Académique Documents
Professionnel Documents
Culture Documents
Topics
Brief
Exercises
1. Concept of liabilities;
definition and
classification.
Writing
Assignments
Exercises
Problems
1, 20
14
1, 14
1, 2, 3
2, 20
3. Short-term obligations
expected to be
refinanced.
6, 7
1, 12, 14
5. Employee-related
liabilities.
8, 9, 10,
11, 12, 20
2, 3, 13, 14 2
20
2, 3
3, 5
1, 14
6, 7, 8, 9,
10
8. Contingent liabilities
(General).
22, 23
9, 10, 12
1, 4, 5, 6
Solutions Manual
14-1
Chapter 14
Copyright 2005 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this
page is strictly prohibited.
Topics
9. Guaranties and
warranties.
Brief
Exercises
Exercises
Problems
16, 17, 18
13, 14, 17
4, 5, 6, 11,
14
15, 16, 20
7, 8, 11
23
20, 21
Writing
Assignments
1, 5
9, 10, 12
8, 14
18
19, 20, 21,
22, 23
Solutions Manual
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Chapter 14
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page is strictly prohibited.
Description
Level of Time
Difficulty (minutes)
Simple
Moderate
Simple
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Simple
Moderate
Complex
10-15
15-20
5-10
15-20
15-20
10-12
10-15
25-30
25-30
15-20
30-35
15-20
Simple
Moderate
Simple
Moderate
Simple
Simple
Moderate
Moderate
10-15
15-20
15-20
20-30
10-15
10-15
20-30
30-35
Simple
Simple
Moderate
15-20
20-25
15-25
Simple
Moderate
Moderate
Simple
Moderate
30-40
20-30
30-35
15-20
20-30
Moderate
Moderate
Moderate
25-35
20-30
30-45
Simple
Moderate
Moderate
25-30
45-50
20-30
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Chapter 14
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page is strictly prohibited.
Description
Advances, self-insurance, loss
contingencies, guarantees and
commitments.
Bonus computation.
Current liabilities: various.
Loss contingencies, warranties,
litigation.
Current versus noncurrent classification.
Refinancing of short-term debt.
Loss contingencies.
Ethical issues: warranties and
contingencies.
Loss contingency.
Level of Time
Difficulty (minutes)
Moderate 25-30
Moderate
Complex
25-30
30-40
Moderate
30-40
Moderate
Moderate
Simple
Simple
30-35
30-40
15-20
20-25
Moderate
15-20
Solutions Manual
14-4
Chapter 14
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page is strictly prohibited.
Cash ...................................................................................
50,000
Notes Payable..........................................................
50,000
Solutions Manual
14-5
Chapter 14
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page is strictly prohibited.
Cash ...................................................................................
50,000
Discount on Notes Payable..............................................
1,125
Notes Payable..........................................................
51,125
Since both criteria are met (intent and ability), none of the
$500,000 would be reported as a current liability. The entire
amount would be reported as a long-term liability.
(b)
Solutions Manual
14-6
Chapter 14
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page is strictly prohibited.
Accounts Receivable........................................................
31,800
Sales.........................................................................30,000
Sales Taxes Payable................................................ 1,800
($30,000 X 6% = $1,800)
(b)
Cash ...................................................................................
19,610
Sales.........................................................................18,500
Sales Taxes Payable................................................ 1,110
($19,610 1.06 = $18,500)
45,500
2,275
3,185
1,169
2,016
Solutions Manual
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Chapter 14
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page is strictly prohibited.
11,600
3,400
1,400
3,426
990
920
250
17,414
1,288
990
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Chapter 14
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page is strictly prohibited.
7,614
36,000
Bonus Payable.....................................................
450,000
Cash..........................................................................
450,000
Warranty Expense.............................................................
70,000
Cash, Inventory, etc.................................................
70,000
Solutions Manual
14-9
Chapter 14
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page is strictly prohibited.
Cash ...................................................................................
1,485,000
Unearned Warranty Revenue..................................
1,485,000
(15,000 X $99)
(b)
Warranty Expense.............................................................
180,000
Cash, Inventory, etc.................................................
180,000
(c)
36,000
40,000
Lawsuit Loss.....................................................................
700,000
Lawsuit Liability.......................................................
700,000
(b)
200,000
Solutions Manual
14-11
Chapter 14
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page is strictly prohibited.
SOLUTIONS TO EXERCISES
EXERCISE 14-1 (10-15 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
Solutions Manual
14-12
Chapter 14
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page is strictly prohibited.
(b)
Sept. 1
Purchases..........................................................................
50,000
Accounts Payable....................................................
50,000
Oct. 1
Accounts Payable.............................................................
50,000
Notes Payable..........................................................
50,000
Oct. 1
Cash ...................................................................................
50,000
Discount on Notes Payable..............................................
6,000
Notes Payable..........................................................
56,000
(c)
(1)
Note payable
Interest payable
$50,000
1,500
$51,500
(2)
Note payable
Less discount ($6,000 $1,500)
$56,000
4,500
$51,500
Solutions Manual
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Chapter 14
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page is strictly prohibited.
(b)
June 30
Sales...........................................................................
44,510.62
Sales Tax Payable................................................ 20,543.36
GST Payable......................................................... 23,967.26
Computation :
Sales plus sales tax ($233,200 + $153,700)
Sales exclusive of tax ($386,900 1.13)
Taxes combined (GST and sales tax)
$386,900.00
342,389.38
$ 44,510.62
$23,967.26
$20,543.36
June 30
Sales...........................................................................
