SM Chapter 10

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 10
Reporting and Analyzing Liabilities
ASSIGNMENT CLASSIFICATION TABLE

Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Account for current 1, 2, 3, 4, 1, 2, 3, 4, 1, 2, 3, 4 1A, 2A, 6A 1B, 2B, 6B 1

liabilities. 5, 6, 7, 8 5
2. Account for instalment 8, 9, 10, 6, 7, 8, 9 5, 6, 7 3A, 4A, 5A 3B, 4B, 5B 1, 6, 7

notes payable. 11, 12, 13
3. Identify the 14, 15, 16, 10, 11, 12, 8, 9, 10 1A, 2A, 4A, 1B, 2B, 4B, 1, 2, 3,
requirements for the 17, 18 5A, 6A, 7A, 5B, 6B, 7B, 4, 5, 7
financial statement 8A, 10A 8B, 10B
presentation and
analysis of liabilities.
4. Account for bonds *19, *20, *13, *14, *11, *12, *9A, *10A *9B, *10B 3
payable. *21 *15 *13, *14
Solutions Manual 10-1 Chapter 10

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ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time
Number Description Level Allotted (min.)
1A Record and present current liabilities. Moderate 25-30
2A Record and present short-term notes. Moderate 30-40
3A Record instalment note. Moderate 30-40
4A Prepare instalment payment schedule; record and Moderate 30-40

present instalment note.
5A Prepare instalment payment schedule; record and Moderate 30-40

6A Classify liabilities. Moderate 20-30
7A Analyze liquidity and solvency. Moderate 30-40
8A Analyze liquidity and solvency. Moderate 30-40
*9A Record bond transactions. Moderate 30-40
*10A Calculate present value; prepare amortization Moderate 30-40

schedule; record and present bond transactions.
1B Record and present current liabilities. Moderate 25-30
2B Record and present short-term notes. Moderate 30-40
3B Record instalment note. Moderate 30-40
4B Prepare instalment payment schedule; record and Moderate 30-40

5B Prepare instalment payment schedule; record and Moderate 30-40

6B Classify liabilities. Moderate 20-30

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time
Number Description Level Allotted (min.)
7B Analyze liquidity and solvency. Moderate 30-40
8B Analyze liquidity and solvency. Moderate 30-40
*9B Record bond transactions. Moderate 30-40
*10B Calculate present value; prepare amortization Moderate 30-40

schedule; record and present bond transactions.

ANSWERS TO QUESTIONS
1. Accounts payable and short-term notes payable are both forms of credit used by a
business to acquire the items they need to operate. Both represent obligations of the
business to repay amounts in the future and are therefore considered to be liabilities.
However, an account payable is normally for a shorter period of time (e.g., 30, 60, 90
days) than a note payable. A note payable usually provides for a longer period of time
to settle the amount owing.
A note payable involves a more formal arrangement than an account payable. A note
payable is an obligation in written form and will provide documentation if legal action is
required to collect the debt. As well, a note payable often requires the payment of
interest because it is generally used when credit is to be granted for a longer period of
time than for an account payable.
2. An operating line of credit, or credit facility, is used by a business to overcome short-

term cash demands or temporary cash shortfalls that invariably happen during the
operating cycle. It is not usually intended to be a permanent type of financing and is
generally used for operations. When needed, the funds are used and then repaid as the
liquidity improves and cash becomes available from operations. Bank loans on the
other hand are structured in such a way to deal with more short-term or long-term cash
needs of the business. Longer type loans are used to finance the purchase of property,
plant, and equipment and short-term bank loans would be used to finance inventory.
Bank loans are for specific amounts that have structured terms for the repayment of the
principal.
3. Disagree. The company only serves as a collection agent for the taxing authority. It
does not keep and report sales tax as revenue; it merely forwards the amount paid by
the customer to the government. Therefore, until it is remitted to the government, sales
tax is reported as a current liability on the statement of financial position.
4. A difference exists in the timing of the incurrence of the expense for property tax and
the timing of the payment of the property tax bills. Due to this difference, at any
reporting period, the balance can shift from a liability when the property tax bill is
received, to a prepayment when it is paid. In addition, an expense must be recorded as
the property tax prepayment is used up.
5. The difference between (a) gross pay (the total amount an employee earned in salary
or wages) and net pay stems from the payroll deductions deducted from the gross pay
of an employee. Some of the deductions are mandatory, such as income tax, and some
are optional such as donations to charities. In turn, the difference between (b)
deductions withheld from an employee (i.e., deducted from an employee’s pay), and
employee benefits, is the employee benefits are paid by the employer only. They are
not part of the employee’s gross earnings. These employer paid benefits include
required payments for CPP and EI, for example.

Answers to Questions (Continued)

6. When determining whether a contingent liability should be accrued as a provision,
management must first assess the level of uncertainty concerning the outcome of a
future event that will confirm either the existence or the amount payable or both. Under
IFRS, if the outcome of a future event is probable and a reasonable estimate can be
made of the amount expected to be paid, the amount will appear as a current liability
on the statement of financial position. Probable, in this case means “more likely than
not” which is normally interpreted to mean that there is more than a 50% probability of
occurring. The details of the reasons for the accrual will also be outlined in the financial
statement notes. If the outcome is not probable or if the amount cannot be reasonably
estimated, the details of the contingent liability will be disclosed in the notes to the
financial statements. On the other hand, if the company is reporting under ASPE, the
probability needs to be “likely.” This is a higher level of probability that the standard
used in IFRS.
7. Shoppers must report details of any outstanding claims or possible claims even though
the amount of any claim cannot be reasonably determined. This disclosure helps the
readers of the financial statements assess any future possible consequences that
might come about concerning these potential claims. Since they cannot be measured,
the amounts cannot be recorded as provisions. Unrecorded claims or possible claims
are contingent liabilities.
8. Current liabilities include those payments that are going to be due for payment in one
year from the financial statement date. Non-current liabilities are to be paid beyond
that period. Included in current liabilities would be the principal portion of any loans or
debt that will be paid in the next year. Consequently, care must be taken to
disaggregate balances of such non-current loans or mortgages to ensure that the
current portion of the debt is properly classified as a current liability.
9. Long-term instalment notes are similar to short-term notes in that they both provide
written documentation of a debtor’s obligation to the lender. The main difference
between the two types of notes is that long-term instalment notes have maturities that
extend beyond one year and have principal repayments included in the periodic
payments required by the note.
For both types of notes, interest expense is calculated by multiplying the outstanding
principal balance by the interest rate. However, because a portion of the principal
balance is usually repaid periodically throughout the term of a long-term instalment
note, the outstanding principal balance will change (decrease). In contrast, the
principal balance does not change throughout the term of a short-term note.


10. Instalment notes usually require the borrower to pay down a portion of the principal
through fixed periodic payments relating to the principal along with any interest that
was due at that time. Each time a payment is made, a constant amount of principal
repayment is deducted from the note. The total payment amount will decline over time
as the interest expense portion decreases due to reductions in the principal amount of
the note.
An instalment note with a blended principal and interest payment is repayable in equal
periodic amounts and results in changing amounts of interest and principal being
applied to the note. The total payment remains the same over the life of the note but
the portion applied to the principal increases over time as the interest portion
decreases due to reductions in the principal amount of the note.
11. It is a blended payment pattern. Instalment notes with blended principal and interest
payments are repayable in equal periodic amounts, including interest. Instalment notes
payable with fixed principal payments are repayable in equal principal periodic
amounts, plus interest.
12. (a) A student choosing the floating rate loan will initially pay less interest, but as the
prime lending rate changes so does the amount of interest that is charged on the
balance owed on the loan. Since the loan repayment is typically several years in
length, this changing of interest rate reduces the risk to the financial institution to
get a proper return on their loan to the student. With the fixed interest rate, the initial
interest rate paid is higher, but the rate does not change over the term of the loan.
(b) If, in the view of the student, interest rates are expected to rise, the fixed rate of
interest is the better choice. On the other hand, if interest rates are expected to
remain steady or fall, the variable rate loan would be the better choice.
13. Doug is incorrect because the amount of interest paid each month will decrease as
payments are made and the outstanding (remaining) principal balance decreases. The
amount of interest is calculated as a percentage of the outstanding principal amount.
Because the monthly cash payment remains constant, over time, greater portions of
the payment will be applied to the principal thereby more rapidly reducing the balance
of the mortgage.


