Bonds

Answer 19

• Bonds can be publicly traded on exchanges (quoted as percentage of value)
• Coupon interest rate
• Market Interest Rate
• Face value
• Discount
• Premium

Question 20

Compound Interest Formulas

Answer 20

FV = (PV) (1 + interest rate) ^ (number of time periods)

PV = (FV in n)/ (1+ interest rate)^n

Question 21

Ordinary Annuity Formulas

Answer 21

PV = (PMT) ([1-(1+i)^-n]/i)

FV = (PMT) ([(1+i)^n - 1]/i)

Question 22

Bonds: Ammortization

Answer 22

They are discount/premium allocated to interest expense over life of the bonds.

It is the difference between interest expense (at market rate or yield) and interest paid (at coupon rate) - discount/premium to be amortized.

Question 23

Discounts/premiums amortized using effective-interest method:

Answer 23

1. Calculate bond interest expense
2. Calculate bond interest paid
3. Calculate amortization amount

Question 24

Amortization Amount Formula

Answer 24

Bond Interest Expense (1) - Bond Interest Paid (2) (1) Carrying amounts of bonds at beginning period * market interest rate (2) Face amount of bonds + coupon interest rate

Question 25

Bonds: Retirement

Answer 25

- Bonds are retired either when they mature or when issuer purchases them on the open market before it matures. - Regardless of issue price, carrying amount of bonds will be equal to the face value at maturity because all discount/ premium will be amortized

Question 26

J/E of retired bonds at maturity (example)

Answer 26

Jan 1/26 Bonds Payable xxx Cash xxx ~retired bonds at maturity