45,778.50
Sales Tax Payable................................................ 21,900.00
GST Payable......................................................... 23,878.50
Calculation:
Sales plus sales tax ($233,200 + $153,700)
Sales plus GST ($386,900 1.06)
Sales tax
Sales plus GST
Sales exclusive of GST
($365,000.00 1.07%)
GST
Alternatively:
Sales exclusive of tax
($386,900 1.1342*)
GST ($341,121.50 X 0.07)
Sales tax ([$341,121.50 + $23,878.50]
X 0.06)
* 1.07 X 1.06 = 1.1342
$386,900.00
365,000.00
$ 21,900.00
$365,000.00
341,121.50
$ 23,878.50
$341,121.50
$23,878.50
$21,900.00
Solutions Manual
14-14
Chapter 14
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page is strictly prohibited.
Cash ...................................................................................
860,000
Liability for Returnable Containers........................
860,000
Liability for Returnable Containers.................................
709,000
Cash..........................................................................
709,000
Liability for Returnable Containers.................................
55,000
Revenue from Container Sales...............................55,000
($170,000 $115,000)
(b)
(c)
Solutions Manual
14-15
Chapter 14
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page is strictly prohibited.
Mar. 31
June 1
Cash ...................................................................................
11,250
Income Taxes Receivable.......................................
11,250
$37,800
(32,400)
$ 5,400
Solutions Manual
14-16
Chapter 14
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page is strictly prohibited.
$250,000
Long-term debt:
Notes payable refinanced in
February 2006 (Note 1)
950,000
$250,000
950,000
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14-17
Chapter 14
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page is strictly prohibited.
$3,400,000
3,600,000
Note 1.
Under a financing agreement with Provincial Bank the
company may borrow up to 60% of the gross amount of its
accounts receivable at an interest cost of 1% above the prime
rate. The company intends to issue notes maturing in 2010 to
replace $3,600,000 of short-term, 15%, notes due periodically in
2006. Because the amount that can be borrowed may range from
$3,600,000 to $4,800,000, only $3,600,000 of the $7,000,000 of
currently maturing debt has been reclassified as long-term debt.
Solutions Manual
14-18
Chapter 14
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page is strictly prohibited.
2004
Wages Expense
Vacation Wages Payable
7,200
Wages Expense
Vacation Wages Payable
7,920
Wages Expense
Vacation Wages Payable
Cash
648
6,480(3)
2005
(1)
(2)
(3)
(4)
7,200(1)
7,920 (2)
7,128(4)
$7,200
$7,920
$6,480
$7,128
2004
Wages Expense
Sick Pay Wages Payable
4,320
4,320(1)
2005
2,880(2)
Wages Expense
Sick Pay Wages Payable
4,752
2,880
4,752 (3)
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14-19
Chapter 14
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page is strictly prohibited.
(1)
(2)
(3)
(4)
Wages Expense
Sick Pay Wages Payable
Cash
144
3,816(4)
3,960(5)
$3,960
$7,200
(2)
$1,440
(3)
(4)
$ 720
+ 7,920
$8,640
$2,376
Solutions Manual
14-20
Chapter 14
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page is strictly prohibited.
2005
(1)
(2)
(3)
(4)
(b)
2004
2005
(1)
(2)
162
6,966 (3)
7,128 (4)
2,880 (1)
3,960 (2)
2,880
3,960
Solutions Manual
14-21
Chapter 14
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page is strictly prohibited.
(1)
$7,740
(2)
$ 774
8,352
$9,126
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14-22
Chapter 14
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page is strictly prohibited.
(b)
10,388
18,563
9,000
Solutions Manual
14-23
Chapter 14
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page is strictly prohibited.
Total
Factory
Sales
$200,000
$120,000
$44,000
Administrative
$36,000
7
9,306
1,607
$210,913
1
2
5,940
1,108
$127,048
3
4
1,584
388
$45,972
5
6
1,782
111
$37,893
(b)
Factory Payroll:
Wages and Salaries Expense - Factory..........................
120,000
Employee Income Tax Deductions
Payable................................................................
EI Premiums Payable ($40,000 X 1.98%)...............
CPP Contributions Payable....................................
Cash .........................................................................
14,500
792
5,940
98,768
1,108
5,940
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Chapter 14
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6,000
277
1,584
36,139
388
1,584
Administrative Payroll:
Wages and Salaries Expense - Administrative..............
36,000
Employee Income Tax Deductions
Payable................................................................
EI Premiums Payable ($4,000 X 1.98%).................
CPP Contributions Payable....................................
Cash .........................................................................
7,500
79
1,782
26,639
111
1,782
(c)
(d)
Solutions Manual
14-25
Chapter 14
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page is strictly prohibited.
$10,000,000
7,000,000
3,000,000
$1,000,000
198,198
1,198,198
1,801,802
810,811
$ 990,991
Solutions Manual
14-26
Chapter 14
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page is strictly prohibited.
(b)
Cash ...................................................................................
800,000
Sales.........................................................................
800,000
Warranty Expense.............................................................
17,000
Cash, Inventory, Accrued Payroll...........................17,000
Solutions Manual
14-27
Chapter 14
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page is strictly prohibited.
Accounts Receivable........................................................
3,000,000
Sales.........................................................................
3,000,000
(500 X $6,000)
Method A:
Warranty Expense.............................................................