14. (a) Current liabilities should be presented in the statement of financial position with
each major type shown separately. They are normally listed in order of maturity,
although other listing orders are also possible. The notes to the financial
statements should indicate the terms, including interest rates, maturity dates, and
other pertinent information such as assets pledged as collateral.
(b) The nature and the amount of each non-current liability should be presented in the
statement of financial position or in schedules included in the accompanying notes
to the statements. The notes should also indicate the interest rates, maturity dates,
conversion privileges, and assets pledged as collateral.
15. Liquidity ratios measure the short-term ability of a company to repay its maturing
obligations. Ratios such as the current ratio, receivables turnover, and inventory
turnover can be used to assess liquidity.
Solvency ratios measure the ability of a company to repay its total debt and survive
over a long period of time. Ratios that are commonly used to measure solvency include
debt to total assets and times interest earned ratios.
16. An operating line of credit, or credit facility, is used by a business to overcome short-
term cash demands that invariably happen during the operating cycle. It is not usually
intended to be a permanent type of financing and is generally used for operations.
When needed, the funds are used and then repaid as the liquidity improves and cash
becomes available from operations. As a consequence, the business does not incur the
constant charge for interest on a long-term debt loan and can save on interest costs.
The liquidity issues of a business can therefore be effectively dealt with using an
operating line of credit.
17. A company’s debt to total asset ratio should be measured in terms of its ability to
manage its debt. A company may have a high debt to total asset ratio but still be able to
meet its interest payments because of high profits. Alternatively, a company with a low
debt to total assets may find itself in financial difficulty if it does not have sufficient profit
to cover required interest payments. Therefore, it is important to interpret these two
ratios in conjunction with one another.
18. A company with significant operating leases has obligations that are reported in the
notes to the financial statements rather than on the statement of financial position. This
is referred to as off-balance sheet financing. The existence of these off-balance sheet
forms of financing highlights the importance of including the information contained in
the notes in any analysis of a company’s solvency. These notes also help the financial
statement user forecast the amount of the future cash outflows that will occur to satisfy
these lease commitments.

19. (a) A bond is a form of a long-term note payable. They are similar in that both have
fixed maturity dates and pay interest. The most significant difference between a
note payable and a bond is that bonds are often traded on the stock exchange,
whereas few notes are. In addition, bonds tend to be issued for much larger
amounts than notes. Because of these differences, generally only large companies
use bonds as a form of debt financing.
(b) When it comes to large sums of money, a business would consider the issue of
shares or bonds for obtaining the necessary cash. Both would be traded on the
stock exchange. Bonds are classified as debt on the statement of financial position
and common shares are classified as equity. Bonds require principal and interest
payments; common shares do not have to be repaid. The board of directors may
choose to pay dividends to the common shareholders, however.
20. Investors paid more than the face value of the bond; therefore, the market interest rate
must have been less than the coupon interest rate. Investors are willing to pay more
for a bond that offers a coupon rate of return greater than the rate offered in the
market. The demand for this bond then causes the price to increase above its face
value.
21. (a) When a bond is sold at a discount, the proceeds received are less than the face
value of the bond because the stated rate of interest that the bond offers is lower
than the market interest rate. This has made the bond less attractive to investors
who will increase the return they get from the bond buy paying less than its face
value. The bond discount is considered to be an additional cost of borrowing. This
additional cost of borrowing should be recorded as additional interest expense
over the term of the bond through a process called amortization. Initially, the
discount is recorded by showing the Bond Payable at an amount lower than its
face value but over time, this account is increased (credited) so that it will be equal
to its face value by the time it matures. The offsetting debit is made to interest
expense. This is the additional interest expense incurred by the company for
selling a bond at a discount. When interest is actually paid, this amount is added to
interest expense. So interest expense will consist of a portion that is paid and a
portion relating to the amortization of the discount thereby making it greater than
the interest paid.


(b) When a bond is sold at a premium, the proceeds received are greater than the
face value of the bond because the stated rate of interest that the bond offers is
higher than the market interest rate. This has made the bond very attractive to
investors who will be prepared to pay a higher price for the bond than its face
value. The bond premium is considered to be a reduction in interest. This benefit
should be recorded through reductions to interest expense over the term of the
bond through a process called amortization. Initially, the premium is recorded by
showing the Bond Payable at an amount higher than its face value but over time,
this account is decreased (debited) so that it will be equal to its face value by the
time it matures. The offsetting credit is made to interest expense. This lowers
interest expense to reflect the benefit of the premium. When interest is actually
paid, this amount is added to interest expense. So interest expense will consist of
a portion that is paid and a portion relating to the amortization of the premium
thereby marking it lower than the interest paid.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
(a)
Oct. 1 Cash ($6,000 + $780) ............................................ 6,780
Sales ............................................................. 6,000
Sales Tax Payable ($6,000 × 13%) ............... 780
(b)
Oct. 1 Cash ($6,000 + $899) ............................................ 6,899
Sales ............................................................. 6,000
Sales Tax Payable [($6,000 × 5%) +
($6,000 × 9.975%)]..................................... 899
BRIEF EXERCISE 10-2
(a)
Apr. 30 Property Tax Expense ($36,000 ÷ 12 × 4) ................ 12,000
Property Tax Payable ....................................... 12,000
(b)
July 15 Property Tax Payable ............................................... 12,000
Property Tax Expense ($36,000 ÷ 12 × 2.5) ............. 7,500
Prepaid Property Tax ($36,000 ÷ 12 × 5.5) ............... 16,500
Cash ................................................................. 36,000
(c)
Dec. 31 Property Tax Expense .............................................. 16,500
Prepaid Property Tax ........................................ 16,500

BRIEF EXERCISE 10-3
(a) Aug. 22 Salaries Expense ...................................................... 15,000

Income Tax Payable ......................................... 6,258
CPP Payable .................................................... 743
EI Payable ........................................................ 267
Cash ($15,000 – $6,258 – $743 – $267) .......... 7,732
(b) Aug. 22 Employee Benefits Expense ..................................... 1,117

CPP Payable .................................................... 743
EI Payable ........................................................ 374
(c) Sept. 1 Income Tax Payable ................................................. 6,258

CPP Payable ($743 + $743) ..................................... 1,486
EI Payable ($267 + $374) ......................................... 641
Cash ($6,258 + $1,486 + $641) ........................ 8,385
BRIEF EXERCISE 10-4
(a) July 1 Cash ...................................................................... 60,000

Bank Loan Payable ....................................... 60,000
(b) (1) Aug. 1 Interest Expense ($60,000 × 5% × 1/12)................ 250

Cash .............................................................. 250
(2) Aug. 31 Interest Expense .................................................... 250

Interest Payable ............................................ 250
(3) Sept. 1 Interest Payable ..................................................... 250

Cash .............................................................. 250
(4) Oct. 1 Interest Expense .................................................... 250

Cash .............................................................. 250
(c) Oct. 1 Bank Loan Payable ................................................ 60,000

Cash ............................................................. 60,000

BRIEF EXERCISE 10-5

IFRS ASPE
a) Record and disclose (likely is a higher level Record and disclose
of probability than more likely than not)
b) Not recorded, disclose only Not recorded, disclose only
c) Not recorded nor disclosed Not recorded nor disclosed
d) Not recorded, disclose only Not recorded, disclose only
BRIEF EXERCISE 10-6
a) The advantage of the fixed interest rate option is that the rate will not change during the
10 year period, regardless of what happens to interest rates in the future. One could view
this feature as a disadvantage in that a decline in interest rates will not result in a
reduction of interest costs. In order to lock in the interest rate for such a long period of
time, the monthly instalment payment and the amount of interest is higher.
The disadvantage of the fixed interest rate option becomes the advantage of the floating
interest rate option. When interest rates decline, the loan interest and the monthly
instalment payment are reduced. The disadvantage is that if interest rates increase, the
opposite will occur.
b) Students generally have limited income upon graduation and so the additional risk of
possible increases in instalment payments for student loans should be avoided. The fixed
interest rate is recommended. Alternately, choosing the floating rate makes the initial
monthly payments smaller, during the time when earnings may be at their lowest. As long
as rates do not increase too much, it could be the less expensive alternative.