20,000
Cash, Inventory,
Accrued Payroll..................................................20,000
Warranty Expense.............................................................
100,000
Estimated Liability Under
Warranties...........................................................
100,000
($120,000 $20,000)
Method B:
Estimated Liability Under Warranties.............................
20,000
Cash, Inventory,
Accrued Payroll..................................................20,000
Warranty Expense.............................................................
120,000
Estimated Liability Under
Warranties...........................................................
120,000
(b)
Accounts Receivable........................................................
3,000,000
Sales.........................................................................
2,850,000
Unearned Warranty Revenue..................................
150,000
Warranty Expense.............................................................
20,000
Cash, Inventory,
Accrued Payroll..................................................20,000
Unearned Warranty Revenue...........................................
25,000
Warranty Revenue...................................................25,000
[$150,000 X ($20,000/$120,000)]
Solutions Manual
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Chapter 14
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page is strictly prohibited.
12,320
495,000
Method A:
Premium Expense.............................................................
6,160
Inventory of Premiums............................................
[(44,000 10) X $1.40]
6,160
Premium Expense.............................................................
3,080
Estimated Liability for Premiums...........................
[(110,000 X 60%) 44,000] 10 X $1.40
3,080
Method B:
Estimated Liability for Premiums....................................
6,160
Inventory of Premiums............................................
[(44,000 10) X $1.40]
6,160
Premium Expense.............................................................
9,240
Estimated Liability for Premiums...........................
(110,000 X 60%) 10 X $1.40
9,240
Solutions Manual
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Chapter 14
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$800,000
60%
480,000
48,000
$528,000
$528,000
330,000
$198,000
$528,000
700,000
70%
490,000
240,000
$2.00
$480,000
490,000
$2.00
$980,000
Solutions Manual
14-30
Chapter 14
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page is strictly prohibited.
$ 108,000
$ 72,000
99,000
108,000
279,000
85,700*
$193,300
Solutions Manual
14-31
Chapter 14
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page is strictly prohibited.
July 2, 2005
600,000
600,000
41,879
41,879
32,094
32,094
1,256
1,256
75,000
5,000
80,000
Solutions Manual
14-32
Chapter 14
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2.
3.
4.
Solutions Manual
14-33
Chapter 14
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page is strictly prohibited.
Assets
Liabilities
Owners Equity
Net Income
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
10
NE
NE
NE
NE
11
NE
12
NE
13
NE
14
NE
NE
15
16
NE
17
NE
18
NE
19
NE
NE
20
Solutions Manual
14-34
Chapter 14
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Current Ratio =
Current Assets
Current Liabilities
$210,000
$80,000
= 2.63
Acid-test
ratio
$115,000
$80,000
1.44
Total Liabilities
Total Assets
$220,000
$430,000
51.16%
Rate of return on
assets
=
=
Net Income
Average Total Assets
$25,000
$430,000
5.81%
Solutions Manual
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Chapter 14
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(e)
Days payables
outstanding
58 days
Solutions Manual
14-36
Chapter 14
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page is strictly prohibited.
Current ratio =
$773,000
$240,000
2.
Acid-test ratio =
= 3.22 times
= 1.38 times
3.
4.
Inventory turnover =
$360,000 + $440,000
= 2 times
2
(or approximately every 183 days)
$800,000
5.
6.
7.
$800,000
365
= 83 days
= 23.76%
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Chapter 14
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Solutions Manual
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Chapter 14
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$200,000 + $170,000
= 4.43 times = 82 days
2
1.
2.
3.
4.
5.
6.
Solutions Manual
14-39
Chapter 14
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page is strictly prohibited.
Purposeto present the student with an opportunity to prepare journal entries for
a variety of situations related to liabilities. The situations presented include
purchases and payments on account, and borrowing funds by giving a zerointerest-bearing note, sales taxes, deposits and income taxes. The student is
also required to prepare year-end adjusting entries and to calculate sales taxes
two ways.
Problem 14-2
Purposeto present the student with an opportunity to prepare journal entries for
four weekly payrolls. The student must compute income tax to be withheld, CPP
premiums, and employment insurance. The student must catch the fact that in
the first week one employees pay exceeds the annual maximum for CPP
premiums. The same employees pay exceeds the maximum for employment
insurance for all four pays.
Problem 14-3
Purposeto provide the student with the opportunity to prepare journal entries
for a monthly payroll. The student must compute income tax to be withheld, CPP
Contributions and Employment Insurance. The student must be aware that the
CPP Contributions do not apply to two employees as their earnings exceed the
statutory maximum subject to CPP. The student must also be aware that the
maximum premiums for EI apply for two employees as their earnings exceed the
statutory maximum.
Problem 14-4
Solutions Manual
14-40
Chapter 14
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page is strictly prohibited.
Purposeto provide the student with a problem covering the sales warranty
method and accrual warranty expenses combined in the same sale. The student
is required to prepare journal entries in the year of sale and in subsequent years
as warranty costs are incurred. Also required are balance sheet presentations for
the year of sale and two subsequent years.
Problem 14-6
Purposeto provide the student with an opportunity to prepare journal entries for
warranty costs under the accrual method and the cash basis method. The
student is also required to indicate the proper balance sheet disclosures under
each method for the year of sale. Finally, the student is required to comment on
the effect on net income of applying each method. The problem highlights the
differences between the two methods in the accounts and on the balance sheet.
Problem 14-7
Purposeto provide the student with a basic problem in accounting for premium
offers. The student is required to prepare journal entries relating to sales, the
purchase of the premium inventory, and the redemption of coupons. The student
must also prepare the year-end adjusting entry reflecting the estimated liability
for premium claims outstanding. The student is required to prepare the entries
under two different approaches; the premium redemptions are recorded as
premium expense or as a decrease of the premium liability. A very basic problem.
Problem 14-8
Solutions Manual
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Chapter 14
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Purposeto present the student with the problem of determining the proper
amount of and disclosure for two contingent losses due to lawsuits. The student
is required to prepare journal entries and footnotes. The student is also required
to discuss any liability incurred by a company due to the risk of loss from lack of
insurance coverage. A straightforward problem dealing with contingent losses.
Solutions Manual
14-43
Chapter 14
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page is strictly prohibited.
SOLUTIONS TO PROBLEMS
PROBLEM 14-1
(a)
Purchases
Accounts Payable
February 2
49,000
49,000
February 26
Accounts Payable
Purchase Discounts Lost
Cash
49,000
1,000
50,000
April 1
Trucks
Cash
Notes Payable
40,000
4,000
36,000
May 1
Cash
Discount on Notes Payable
Notes Payable
80,000
12,000
92,000
June 30
22,000
22,000
August 14
Retained Earnings (Dividends Declared)
Dividends Payable
15,000
15,000
September 10
Dividends Payable
Cash
15,000
15,000
December 5
Cash
500
Returnable Deposit Liability
500
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Chapter 14
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9,450
630
10,080
December 31
Cash
83,500
Sales ($83,500 1.12)
Sales Taxes Payable ($74,553 X .05)
GST Payable ($74,553 X .07)
74,553
3,728
5,219
December 31
Income Tax Expense
Cash
22,000
22,000
December 31
8,500
8,500
December 31
Interest Expense ($36,000 X 12% X )
Interest Payable
3,240
December 31
Interest Expense ($12,000 X 8/12)
Discount on Notes Payable
8,000
3,240
8,000
Solutions Manual
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Chapter 14
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Current Liabilities:
Accounts Payable
Note Payable
Interest Payable
Note Payable
Discount on Note Payable
Sales Taxes Payable
GST Payable ($5,219 - $630)
Income Taxes Payable
Returnable Deposit Liability
Total Current Liabilities
(c)
December 10
Display Cases ($9,000 + [$9,000 X 1.07 X .05])
GST Receivable ($9,000 X .07)
Accounts Payable
$10,080
$36,000
3,240
92,000
(4,000)
39,240
88,000
3,728
4,589
8,500
500
$154,637
9,482
630
10,112
December 31
Cash
83,500
Sales ($83,500 1.1235*)
Sales Taxes Payable
($74,321 X 1.07 X .05)
GST Payable ($74,321 X .07)
74,321
3,976
5,203
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Chapter 14
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PROBLEM 14-2
(a)
Entries for Payroll 1
Wages and Salaries Expense
Employee Income Tax Deductions
Payable (10% X $2,540)
EI Premiums Payable **
CPP Contributions Payable ***
Union Dues Payable (1% X $2,540)
Cash
2,540.00*
254.00
40.39
50.53
25.40
2,169.68
107.08
56.55
50.53
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Chapter 14
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page is strictly prohibited.
107.08
56.55
50.53
2,540.00
254.00
40.39
50.53
25.40
2,169.68
107.08
56.55
50.53
Solutions Manual
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Chapter 14
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page is strictly prohibited.
261.60
$203.20
58.40
$261.60
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page is strictly prohibited.
PROBLEM 14-3
(a)
Name
Earnings
to Aug. 31
B. D. Williams
D. Prowse
K. Baker
F. Oz
A. Daniels *
P. Mayhew *
Total
$ 6,800
6,300
7,600
13,600
105,000
112,000
$251,300
Income
Tax
WithSept.
Earnings holding
$ 800
700
1,100
1,900
15,000
16,000
35,500
$ 80
70
110
190
1,500
1,600
$3,550
CPP
EI
Union
Dues
$ 39.60 $15.84
$8.00
34.65
13.86
7.00
54.45
21.78
11.00
94.05
37.62
19.00
64.35 150.00
64.35 160.00
$222.75 $217.80 $355.00
35,500.00
3,550.00
217.80
222.75
355.00
31,154.45
527.67
304.92
222.75
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3,550.00
522.72
445.50
355.00
4,873.22
$35,500.00
527.67
$36,027.67
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PROBLEM 14-4
(a)
(b)
1,050,000
1,050,000
Warranty Expense
Estimated Liability Under
Warranties
(300 X [$155 + $185])
1,050,000
1,050,000
102,000
102,000
(c)
(d)
Current Liabilities:
Estimated Liability Under Warranties
$51,000
Long-term Liabilities:
Estimated Liability Under Warranties
$51,000
(e)
(f)
(g)
Warranty Expense
Parts Inventory
Accrued Payroll
46,300
46,300
21,400
24,900
21,400
24,900
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PROBLEM 14-5
(a)
Cash
245,250
Sales (300 X $750)
Unearned Warranty Revenue
(270 X $75)
Warranty Expense
Estimated Liability Under
Warranties
(300 X $15)
(b)
(c)
(d)
225,000
20,250
4,500
4,500
Current Liabilities:
Estimated Liability Under
Warranty
$ 4,500
Long-term Liabilities:
Unearned Warranty Revenue
$20,250
4,410
1,470
2,940
Current Liabilities:
Unearned Warranty Revenue*
$ 6,750
Long-term Liabilities:
Unearned Warranty Revenue
$13,500
(f)
6,750
Warranty Expense**
Parts Inventory
Accrued Payroll
5,000
6,750
2,000
3,000
Current Liabilities:
Unearned Warranty Revenue
$ 6,750
Long-term Liabilities:
Unearned Warranty Revenue
$ 6,750
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PROBLEM 14-6
(a)
1.