BRIEF EXERCISE 10-7
(a) [1] $50,000 × 7% = $3,500

[2] $13,500 – $3,500 = $10,000
[3] $12,800 – $2,800 = $10,000 or same as [2] as fixed principal reduction
[4] $40,000 – $10,000 = $30,000 (or $2,100 ÷ 7% = $30,000)
[5] $10,000 fixed principal reduction [6] + $2,100 = $12,100
[6] $10,000 fixed principal reduction
[7] $30,000 [4] – $10,000 [6] = $20,000
[8] $11,400 – $1,400 = $10,000 fixed principal reduction or $20,000 [7] – $10,000
[9] $10,700 – $700 = $10,000 fixed principal reduction
[10] $10,000 – $10,000 = $0
(b) The current portion of the note at the end of period 3 is the amount of principal
reduction in the next year (period 4), which is $10,000. This leaves $10,000 ($20,000
less current portion of $10,000) as the non-current portion of the debt.
BRIEF EXERCISE 10-8
(a) [1] $50,000 × 7% = $3,500

[2] $12,195 fixed cash payment
[3] $12,195 [2] – $2,891 = $9,304 or $41,305 – $32,001
[5] $12,195 [4] – $9,955 = $2,240 or $32,001 × 7%
[6] $32,001 – $9,955 = $22,046
[8] $12,195 [7] – $1,543 = $10,652 or $22,046 [6] – $11,394 = $10,652
[10] $11,394 – $11,394 = $0
(b) The current portion of the note at the end of period 3 is the amount of principal
reduction in the next year (period 4), which is $10,652 [8]. This leaves $11,394
($22,046 [6] less current portion of $10,652) as the non-current portion of the debt.

BRIEF EXERCISE 10-9

(a) Fixed principal payment
(B) (C)
(A) Interest Reduction (D)
Monthly Cash Expense of Principal Principal
Interest Payment (D) × 7% ÷ ($300,000 ÷ Balance
Period (B) + (C) 12 mos. 120) (D) – (C)
Nov. 30, 2014 $300,000
Dec. 31, 2014 $4,250 $1,750 $2,500 297,500
Jan. 31, 2015 04,235 01,735 02,500 295,000
2,000
2014
Nov. 30 Cash ......................................................................... 300,000
Mortgage Payable............................................ 300,000
Dec. 31 Interest Expense ....................................................... 1,750

Mortgage Payable .................................................... 2,500
Cash ................................................................ 4,250
2015
Jan. 31 Interest Expense ....................................................... 1,735
Mortgage Payable .................................................... 2,500
Cash ................................................................ 4,235

BRIEF EXERCISE 10-9 (Continued)
(b) Blended principal and interest payment
(B)
Interest (C) (D)
Monthly (A) Expense Reduction Principal
Interest Cash (D) × 7% ÷ of Principal Balance
Period Payment 12 mos. (A) – (B) (D) – (C)
Nov. 30, 2014 $300,000
Dec. 31, 2014 $3,483 $1,750 $1,733 298,267
Jan. 31, 2015 3,483 1,740 1,743 296,524
01476.73 22,000
2014
Nov. 30 Cash .................................................................. 300,000
Mortgage Payable..................................... 300,000
Dec. 31 Interest Expense ................................................ 1,750

Mortgage Payable ............................................. 1,733
Cash ......................................................... 3,483
2015
Jan. 31 Interest Expense ................................................ 1,740
Mortgage Payable ............................................. 1,743
Cash ......................................................... 3,483
BRIEF EXERCISE 10-10
a. Non-current liability
b. Current liability
c. Current liability
d. Neither – no balance is outstanding but line of credit limits should be disclosed in the
notes to the financial statements
e. Current liability
f. Neither – obligations are reported in the notes to the financial statements
g. Non-current liability
h. Current liability
i. Current asset
j. Current liability for the $5,000 due next year. The remaining $70,000 balance is a non-
current liability.

(in USD millions)
(a) Current ratio

$1,748.0
= 0.7:1
$2,598.7
(b) Debt to total $8,220.6

= = 50.7%
assets $16,212.2
$443.0 + $154.5 + $185.0

(c) Times interest earned = = 4.2 times
$185.0

(a) Debt to total assets Improvement
Times interest earned Deterioration
(b) Although Fromage’s debt to total assets ratio improved in 2015, its times interest
earned ratio deteriorated. Fromage’s overall solvency appears to have deteriorated
because even though liabilities relative to assets has fallen, the company is generating
less profit before income tax and interest relative to its interest expense than it did in
the prior year.

*BRIEF EXERCISE 10-13
(a) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 2.5% (5% × 6/12)
Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12)
Number of semi-annual periods (n) = 10 (5 years × 2)
Present value of $500,000 received in 10 periods

($500,000 × 0.78120) (n = 10, i = 2.5%) $390,600
Present value of $15,000 received each of 10 periods
($500,000 × 3% × 8.75206) (n = 10, i = 2.5%) 131,281
Present value (issue price) of the bonds $521,881
(b) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 3% (6% × 6/12)

($500,000 × 0.74409) (n = 10, i = 3%) $372,045
($500,000 × 3% × 8.53020) (n = 10, i = 3%) 127,953
Present value (issue price) of the bonds (rounded to $500,000) $500,000
This is rounded because we know that there would be no
discount or premium because the market and stated rate are equal
(c) Key inputs: Future value (FV) = $500,000


($500,000 × 0. 70892) (n = 10, i = 3.5%) $354,460
($500,000 × 3% × 8.31661) (n = 10, i = 3.5%) 124,749
Note to the instructor: Rounding discrepancies may arise depending on whether present
value tables, calculators, or a spreadsheet program is used to determine the present value.

(a) CARVEL CORP.

Bond Premium Amortization
(A) (B) (C) (D) (E)

Semi- Interest Interest Premium Unamor- Bond
annual Payment Expense Amor- tized Carrying
Interest (6% × (5% × 6/12 tization Premium Amount
Periods 6/12 = = 2.5%) (A) – (B) (D) – (C) ($500,000 + D)
3%)
Jan. 1/15 $21,881 $521,881

July 1/15 $15,000 $13,047 $1,953 19,928 519,928
Jan. 1/16 15,000 12,998 2,002 17,926 517,926
(b) CARVEL CORP.
Interest Interest Bond

Semi- Payment Expense Carrying
annual (6% × (6% × 6/12 Amount
Interest 6/12 = = 3%) ($500,000)
Periods 3%)
Jan. 1/15 $500,000

July 1/15 $15,000 $15,000 500,000
Jan. 1/16 15,000 15,000 500,000
(c) CARVEL CORP.

Bond Discount Amortization
(A) (B) (E)

Semi- (C) (D)
Interest to Be Interest Bond
annual Discount Unamortized
Paid Expense Carrying
Interest Amortization Discount
(6% × 6/12 = (7% × 6/12 Amount
Periods (A) – (B) (D) – (C)
3%) = 3.5%) ($500,000 – D)
Jan. 1/15 $20,791 $479,209

July 1/15 $15,000 $16,772 $1,772 19,019 480,981
Jan. 1/16 15,000 16,834 1,834 17,185 482,815

(a)
Jan. 1 Cash ........................................................... 521,881
Bonds Payable ................................... 521,881
July 1 Interest Expense ......................................... 13,047

Bonds Payable ............................................ 1,953
Cash ................................................... 15,000
Dec. 31 Interest Expense ......................................... 12,998

Bond Payable .............................................. 2,002
Interest Payable ................................. 15,000
(b)
Jan. 1 Cash ........................................................... 500,000
Bonds Payable ................................... 500,000

Cash ................................................... 15,000

(c)
Jan. 1 Cash ........................................................... 479,209
Bonds Payable ................................... 479,209

Bonds Payable ................................... 1,772
Cash ................................................... 15,000

Bond Payable ..................................... 1,834

SOLUTIONS TO EXERCISES
EXERCISE 10-1
Shareholders’
Assets Liabilities Revenues Expenses Profit
Equity
1. + + NE NE NE NE
2. NE NE NE NE NE NE
3. NE + - NE + -
4. - - NE NE NE NE
5. + + + + NE +
6. - + - NE + -
7. NE + - NE + -
8. NE + - NE + -
9. + + NE NE NE NE
10. NE - + + NE +