2.
3.
Method A:
Warranty Expense
Estimated Liability Under
Warranties
([650 machines X $370] $120,250)
Method B:
Warranty Expense
Estimated Liability Under
Warranties
(650 machines X $370)
4.
4,810,000
4,810,000
120,250
55,250
65,000
120,250
55,250
65,000
120,250
120,250
240,500
240,500
120,250
55,250
65,000
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4,810,000
4,810,000
120,250
55,250
65,000
3.
4.
Warranty Expense
Parts Inventory
Accrued Payroll
120,250
55,250
65,000
(c)
(d)
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page is strictly prohibited.
PROBLEM 14-7
(a)
Inventory of Premium Puppets........................................
60,000
Cash..........................................................................
(To record purchase of 40,000
puppets at $1.50 each)
60,000
Cash ...................................................................................
1,650,000
Sales......................................................................... 1,650,000
(To record sales of 440,000 boxes
at $3.75 each)
Premium Expense.............................................................
31,500
Inventory of Premium Puppets...............................
[To record redemption of 105,000
coupons. Computation:
(105,000 5) X $1.50 = $31,500]
Premium Expense.............................................................
21,300
Estimated Liability for Premiums...........................
[To record estimated liability for
premium claims outstanding at
December 31, 2005.]
31,500
21,300
440,000
176,000
105,000
71,000
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60,000
Cash ...................................................................................
1,650,000
Sales......................................................................... 1,650,000
(To record sales of 440,000 boxes
at $3.75 each)
Premium Expense.............................................................
52,800
Estimated Liability for Premiums...........................
[To record premium expense for
the full estimated cost of the
premium plan]
Computation:
Total coupons issued in 2005
Redemption rate
Total estimated redemptions (40%)
Number of coupons per premium
Number of premium claims
Cost of premium
Total premium expense for the year 2005
Estimated Liability for Premiums....................................
31,500
Inventory of Premium Puppets...............................
[To record redemption of 105,000
coupons. Computation:
(105,000 5) X $1.50 = $31,500]
52,800
440,000
X
40%
176,000
5
35,200
X $1.50
$52,800
31,500
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PROBLEM 14-8
(a) 2005
Inventory of Premium CDs
Cash
(To record the purchase of 250,000
CDs at $1.80 each)
Cash
450,000
450,000
868,620
Sales
(To record the sale of 2,895,400
candy bars at 30 cents each)
868,620
360,000
72,000
432,000
$432,000
120,000
$552,000
480,000
$ 72,000
Premium Expense
17,400*
Estimated Liability for Premiums
(To record the estimated liability for
premium claims outstanding at
12/31/05)
*(290,000 5) X ($1.80 + $.50 $2.00) = $17,400
17,400
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594,000
Cash
823,080
594,000
Sales
(To record the sale of 2,743,600 candy
bars at 30 cents each)
Cash ($600,000 $150,000)
Estimated Liability for Premiums
Premium Expense
Inventory of Premium CDs
(To record the redemption of 1,500,000
wrappers, the receipt of $600,000
[(1,500,000 5) X $2.00], and the
mailing
of 300,000 CDs.)
Computation of premium expense:
300,000 CDs X $1.80 =
Postage300,000 X $0.50 =
Less: Cash received
(1,500,000 5) X $2.00
Premium expense for CDs issued
Less: Outstanding claims at 12/31/05
charged to 2005 but redeemed in 2006
Premium expense chargeable to 2006
823,080
450,000
17,400
72,600
540,000
$540,000
150,000
690,000
600,000
90,000
17,400
$ 72,600
Premium Expense
21,000*
Estimated Liability for Premiums
21,000
*(350,000 5) X ($1.80 + $.50 $2.00) = $21,000
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Amount
2005
2006
Classification
$18,0001 $72,0002 Current asset
17,400
89,4003
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PROBLEM 14-9
(a) 1. It is likely a loss and liability have been incurred and a
reasonable estimate can be made of the amount. The loss
and liability should be recorded as follows:
Loss from Accident
Liability for Accident
800,000
800,000
3,000,000
3,000,000
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page is strictly prohibited.
PROBLEM 14-10
(a)
1.
2.
3.
4.
(b)
1.
225,000
500,000
225,000
500,000
2,245,000
2,245,000
No entry required.
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3.
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page is strictly prohibited.
(c)
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page is strictly prohibited.
PROBLEM 14-11
1.
$5,400,000
.02
$ 108,000
2.
$ 136,000
108,000
244,000
164,000
$ 80,000
3.
1,800,000
.60
1,080,000
200
5,400
14
$ 75,600
5.