EXERCISE 10-2
(a)
Mar. 17 Cash ............................................................................... 56,000

Sales ...................................................................... 50,000
Sales Tax Payable ($2,500 + $3,500) .................... 6,000
May 1 Property Tax Expense ($52,800 ÷ 12 × 4) ...................... 17,600

Property Tax Payable ............................................. 17,600
July 1 Property Tax Expense ($52,800 ÷ 12 × 2) ...................... 8,800

Prepaid Property Tax ($52,800 ÷ 12 × 6) ....................... 26,400
Property Tax Payable ..................................................... 17,600
Cash ....................................................................... 52,800
Aug. 15 Salaries Expense............................................................ 81,000

CPP Payable .......................................................... 4,010
EI Payable .............................................................. 1,442
Income Tax Payable ............................................... 16,020
Pension Payable..................................................... 6,400
Cash ....................................................................... 53,128
15 Employee Benefits Expense ........................................... 6,029

CPP Payable .......................................................... 4,010
EI Payable .............................................................. 2,019
Oct. 1 Cash ............................................................................... 100,000

Bank Loan Payable ................................................ 100,000
Nov. 1 Interest Expense ($100,000 × 4% × 1/12) ...................... 333

Cash ..................................................................... 333
Dec. 1 Interest Expense ($100,000 × 4% × 1/12) ...................... 333

Cash ..................................................................... 333
(b)
Dec. 31 Property Tax Expense .................................................... 26,400

Prepaid Property Tax.............................................. 26,400
31 Interest Expense ($100,000 × 4% × 1/12) ...................... 333

Interest Payable...................................................... 333

EXERCISE 10-3
(a) Dougald Construction
(1) Oct. 1, 2014 Cash ..................................................................... 250,000

Bank Loan Payable ........................................ 250,000
(2) Dec. 31, 2014 Interest Expense................................................... 3,125

Interest Payable ............................................. 3,125
($250,000 × 5% × 3/12)
(3) July 1, 2015 Interest Expense ($250,000 × 5% × 6/12) ............ 6,250

Bank Loan Payable .............................................. 250,000

Interest Payable ($3,125 + $6,250) ...................... 9,375
Cash ............................................................... 259,375
(b) TD Bank
(1) Oct. 1, 2014 Notes Receivable ................................................. 250,000

Cash ............................................................... 250,000
(2) Dec. 31, 2014 Interest Receivable ............................................... 3,125

Interest Revenue ............................................ 3,125
($250,000 × 5% × 3/12)
(3) July 1, 2015 Interest Receivable ($250,000 × 5% × 6/12) ........ 6,250

Interest Revenue ........................................... 6,250
Cash ..................................................................... 259,375

Interest Receivable ($3,125 + $6,250) ........... 9,375
Notes Receivable ........................................... 250,000
EXERCISE 10-4
(a) It would be appropriate for Walmart to accrue a liability as a provision, rather than only
disclose the item as a contingent liability when a reasonable estimate can be made of the
amount of the claim and when a payment to the claimant in the lawsuit is “more likely than
not” to occur.
(b) If Walmart were reporting under ASPE, the probability of the contingent liability becoming
a liability needs to be “likely” before it is accrued as a provision. The probability level
required is higher than that used under IFRS, which is “more likely than not.”

EXERCISE 10-5
(a) and (b)
(1) Fixed principal payment

(B) (C)
Semi-annual Cash Expense of Principal Principal
Interest Payment (D) × 5% × ($150,000 ÷ Balance
Period (B) + (C) 6/12 20) (D) – (C)
Dec. 31, 2014 $150,000
June 30, 2015 $11,250 $3,750 $7,500 142,500
Dec. 31, 2015 11,063 3,3,,5$3,563 7,500 135,000
01 01476.73 22,000
Issue of Mortgage
2014 Dec. 31 Cash ............................................................... 150,000

Mortgage Payable .................................. 150,000
First Instalment Payment
2015 June 30 Interest Expense ($150,000 × 5% × 6/12) ..... 3,750

Mortgage Payable ........................................... 7,500
Cash ...................................................... 11,250
Second Instalment Payment
Dec. 31 Interest Expense

[($150,000 – $7,500) × 5% × 6/12] ............. 3,563
Cash....................................................... 11,063

EXERCISE 10-5 (Continued)

(a) and (b) (Continued)
(2) Blended principal and interest payment

(B)
Interest (C) (D)
Semi-annual (A) Expense Reduction Principal
Interest Cash (D) × 5% × of Principal Balance
Period Payment 6/12 (A) – (B) (D) – (C)
Dec. 31, 2014 $150,000
June 30, 2015 $9,622 $3,750 $5,872 144,128
Dec. 31, 2015 9,622 3,603 6,019 138,109
01 0 01476.73 22,000
Issue of Mortgage
2014 Dec. 31 Cash ............................................................... 150,000

Mortgage Payable .................................. 150,000
2015 June 30 Interest Expense

($150,000 × 5% × 6/12) .............................. 3,750
Cash ...................................................... 9,622
Dec. 31 Interest Expense [($150,000

– $5,872) × 5% × 6/12] ................................ 3,603
Cash....................................................... 9,622
(c) Interest expense for the six month period ending June 30, 2015 is in the same amount
of $3,750 whether the payment is blended or based on fixed principal payments
because for this first period, the amount of the principal balance of the loan is the same
at the initial amount of $150,000. Once the six month period is completed, the principal
balance of the mortgage payable on which interest changes are applied changes by a
different amount based on whether the principal payment is fixed or is blended with
interest based on the repayment terms of the loan.

EXERCISE 10-6
(a)
(B) (C) (D)
Annual (A) Interest Reduction Principal
Interest Cash Expense of Principal Balance
Period Payment (D) × 6% (A) – (B) (D) – (C)
July 1, 2014 $9,000
June 30, 2015 $4,909 $540 $4,369 4,631
June 30, 2016 4,909 278 4,631 0
(b) 2014
(1) July 1 Cash ....................................................................... 9,000
Notes Payable ............................................... 9,000
(2) Dec. 31 Interest Expense ($540 × 6/12) .............................. 270

Interest Payable ............................................. 270
(3) 2015
June 30 Interest Expense .................................................... 270
Interest Payable ..................................................... 270
Notes Payable ........................................................ 4,369
Cash .............................................................. 4,909
(c) On December 31, 2015 another accrual for interest expense would be made as follows:
Dec. 31 Interest Expense ($278 × 6/12) .............................. 139

Interest Payable ............................................. 139
After making the above entry the company would have two current liabilities relating to
the note as follows:
Current liability
Interest payable $139
Note payable 4,631

EXERCISE 10-7
(a) This is a blended principal and interest payment schedule, as the cash payment is
constant at $23,097.48 each year.
(b) The interest rate is 5% ($5,000 ÷ $100,000).
(c) Interest Expense ....................................................................... 5,000.00

Bank Loan Payable ................................................................... 18,097.48
Cash................................................................................ 23,097.48
(d) Current portion = $19,952.47

Non-current portion = $20,950.10 + $21,997.60 = $42,947.70
EXERCISE 10-8
(a) Current liabilities would likely include:
Accounts payable and accrued liabilities
Current portion of long-term debt
Income taxes payable
Provisions
Unearned revenue
Non-current liabilities would likely include:

Deferred income taxes
Long-term debt
Pension liabilities
Depending on when the liability will become due, some items listed above under non-
current could instead be current. As well, some items listed above as current could be
non-current or portions of the balances could be non-current; examples include:
Provisions and Unearned Revenue.