39,950
221,000
260,950
$ 204,000
$ 56,950
44,800
75,600
120,400
84,000
36,400
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PROBLEM 14-12
(a)
400,000
400,000
$2,300,000
1,900,000
$ 400,000
(b)
(c)
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(e)
(f)
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PROBLEM 14-13
(B = bonus; T = taxes)
(a)
B
B
T
T
=
=
=
=
0.12 ($250,000)
$30,000
.40 ($250,000 $30,000)
$88,000
(b)
B
B
1.12B
B
T
T
=
=
=
=
=
=
0.12 ($308,000 B)
$36,960 .12B
$36,960
$33,000
0.40 ($308,000 $33,000)
$110,000
(c)
B
T
B
B
B
0.952B
B
T
T
=
=
=
=
=
=
=
=
=
0.12 ($350,000 T)
0.40 ($350,000 B)
0.12 [$350,000 0.40 ($350,000 B)]
0.12 ($350,000 $140,000 + .4B)
$25,200 + .048B
$25,200
$26,470.59
.40 ($350,000 $26,470.59)
$129,411.76
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PROBLEM 14-14
(a)
Current Liabilities:
Trade payables ($414,000 $23,000)
Liability to affiliated company
Notes payable ($150,000 + $200,000)
GST payable (Schedule 5)
Dividends payable
Bonus payable (75% X $25,000)
Unearned revenue (1/3 X $330,000)
Accrued liabilities (Schedule 1)
Total current liabilities
Schedule 1:
Interest payable (Schedule 2)
Warranty liability (Schedule 3)
Salaries and wages payable
Employee withholdings payable (Schedule 4)
Union dues payable
Audit fee payable
Total accrued liabilities
Schedule 2:
Interest on the bond
($4,000,000 X 7% X 3/12)
Interest on Note due 04/01/05
($150,000 X 8% X 11/12)
Interest on Note due 01/31/06 ($200,000 X 9% X 1/12)
Interest on Note due 03/15/06
($500,000 X 7% X 11.5/12)
Interest on Note due 10/30/07 ($250,000 X 8% X 4/12)
Total interest payable
$ 391,000
23,000
350,000
11,900
50,000
18,750
110,000
545,749
$1,500,399
$ 122,709
1,240
220,000
105,300
21,500
75,000
$545,749
$ 70,000
11,000
1,500
33,542
6,667
$ 122,709
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$5,700
(4,900)
800
1,540
(1,100)
$1,240
Schedule 4:
EI premiums payable (2.4 X $9,500)
CPP contributions payable (2 X $16,900)
Employee income tax deductions payable
Employee withholdings payable
$ 22,800
33,800
48,700
$105,300
Schedule 5:
Net GST payable, 01/31/05 ($60,000 $34,000)
Less payment to government on 15th of Feb./05
GST charged on February sales
GST paid on February purchases
Net GST payable, 02/28/05
$ 26,000
(26,000)
39,900
(28,000)
$11,900
(b)
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Assignment 14-2
Assignment 14-3
Assignment 14-4
Assignment 14-5
Purposeto provide an opportunity for the student to discuss the ethical issues
of changing estimates for warranty and contingencies in order to trigger a bonus
for management.
Assignment 14-6
During June of this year, the client began manufacture and sales
of a new line of dishwasher. Sales of 100,000 dishwashers
during this period amounted to $50,000,000. These dishwashers
were sold under a one-year warranty, and the client estimates
warranty costs to be $25 per appliance.
As of the balance sheet date, the client paid out $1,000,000 in
warranty expenditures that was also the amount expensed in its
income statement. No recognition of any further liability
associated with the warranty had been made.
Because ProVision accounts for warranties on the accrual basis,
it must recognize the entire $2,500,000 as warranty expense in
the year of sale. I advised the client to make the following
journal entries:
1.
Cash/Accounts Receivable
50,000,000
Sales
50,000,000
(To record sale of 100,000 dishwashers)
2.
Warranty Expense
1,000,000
Cash, Inventory, Accrued Payroll
1,000,000
(To record warranty costs incurred)
3.
Warranty Expense
1,500,000
Estimated Liability Under Warranties
1,500,000
(To accrue estimated warranty costs)
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page is strictly prohibited.
ASSIGNMENT 14-2
(a) A liability is defined as obligations of an enterprise arising
from past transactions, the settlement of which may result in
the transfer of assets, provision of services or other yielding
of economic benefits in the future. In other words, it is an
obligation to transfer some type of resource in the future as
a result of a past transaction.
(a)Current liabilities are obligations whose liquidation is
reasonably expected to require use of existing resources
properly classified as current assets or the creation of other
current liabilities. In other words, they are liabilities
generally payable within one year or the operating cycle,
whichever is longer.
(b)A financial liability is any liability that is a contractual
obligation to deliver cash or another financial asset to
another party. A contractual obligation refers to an
agreement between two or more parties that has clear
economic consequences that the parties have little, if any,
discretion to avoid, usually because the agreement is
enforceable at law. Contracts, and thus financial
instruments, may take a variety of forms and need not be in
writing.
(d)
1. Generally, accounts payable would be classified as a current
liability. In this case, since the due date is January 2006, the
amount would be classified as a current liability.
2 and 5.
Since the notes payable and bonds payable are due in less
than one year from the balance sheet date, they would
generally be reported as current liabilities. The only situation
in which these short-term obligations could possibly be
excluded from current liabilities is if Antigonish Corporation
intends to refinance it. For those notes to qualify for
exclusion from current liabilities, the company must meet the
following criteria:
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ASSIGNMENT 14-3
(a) No. Refinancing a short-term obligation on a long-term basis
means either replacing it with a long-term obligation or with
equity securities, or renewing, extending, or replacing it with
short-term obligations for an uninterrupted period extending
beyond one year (or the operating cycle, if applicable) from
the date of an enterprises balance sheet.