EXERCISE 10-8 (Continued)
(b)
SHAW COMMUNICATIONS INC.
Statement of Financial Position (partial)
August 31, 2012
(in thousands)
Current liabilities
Accounts payable and accrued liabilities ................................ $ 811
Provisions ............................................................................... 27
Income taxes payable............................................................. 156
Unearned revenue .................................................................. 157
Current portion of long-term debt ........................................... 451
Total current liabilities ................................................. 1,602
Non-current liabilities
Long-term debt ....................................................................... 4,812
Deferred income taxes ........................................................... 1,085
Pension liability ....................................................................... 401
Total liabilities .................................................................................. $7,900

EXERCISE 10-9
($ in thousands)
(a) Current ratio
2015: $6,244 = 1.4:1 2014: $3,798 = 1.5:1

$4,503 $2,619
(1) Based only on the current ratio, the Fruition’s liquidity appears to be relatively
stable and strong as there are enough current assets to pay the current liabilities.
(2) To make a proper assessment, information concerning the due dates for the
liabilities and the type of current assets that make up the remaining assets would
need to be scrutinized. For example if current assets consisted mainly of cash
rather than merchandise inventory, we would conclude that the company had
greater liquidity. Knowing the quality of receivables and the turnover of the
inventory would be useful.
(b) Current ratio for 2015:
Before:
$6,244
= 1.4:1
$4,503
After:
$6,244 - $1,000
= 1.5:1
$4,503 - $1,000
Paying off the $1 million improves Fruition’s current ratio from 1.4:1 to 1.5:1. This is
because $1 million represents a greater percentage of the denominator than it does the
numerator. The greater percentage decrease to the denominator makes the ratio rise.
(c) Having access to an operating line of credit means that cash is available on a short-
term basis and therefore the assessment of the company’s short-term liquidity is better
than it first appeared. Although the ability to access cash improves the liquidity position,
it does not necessarily mean that drawing down the operating line of credit will improve
the current ratio. If the unused line of credit were to be fully drawn down, Fruition’s
current assets would increase by the addition of $4 million of cash. At the same time,
the current liabilities would increase by the addition of a $4 million bank loan payable.
As is demonstrated in the calculation below, the current ratio would deteriorate to 1.2:1.
$6,244 + $4,000
= 1.2:1
$4,503 + $4,000

EXERCISE 10-10
($ in thousands)
(a)
2011
$97,171
Debt to total assets = = 40.2%
$241,733
$11,917 + $3,623 + $3,004

Times interest earned = = 6.2 times
$3,004
2012
$89,830
Debt to total assets = = 35.8%
$250,755
$16,363 + $3,278 + $3,507

Times interest earned = = 6.6 times
$3,507
Buhler Industries Inc.’s debt to total assets ratio improved in 2012, with a decline from
40.2% to 35.8%. The company’s times interest earned ratio increased from 6.2 times in
2011 to 6.6 times in 2012. This reveals an improvement in solvency.
(b) Having access to an operating line of credit means that cash is available on a short-
term basis. Of the total line of credit available in the amount of $60 million, $13 million
has been drawn down by the end of the 2012 fiscal year and is therefore included in the
total liabilities of $89.83 million. The amount drawn down of $13 million would be shown
as bank loan payable in the current liability section of the statement of financial position.
It is not shown as non-current liability because it does not have a fixed payment date
beyond one year from the end of the current year.

*EXERCISE 10-11
(a) The BC Provincial bonds were issued at a discount.
(b) The Bank of Montreal bonds were issued at a premium.
(c) One reason the prices of the two bonds differed is because a bond price is based on
the market rate of interest not the coupon rate of interest. Although the market rate of
interest is very close in amount for two bonds, the coupon rate of interest for the Bank
of Montreal bond is almost double that of BC Provincial. This difference in cash flow
from the coupon or contractual interest rate would explain a large portion of the
premium recorded on the issuance of the Bank of Montreal bond. Also, investors
probably believed there is a different credit risk level for each issuer of the bonds and
this could have an effect on the selling prices of the bonds. The lower the amount of
risk, the higher will be the premium paid by the investor.
(d) Cash (0.999 × $100,000)................................................. 99,900

Bonds Payable ........................................................ 99,900
Cash (1.0897 × $100,000)............................................... 108,970

Bonds Payable ........................................................ 108,970
*EXERCISE 10-12
(a) 2015
1. Oct. 1 Cash ............................................................ 800,000
Bonds Payable ................................... 800,000
2. Dec. 31 Interest Expense ($800,000 × 5% × 3/12) ... 10,000

2016
3. Apr. 1 Interest Expense ($800,000 × 5% × 3/12) ... 10,000
Interest Payable .......................................... 10,000
Cash ($800,000 × 5% × 6/12) ............ 20,000
(b)
December 31, 2015
Current liabilities
Interest payable .................................................... $ 10,000
Bonds payable, due 2025 ..................................... 800,000

*EXERCISE 10-13
(a) [1] $25,000 + $2,768 = $27,768
[2] $74,387 – $2,768 = $71,619
[3] $27,851 – $25,000 = $2,851
[4] $928,381 + $2,851[3] = $931,232 or $1,000,000 – $68,768
[5] $25,000 same as previous semi-annual payments
[6] $27,937 – $25,000 = $2,937
[7] $68,768 – $2,937 [6] = $65,831
(b) $1,000,000 face value ($925,613 carrying amount plus unamortized discount $74,387 at
issue date)
(c) The bonds were issued at a discount as the carrying amount of $925,613 is lower than
the face value of the bond $1,000,000 at the issue date.
(d) Coupon interest rate: Semi-annual payments are $25,000 × 2 divided by the face value
$1,000,000 = 5% per year
Market interest rate: Interest expense April 30 (item [1] of part (a) $27,768) divided by
carrying amount at issue date $925,613 = 3% × 2 = annual rate of 6%
(e) The effective rate of interest of 6% is greater than the coupon rate. Interest expense is
calculated using the market rate of interest and cash interest paid is calculated using the
coupon rate. Therefore, interest expense is greater than cash interest paid.
(f) Interest expense is calculated by multiplying the carrying value of the bonds by the
market rate of interest. With each semi-annual payment, the carrying amount of the
bonds increases, from the semi-annual amortization of the discount, and consequently,
the amount of interest expense increases.
(g) The carrying amount of the bonds will be equal to the face value of the bonds of
$1,000,000 as the entire amount of the discount will have been amortized.

*EXERCISE 10-14
(a) Key inputs: Future value (FV) = $1,000,000

Interest payment (PMT) = $25,000 ($1,000,000 × 5% × 6/12)
Present value of $1,000,000 received in 20 periods

($1,000,000 × 0.55368) (n = 20, i = 3%) $553,680
($1,000,000 × 2.5% × 14.87747 (n = 20, i = 3%) 371,937
Note to the instructor: Rounding discrepancies may arise depending on whether

present value tables, calculators, or a spreadsheet program is used to determine the
present value.
(b) Jan. 1 Cash ......................................................................... 925,617

Bonds Payable ................................................. 925,617
(c) July 1 Interest Expense ($925,617× 6% × 6/12) ................. 27,769

Bonds Payable ($27,769 – $25,000) ................ 2,769
Cash ($1,000,000 × 5% × 6/12) ....................... 25,000
(d) Dec. 31 Interest Expense [($925,617 + $2,769) × 6% × 6/12] 27,852

Bonds Payable ($27,852 – $25,000) ................ 2,852
Interest Payable ($1,000,000 × 5% × 6/12) ...... 25,000

SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
(a) Mar. 2 Accounts Payable ................................................ 10,000

Notes Payable ............................................. 10,000
5 Cash .................................................................... 45,200

Sales ............................................................ 40,000
Sales Tax Payable ($40,000 × 13%) ........... 5,200
Cost of Goods Sold .............................................. 24,000

Merchandise Inventory................................. 24,000
9 Property Tax Expense ($18,000 × 3/12) .............. 4,500

Property Tax Payable .................................. 4,500
As we are now in the third month, expense 3 months of property taxes.
12 Unearned Revenue .............................................. 11,300

Service Revenue ......................................... 10,000
Sales Tax Payable ($11,300 ÷ 1.13 × 13%) 1,300
13 Sales Tax Payable ............................................... 5,800

Cash ............................................................ 5,800
16 CPP Payable ($1,340 + $1,340) .......................... 2,680

EI Payable ($468 + $655) .................................... 1,123
Income Tax Payable ............................................ 5,515
Cash ............................................................ 9,318
27 Accounts Payable ................................................. 30,000

Cash ............................................................ 30,000
31 Salaries Expense.................................................. 16,000

CPP Payable ............................................... 792
EI Payable ................................................... 285
Income Tax Payable .................................... 5,870
Cash ............................................................ 9,053
31 Employee Benefits Expense ................................ 1,191

CPP Payable ............................................... 792
EI Payable ................................................... 399

PROBLEM 10-1A (Continued)
(b) Mar. 31 Interest Expense .................................................. 50

Interest Payable .............................................. 50
($10,000 × 6% × 1/12)
(c)
MOLEGA LTD.
March 31, 2015
Current liabilities
Accounts payable ($42,500 – $10,000 – $30,000) ............ $ 2,500
Notes payable.................................................................... 10,000
Unearned revenue ($15,000 – $11,300)............................ 3,700
Income tax payable ($5,515 – $5,515 + $5,870) ............... 5,870
Property tax payable.......................................................... 4,500
Sales tax payable ($5,800 + $5,200 + $1,300 - $5,800) .... 6,500
CPP payable ($2,680 – $2,680 + $792 + $792) ................ 1,584
EI payable ($1,123 – $1,123 + $285 + $399) .................... 684
Interest payable ................................................................. 50
Total current liabilities ................................................ $35,388

PROBLEM 10-2A
(a) Sept. 1 Merchandise Inventory ......................................... 15,000

Accounts Payable ........................................ 15,000
30 Bank Loan Payable............................................... 12,000

Interest Expense ($12,000 × 6% × 3/12) .............. 180
Cash ............................................................ 12,180
Oct. 1 Accounts Payable ................................................. 15,000

Notes Payable ............................................. 15,000
2 Buildings ............................................................... 25,000

Bank Loan Payable...................................... 25,000
Nov. 1 Interest Expense ($15,000 × 7% × 1/12) .............. 88

Cash ............................................................ 88
1 Interest Expense ($25,000 × 8% × 1/12) .............. 167

Cash ............................................................ 167
Dec. 1 Interest Expense ($15,000 × 7% × 1/12) .............. 88

Cash ............................................................ 88
1 Interest Expense ($25,000 × 8% × 1/12) .............. 167

Cash ............................................................ 167
2 Vehicles ................................................................ 28,000

Cash ............................................................ 8,000
31 Interest Expense ($88* + $167** + $117***) ......... 372

Interest Payable ........................................... 372
* $15,000 × 7% × 1/12 = $88
** $25,000 × 8% × 1/12 = $167
*** $20,000 × 7% × 1/12 = $117


(b)
Interest Expense
Sept. 1 Bal. 0
Sept. 30 180
Nov. 1 88
Nov. 1 167
Dec. 1 88
Dec. 1 167
Dec. 31 372
Dec.31 Bal. 1,062
Interest Payable
Sept. 1 Bal. 0
Dec. 31 372
Dec. 31Bal. 372
Notes Payable
Sept. 1 Bal. 0
Sept. 30 15,000
Dec. 31Bal. 15,000
Bank Loan Payable

Sept. 1 Bal. 12,000
Sept. 30 12,000 Oct. 2 25,000
Dec. 2 20,000
Dec. 31Bal. 45,000
(c)
CLING-ON LTD.
Income Statement (partial)
Year Ended December 31, 2015
Other revenues and expenses

Interest expense .........................................................................$1,062
(d)
CLING-ON LTD.
December 31, 2015
Current liabilities
Bank loan payable ................................................................................ $45,000
Notes payable ...................................................................................... 15,000
Interest payable .................................................................................... 372

PROBLEM 10-3A
(a) Table not required but source for detailed calculations
Interest
Quarterly Cash Expense Reduction of Principal
Interest Period Payment 8% × 3/12 Principal Balance
Sept. 30, 2014 $1,000,000

Dec. 31, 2014 $103,333 $20,000 $83,333 916,667
Mar. 31, 2015 101,666 18,333 83,333 833,334
June 30, 2015 100,000 16,667 83,333 750,001
2014
Sept. 30 Equipment............................................................... 1,100,000
Cash .............................................................. 100,000
Bank Loan Payable ........................................ 1,000,000
(b) 2014
Nov. 30 Interest Expense ($20,000 × 2/3)............................ 13,333
Interest payable ............................................. 13,333
(c) 2014
Dec. 31 Interest Payable ...................................................... 13,333
Interest Expense ..................................................... 6,667
Bank Loan Payable ................................................. 83,333
Cash .............................................................. 103,333
2015
Mar. 31 Interest Expense ..................................................... 18,333
Cash .............................................................. 101,666

(d) Table not required but source for detailed calculations
Interest
Quarterly Cash Expense Reduction of Principal
Sept. 30, 2014 $1,000,000

Dec. 31, 2014 $94,560 $20,000 $74,560 925,440
Mar. 31, 2015 94,560 18,509 76,051 849,389
June 30, 2015 94,560 16,988 77,572 771,817
2014
Nov. 30 Interest Expense ..................................................... 13,333

Dec. 31 Interest Expense ..................................................... 6,667

Interest Payable ...................................................... 13,333
Cash .............................................................. 94,560
2015
Mar. 31 Interest Expense ..................................................... 18,509
Cash .............................................................. 94,560

PROBLEM 10-4A
(a)
Interest
Semi-annual Cash Expense Reduction of Principal
Interest Period Payment 6.5% × 6/12 Principal Balance
June 30, 2014 $700,000

Dec. 31, 2014 $48,145 $22,750 $25,395 0674,605
June 30, 2015 48,145 021,925 26,220 0648,385
Dec. 31, 2015 48,145 021,073 27,072 621,313
June 30, 2016 48,145 020,193 27,952 0593,361
(b) 2014
June 30 Cash ....................................................................... 700,000
Mortgage Payable .......................................... 700,000
(c) 2014
Mortgage Payable ................................................... 25,395
Cash .............................................................. 48,145
2015
June 30 Interest Expense ..................................................... 021,925
Cash .............................................................. 48,145
(d)
STARLIGHT GRAPHICS LTD.
Statement of Financial Position (Partial)
June 30, 2015
Current liabilities
Current portion of mortgage payable ............................... $ 55,024*
Mortgage payable ............................................................ 0593,361
*($27,072 + $27,952) = $55,024

PROBLEM 10-5A
(a)
(A) (B) (C)
Cash Interest Principal (D)
Payment Expense Reduction Balance
Period (B) + (C) (D) × 12% × 3/12 $100,000 ÷ 12 (D) – (C)
Apr. 30, 2015 $100,000
July 31, 2015 $11,333 $3,000 $8,333 91,667
Oct. 31, 2015 11,083 2,750 8,333 83,334
Jan. 31, 2016 10,833 2,500 8,333 75,001
Apr. 30, 2016 10,583 2,250 8,333 66,668
July 31, 2016 10,333 2,000 8,333 58,335
Oct. 31, 2016 10,083 1,750 8,333 50,002
Jan. 31, 2017 9,833 1,500 8,333 41,669
Apr. 30, 2017 9,583 1,250 8,333 33,336
July 31, 2017 9,333 1,000 8,333 25,003
Oct. 31, 2017 9,083 750 8,333 16,670
Jan. 31, 2018 8,833 500 8,333 8,337
Apr. 30, 2018 8,583 250 8,333 0
Total $19,500 $100,000
(b)
2015
Apr. 30 Cash .......................................................... 100,000
Notes Payable ................................... 100,000
(c)
July 31 Notes Payable ........................................... 8,333
Interest Expense........................................ 3,000
Cash .................................................. 11,333
Oct. 31 Notes Payable ........................................... 8,333

Interest Expense........................................ 2,750
Cash .................................................. 11,083

(d)
FURLONG SAILING SCHOOL
October 31, 2015
Current liabilities
Current portion of 12% notes payable .................. $33,332*
Notes payable, 12%, due in 2018
($83,334 – $33,332) ................................... 50,002
Total liabilities $83,334
*$8,333 × 4 = $33,332

(e) Had the repayment of the note been blended payments of principal and interest, the
instalment schedule would have been as follows.
(B) (C)
(A) Interest Principal (D)
Cash Expense Reduction Balance
Period Payment (D) × 12% × 3/12 (A) – (B) (D) – (C)
Apr. 30, 2015 $100,000
July 31, 2015 $10,046 $ 3,000 $7,046 92,954
Oct. 31, 2015 10,046 2,789 7,257 85,697
Jan. 31, 2016 10,046 2,571 7,475 78,222
Apr. 30, 2016 10,046 2,347 7,699 70,523
July 31, 2016 10,046 2,116 7,930 62,593
Oct. 31, 2016 10,046 1,878 8,168 54,425
Jan. 31, 2017 10,046 1,633 8,413 46,012
Apr. 30, 2017 10,046 1,380 8,666 37,346
July 31, 2017 10,046 1,120 8,926 28,420
Oct. 31, 2017 10,046 853 9,193 19,227
Jan. 31, 2018 10,046 577 9,469 9,758
Apr. 30, 2018 10,046 288 * 9,758 0
Total $20,552 $100,000
* Adjusted for rounding of $5
Interest expense would only be the same on October 31, 2015. After the first payment, the
principal reduction would be lower under the blended payment method for both the July 31
and October 31 payments. Correspondingly, the total interest expense over the term of the
note will be higher by $1,052 ($20,552 – $19,500) when paying using the blended payment
method. This is because the fixed principal payments earlier in the term of the note under the
fixed principal payment method are larger than with the blended payments method shown
above.