Managements intent to refinance the obligation on a longterm basis is not enough to warrant reclassification of the
short-term obligation. CICA Handbook, Section 1510, par. 06,
indicates that a contractual arrangement must have been
made before an otherwise current liability may be classified
as non-current.
(b) Yes. The events described will have an impact on the
financial statements. Since Eshkol Corporation refinanced
the long-term debt maturing in March 2006 in a manner that
meets the conditions set forth in CICA Handbook Section
1510, that obligation should be excluded from current
liabilities. The $11,000,000 should be classified as long-term
at December 31, 2005.
A short-term obligation, other than one classified as a
current liability shall be excluded from current liabilities if
the enterprises intent to refinance the short-term obligation
on a long-term basis is supported by an ability to
consummate the refinancing. This can be demonstrated
through the issuance of long-term debt or equity securities
after the date of the balance sheet but before that balance
sheet is issued. The issuance of the long-term debt or equity
securities must be for the purpose of refinancing the shortterm obligation on a long-term basis.
(c) No. Since Eshkol Corporation refinanced the long-term debt
maturing in March 2006 in a manner that meets the
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ASSIGNMENT 14-4
Because the casualty occurred subsequent to the balance sheet
date, it does not meet the criteria of a loss contingency; that is,
an asset had not been impaired or a liability incurred at the date
of the balance sheet. Therefore, a loss contingency should not
be accrued by a charge to expense due to the explosion.
However, because it had become known before the financial
statements were issued that assets were impaired and liabilities
were incurred after the balance sheet date, disclosure is
necessary to keep the financial statements from being
misleading. The financial statements should indicate the nature
of and an estimate of the loss to the companys assets as a
result of the explosion and the nature of and an estimate of the
loss contingency anticipated from suits that will be filed and
claims asserted for injuries and damages.
If the loss to assets or the liability incurrence can be reasonably
estimated, disclosure may best be made by supplementing the
historical financial statements with pro forma financial data
giving effect to the loss as if it had occurred at the date of the
financial statements.
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ASSIGNMENT 14-5
(a) and (b)
No, Don Street, the controller, should not manipulate net
income in view of any compensation plan the company
may have.
(c)
(d)
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ASSIGNMENT 14-6
(a) Two conditions must exist before a loss contingency is
recorded:
1. Information available prior to the issuance of the financial
statements indicates that it is likely that a liability has
been incurred at the date of the financial statements.
2. The amount of the loss can be reasonably estimated.
(b) When some amount within the range appears at the time to
be a better estimate than any other amount within the range,
that amount is accrued. When no amount within the range is
a better estimate than any other amount, the dollar amount at
the low end of the range is accrued and the dollar amount at
the high end of the range is disclosed.
(c) If the amount of the loss is uncertain, the following
disclosure in the notes is required:
1. The nature of the contingency.
2. An estimate of the possible loss or range of loss or a
statement that an estimate cannot be made.
(d) If the likelihood of the loss is unknown, the same disclosure
in the notes as detailed in part (c) is required.
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Conclusion
It might be more prudent to depreciate the land values.
Environmental standards change (and are increasing) and
therefore, given the potential liability if toxins are subsequently
found, the value of the land could be wiped out.
Issue: Lawsuits
Must be disclosed as could be material. Alternatively, given that
LL has already agreed to be responsible for these costs, if
measurable, they should be accrued. It would be more prudent
to accrue the costs if they are measurable. The company should
contact the lawyers and verify the status.
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INTRAWEST CORPORATION
2003
Amounts payable
218,444
134,878
Total
287,176
640,498
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(e) Intrawests current ratio and quick ratio for each year
presented are reported below. Both ratios show a positive
trend indicating that the companys liquidity has improved
from 2002 to 2003. This is due to the level of current and
quick assets increasing by a greater proportion than the level
of current liabilities. The improvement in the current ratio is
more substantial than the improvement in the quick ratio
since a significant amount of the increase in the current
assets is due to an increase in resort properties which is
excluded from the calculation of the quick ratio.
2003
Current
assets
Quick
assets
Current
liabilities
Current
ratio
Quick
ratio
2002
1,049,983 681,807
253,557
186,637
640,498
576,785
1.64
1.18
0.40
0.32
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RA14-2
(In thousands)
Accounts payable and other
Income taxes payable
Current portion of long-term
debt
2002
Balance
$ 1,294,700
80,700
208,200
$1,583,600
Acid-test ratio =
(3)
Current ratio =
Current assets
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Current liabilities
2002: 1.46 times =
$2,314.2
$1,583.6
$1,993.2
$1,110.1
$1,483.3
$1,167.3
Inventory turnover =
Sales
Average receivables*
$5,944.5
($584.1 + $579.8 + $433.9 + $525.3)/2
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RA14-3
(a)
NORTHLAND CRANBERRIES
Prior year
Working
capital
$6,745,759 $10,168,685 $5,598,054 $4,484,687
(deficiency) = ($3,422,926)
= $1,113,367
Current
ratio
($6,745,759/$10,168,685)
= .66
($5,598,054/$4,484,687)
= 1.25
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Prior year
Working
capital
$6,745,759 $7,168,685 $5,598,054 $4,484,687
(deficiency) = ($422,926)
= $1,113,367
Current
ratio
($6,745,759/$7,168,685) ($5,598,054/$4,484,687)
= .94
= 1.25
Prior year
Gross
($21,783,966 $13,057,275) ($18,051,355 $8,751,220)
margin
$18,051,355
$21,783,966
percentage = 40%
= 52%
Profit
margin
($1,581,707/ $21,783,966)
= 7.3%
($2,942,954/$18,051,355)
= 16%
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RA14-4
1.
Current Assets
Current Liabilities
Current Ratio
Danier Leather
($ thousands)
2003
2002
46,899 44,154
10,559 10,552
4.44
4.18
Costco
($ thousands)
2003
2002
5,711,538 4,630,539
5,011,107 4,449,733
1.14
1.04
7,254
3,777
1,545,439
805,518
683
484
556,090
474,861
7,937
4,261
2,101,529
1,280,379
Quick Ratio
0.752
0.404
0.419
0.288
Both the current ratios and the quick ratios indicate that Danier
Leather has better liquidity than Costco by a considerable
margin in both years presented. The difference between the two
companies quick ratios is less significant than the difference
between their current ratios because Daniers inventory is a
significantly higher proportion (79%) of its total current assets
than is Costcos (58%). The exclusion of this major item results
in the quick ratio of Costco being much closer to that of Danier
than its current ratio. The higher proportion of inventory shown
by Danier makes sense in relation to the two businesses
differing strategies with respect to inventory turnover. By
comparing their quick ratios instead of their current ratios, this
difference is somewhat isolated from the analysis. Both
companies show an increase in their liquidity from 2002 to 2003
using both ratios.
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2.
COGS
Accounts Payable
A/P Turnover
Payment Period
(365/ A/P Turnover)
Inventory
Inventory Turnover
# of days in
inventory
(365/ Inv. Turnover)
Sales
Accounts
receivable
A/R Turnover
Collection Period
(365/ A/R Turnover)
Danier Leather
($ thousands)
2003
2002
88,788
10,559 10,472
8.44
43 days
37,029
2.35
Costco
($ thousands)
2003
2002
37,235,383
3,131,320 2,884,269
12.38
29 days
38,662
3,339,428
11.52
155 days
32 days
175,487
600
41,692,699
556,090
484
324
81
1.1 day
4.5 days
3,127,221
474,861
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0
Receive
goods
43
Payment
for goods
Sale of
goods
155
156
Collection
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37
29
Payment
for
goods
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From the above charts, we can see that Costco Wholesale has a
much shorter cash-to-cash cycle. Danier Leather has 113 days
(156 days for collection less 43 days since payment of goods)
from the time cash is paid out for inventory until cash is
collected from customers.
Costco has 8 days (37 days for collection less 29 days since
payment of goods) from the time cash is paid out for inventory
until cash is collected from its customers.
This analysis shows that Costco is more liquid than Danier if
liquidity is measured purely in terms of the cash to cash
operating cycle since its inventory is converted to cash more
quickly. A higher inventory turnover also involves less risk of
non-saleability of inventory. Considering the proportion of
inventory that is perishable food for Costco, this is of major
concern for management. All necessary steps would be taken to
ensure this result. Note that this measure of liquidity is different
than the purely balance sheet perspective taken in part a) which
indicated that Danier was more liquid than Costco.
RA14-5
(a)
Current
Assets
Current
Liabilities
Loblaw
($ millions)
2002 2001
3,526 3,086
Sobeys
($ millions)
2003 2002
1,094
985
3,154 2,796
1,181
990
1.
12
1.
10
0.
93
0.
99
Cash
Short-term
investments
823
304
575
426
123.1
191.4
196.7
77.7
Accounts
receivable
Current
portion of
mortgages
and loans
receivable
605
472
285.4
15.4
251.
0
23.2
615
549
0.
52
0.
55
Current
Ratio
Total Quick
Assets
Acid-test
Ratio
1,732 1,473
0.
55
0.
53
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The current and acid-test ratios are very low. Current liabilities
exceed current assets for Sobeys and are very close to
exceeding current assets for Loblaw. The companies operate in
the grocery business. Since the business is cash-intensive, cash
management is important to success and highly liquid assets
are kept to a minimum. Because of the volume of business that
these companies generate, they can negotiate preferential
payment terms with their suppliers that allow them to operate
with more modest liquidity positions.
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(b)
Cash from
operations
Total liabilities
Loblaw
($ millions)
2002
2001
981
6,986 6,456
Cash debt
coverage*
Current liabilities
0.15
3,154 2,796
0.33
Sales
Accounts
receivable
A/R Turnover
23,082
605
472
42.9
Collection period
(365/AR turnover)
COGS selling and
administrative
exp.
Inventory
Sobeys
($ millions)
2003
2002
348.1
8.51
21,425
1,75
5.7
0
.21
1,18
0.5
0
.32
10,41
4.5
28
5.4
3
8.8
9
.41
9,964.40
1,702 1,512
1,591.
9
990.
4
251.
0
394.6
444.0
Inventory
Turnover
Days in Stock
Accounts payable
Accounts
Payable Turnover
Days payables
outstanding
13.33
27.38
2,336 2,291
23
.76
15
.36
971.9
9.26
10
.52
39.42
34
.70
922.9
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(c)
Loblaw
($ millions)
$106
106
215
129
5
Sobeys
($ millions)
Debt retirement
Capital lease
payments
obligations
$ 148.7
28.5
183.5
7.1
8.4
$ 1.4
1.5
1.5
1.6
1.1
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RA14-6
RESEARCH TOPIC
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