PROBLEM 10-6A
(a) 1. Current liabilities Property tax payable $ 0
(paid in May)
2. Current liabilities Interest payable 7,000

($200,000 × 7% × 6/12)
Current portion of note payable 40,000
Non-current liabilities Notes payable 160,000

($200,000 – $40,000)
3. Current liabilities Accounts payable 120,000
4. Current liabilities Unearned revenue 10,000

(earned in January)
5. Current liabilities Sales tax payable 1,040

($8,000 × 13%)
6. Current liabilities Salaries payable 1,896

[($6,000 × 3/5 days) – $297
– $107 – $1,300]
CPP payable 594
($297 + employer share $297)
EI payable 257
($107 + employer share $150 (1.4 × $107)
Income tax payable 1,300
7. Contingent liability Not on statement of financial position 0
8. Current liabilities Income tax payable 5,000

($50,000 – $45,000)
9. Current liabilities Debt due within one year 30,000

Non-current liabilities Non-current debt 220,000
($250,000 – $30,000)
10. Not on the financial statements as not drawn on

(b) The notes should disclose information on the contingent liability–the lawsuit,
including the fact that the likelihood of the loss cannot be determined.
Information on the note payable should also be disclosed–including the interest

rate and repayment terms and payments required in each of the next five years.
Details of Wendell’s non-current debt should be disclosed, including interest

rates, maturity dates, conversion privileges and any assets pledged as collateral.
Details of the operating line of credit terms and maximum balance should be
disclosed in the notes to the financial statements even though no funds have yet
been drawn.

PROBLEM 10-7A
(a)
2012 2011
(in USD millions)
1. Current ratio $9,135 $8,146

= 1.4:1 = 1.4:1
$6,684 $5,724
2. Receivables $30,837 $28,748

= 6.7 times = 7.2 times
turnover $4,774 + $4,398 $4,398 + $3,543
2 2
3. Inventory $27,010 $25,434

turnover $2,512 + $2,045 $2,045 + $1,822
2 2
4. Debt to $7,651 $6,477

= 44.7% = 44.1%
total assets $17,109 $14,679
5. Times
Interest earned $1,433+$16+$324 = 111 times $1,018+$0+$202 = NA
$16 $0

(b) Magna’s current ratio has remained the same at 1.4:1. The receivables turnover ratio
deteriorated from 7.2 times in 2011 to 6.7 times in 2012. The inventory turnover
deteriorated as well from 13.2 times in 2011 to 11.9 times in 2012. This means that
Magna is collecting its receivables and moving its inventory more slowly in 2012 than
in 2011. Despite the deterioration in these liquidity ratios, the current ratio remained
the same because the company offset the declining receivables and inventory turnover
with an increase in cash. Magna’s 2012 liquidity ratios are slightly worse than the
industry averages, but still quite healthy.
During 2012, Magna’s debt to total assets ratio deteriorated slightly from 44.1% in
2011 to 44.7% in 2012. The company’s times interest earned ratio deteriorated
because it had no interest expense in 2011 but had a modest amount of interest
expense in 2012. In comparison to the industry average, Magna is carrying more debt
compared to total assets, but its times interest earned ratio is significantly higher. This
indicates that even though the company is using more debt than the average firm in
the industry the company appears to be earning more than enough profit to make the
required debt interest payments or the majority of the debt is non-interest bearing.
Therefore, there do not appear to be any significant concerns regarding Magna’s
solvency in 2012.
(c) Magna has secured a line of credit which helps it through short-term liquidity problems
during its operating cycle. The fact that it has not used any of the $2.25 billion line of
credit as of the end of 2012 demonstrates that it is not in great need of cash to meet its
obligations. Magna is ready to take advantage of opportunities that may come up in
the future that would require significant amounts of cash. As for the decline in the
currencies from Brazil and China against the U.S. dollar, these changes provide an
advantage to Magna as it will take fewer U.S. dollars to satisfy the debt owing in the
future. Balances for any foreign debt would be reported at exchange rates as of the
date on the statement of financial position.
(d) When assessing Magna’s liquidity and solvency it is necessary to look at operating
lease commitments which will require cash payments in the same way as all liabilities
in the coming years. The fact that the amounts do not appear as liabilities on the
statement of financial position does not erase the commitment to pay the amounts
under those contracts in the future. The absence of these commitments on the
statement of financial position artificially improves the company’s solvency. Upon
further analysis, and with the inclusion of these amounts, one can better assess a
company’s liquidity and solvency.

PROBLEM 10-8A
(a) When reviewing the liquidity ratios for the two companies, it would appear that Sun-Oil
is less liquid than Petro-Zoom. Sun-Oil has a lower current ratio than Petro-Zoom.
Although it is turning its receivables over faster than Petro-Zoom, Petro-Zoom is able
to move its inventory much more quickly than Sun-Oil.
Furthermore, neither Petro-Zoom’s nor Sun-Oil’s receivables turnover ratios are of

particular concern. Both are collecting their receivables within an average 30 day
collection period (365 days divided by either 12 or 13 is approximately 30 days).
What is of concern is Sun-Oil’s inventory turnover of 10 times which is well below

Petro-Zoom’s of 16 times and the industry average of 19 times. This may be of
concern to a lender or other creditor as a company will not be able to generate cash in
the short-term if it cannot sell its inventory.
Based on the concerns over Sun-Oil’s inventory turnover, I would think that Petro-
Zoom is the more liquid of the two companies. I would be more inclined to lend money
to Petro-Zoom.
(b) In reviewing the solvency of these two companies we see that Petro-Zoom’s debt to
total assets ratio is marginally higher (worse) than Sun-Oil’s ratio, indicating that Petro-
Zoom has a higher percent of its assets financed by debt. Sun-Oil also appears to be
in a better position to repay its interest payments, as indicated by the higher times
interest earned ratio (24 times for Sun-Oil compared to 21 times for Petro-Zoom).
When compared to the industry we can see that both companies have debt to total
assets ratios higher than the industry average. On the other hand, these ratios are not
far off the industry average and their high times interest earned ratios leaves little
doubt that that both companies are able to make their respective interest payments on
the debt.
Based on the debt to total assets ratio and times interest earned ratio Sun-Oil seems
to be the more solvent of the two. However, both companies appear to be generating
sufficient profit to cover interest payments so I would not be significantly concerned
about the solvency of either company.

*PROBLEM 10-9A
(a) Able Limited – issued at par or 100 with coupon rate 6%:
2015
Jan. 1 Cash .................................................................... 100,000
Bonds Payable ............................................ 100,000
(b)
Dec. 31 Interest Expense ($100,000 × 6%) ....................... 6,000
Cash ............................................................ 6,000
(a) Beta Corp. – issued at a discount price 94 with coupon rate 4%:
2015
Jan. 1 Cash ($100,000 × .94) ......................................... 94,000
Bonds Payable ............................................ 94,000
(b)
Dec. 31 Interest Expense ($94,000 × 6%) ......................... 5,640
Bonds Payable ($5,640 – $4,000) ............... 1,640
Cash ($100,000 × 4%) ................................ 4,000
(a) Charles Inc. – issued at a premium price 105 with coupon rate 7%:
2015
Jan. 1 Cash ($100,000 × 1.05) ....................................... 105,000
Bonds Payable ............................................ 105,000
(b)
Bonds Payable ($7,000 – $6,300) ........................ 700
Cash ($100,000 × 7%) ................................ 7,000
(c) As seen in parts (a) and (b), Able is the only company that issued the bonds at par. This
occurred because its coupon rate matched the market rate of interest, both at 6% and
therefore the interest expense it records is equal to the interest paid. In the case of Beta
Corp. since its coupon rate of 4% allows it to pay less interest than the market rate of
interest, it must issue the bond at a discount and receive less than the face value of the
bond at the date of issuance. The discount is the mechanism that the investor uses to
obtain a return on the bond equal to the market interest rate. The difference between
the $94,000 Beta received at issuance and the amount that will be paid at the maturity
of the bond of $100,000 will be allocated to interest expense over the term of the bond.
This will make the interest expense greater than the amount of interest paid. In the case
of Charles Inc., since its coupon rate of 7% forces it to pay more interest than the
market rate of interest, it will issue the bond at a premium and receive more than the
face value of the bond at the date of issuance. The difference between what Charles
received which is $105,000 and the amount that will be paid at the maturity of the bond
of $100,000 will be allocated to interest expense over the term of the bond and reduce
the expense. This will make the interest expense less than the amount of interest paid.

*PROBLEM 10-9A (Continued)
(d) Balance in Bonds Payable account December 31, 2015:
Able Limited:
Bond issue January 1, 2015 $100,000
No premium or discount Dec. 31, 2015 $100,000
Beta Corp:
Plus amortization of bond discount 1,640
Balance Dec. 31, 2015 $95,640
Charles Inc.:
Less amortization of bond premium 700
Balance Dec. 31, 2015 $106,300

*PROBLEM 10-10A


($1,500,000 × 0.55368) (n = 20, i = 3%) $ 830,520
($1,500,000 × 3.5% × 14.87747) (n = 20, i = 3%) 781,067
Present value (issue price) of the bonds $1,611,587
value tables, calculators, or a spreadsheet program is used to determine the present
value. When using a calculator, students will likely determine the first amount above to
be $1,611,581.
(b) GLOBAL SATELLITES CORPORATION

Bond Premium Amortization
(B) (C) (D) (E)

Semi- (A) Interest Premium Unamor- Bond
annual Interest Expense Amor- tized Carrying
Interest to Be to Be tization Premium Amount
Periods Paid (7% Recorded (A) – (B) (D) – (C) ($1,500,000 + D)
× 6/12 = (6% × 6/12
3.5%) = 3%)
July 1/14 $111,587 $1,611,587

Jan. 1/15 $52,500 $48,348 $4,152 107,435 1,607,435
July 1/15 52,500 48,223 4,277 103,158 1,603,158
Jan. 1/16 52,500 48,095 4,405 98,753 1,598,753
July 1/16 52,500 47,963 4,537 94,216 1,594,216

*PROBLEM 10-10A (Continued)
2014
(c) July 1 Cash ........................................................... 1,611,587
Bonds Payable ................................... 1,611,587
Note: Interest would also be recorded January 1, 2015 and July 1, 2015 (not illustrated
here)
2015
(d) Dec. 31 Interest Expense ....................................... 48,095
Bonds Payable .......................................... 4,405
Interest Payable ............................... 52,500
(e)
GLOBAL SATELLITES CORPORATION
December 31, 2015
Current liabilities
Interest payable $ 52,500
Bonds payable, due 2024 1,598,753
2016
(f) Jan. 1 Interest Payable ........................................ 52,500
Cash ................................................. 52,500

PROBLEM 10-1B
(a) Jan. 5 Cash ...................................................................... 22,400

Sales ............................................................ 20,000
Sales Tax Payable [($20,000 × 5%)
+ ($20,000 × 7%)] .................................... 2,400
Cost of Goods Sold ................................................ 14,000

Inventory ........................................................ 14,000
13 Sales Tax Payable.................................................. 7,500

Cash .............................................................. 7,500
13 Sales Tax Payable.................................................. 10,500

Cash .............................................................. 10,500
14 CPP Payable ($1,905 + $1,905) ............................. 3,810

EI Payable ($666 + $932) ....................................... 1,598
Income Tax Payable ............................................... 7,700
Cash .............................................................. 13,108
15 Cash ...................................................................... 18,000

Bank Loan Payable ...................................... 18,000
19 Unearned Revenue ................................................ 11,200

Service Revenue ........................................... 10,000
Sales Tax Payable [($10,000 × 5%) + ($10,000 × 7%)] 1,200
Service revenue before sales tax was $11,200 ÷ 1.12 = $10,000
22 Accounts Payable ................................................... 32,000

Cash .............................................................. 32,000
28 Property Tax Expense ($4,200 ÷ 12) ...................... 350

Property Tax Payable .................................... 350
29 Salaries Expense.................................................... 40,000

CPP Payable ................................................. 1,980
EI Payable ..................................................... 712
Income Tax Payable ...................................... 9,474
Cash .............................................................. 27,834
29 Employee Benefits Expense ................................... 2,977

CPP Payable ................................................. 1,980
EI Payable ..................................................... 997

PROBLEM 10-1B (Continued)
(b) Jan. 31 Interest Expense ($18,000 × 6% × 0.5/12) ............. 45

Interest Payable............................................. 45
(c) BURLINGTON INC.

January 31, 2015
Liabilities
Current liabilities
Accounts payable ($52,000 – $32,000) .................................................. $20,000
Bank loan payable .................................................................................. 18,000
Unearned revenue ($16,000 – $11,200) ................................................. 4,800
Income tax payable ($7,700 – $7,700 + $9,474)..................................... 9,474
CPP payable ($3,810 – $3,810 + $1,980 + $1,980) ................................ 3,960
EI payable ($1,598 – $1,598 + $712 + $997) .......................................... 1,709
Sales tax payable ($18,000 + $2,400 – $7,500 – $10,500 + $1,200)...... 3,600
Property tax payable ............................................................................... 350
Interest payable ...................................................................................... 45
Total current liabilities ........................................................................ $61,938

PROBLEM 10-2B
(a) Mar. 2 Equipment ............................................................ 16,000

31 Notes Payable ...................................................... 30,000

Interest Expense ($30,000 × 7% × 6/12) .............. 1,050
Cash ............................................................ 31,050
Apr. 1 Land ..................................................................... 50,000

Notes Payable ............................................. 50,000
May 1 Interest Expense ($50,000 × 6% × 1/12) .............. 250

Cash ............................................................ 250
2 Cash ..................................................................... 36,000

June 1 Interest Expense ($50,000 × 6% × 1/12) .............. 250

Cash ............................................................ 250
2 Bank Loan Payable............................................... 16,000

Interest Expense ($16,000 × 8% × 3/12) .............. 320
Cash ............................................................ 16,320
29 Equipment ............................................................ 10,000

Cash ............................................................ 1,000
30 Interest Expense ($250 + $420*) .......................... 670

Interest Payable ........................................... 670
(*$36,000 × 7% × 2/12 = $420)


(b)
Interest Expense
Mar. 1 Bal. 0
Mar.31 1,050
May 1 250
June 1 250
June 2 320
June 30 670
June 30 Bal. 2,540
Interest Payable
Mar. 1 Bal. 0
June 30 670
June 30 Bal. 670
Notes Payable
Mar. 31 30,000 Mar. 1 Bal. 30,000
April 1 50,000
June 30 Bal. 50,000
Bank Loan Payable

Mar. 1 Bal. 0
Mar. 2 16,000
May 1 36,000
June 2 16,000 June 29 9,000
June 30 Bal. 45,000
(c)
SPARKY’S MOUNTAIN BIKES LTD.
Income Statement (partial)
Year Ended June 30, 2015
Other revenues and expenses

Interest expense ................................................................................... $2,540
(d)
SPARKY’S MOUNTAIN BIKES LTD.
June 30, 2015
Current liabilities
Bank loan payable ................................................................................ $45,000
Notes payable ...................................................................................... 50,000
Interest payable .................................................................................... 670

PROBLEM 10-3B
(a)
July 31 Equipment ...................................................... 750,000
Bank Loan Payable................................. 700,000
Cash ....................................................... 50,000
(b) Note that instalment schedule is not required. It is included for information only.
(B)
Interest (C) (D)
(A) Expense Reduction Principal
Monthly Cash (D) × 6% × of Principal Balance
Interest Period Payment 1/12 (A) – (B) (D) – (C)
Issue Date $700,000
Aug. 31/15 $16,440 $3,500 $12,940 687,060
Sept. 30/15 16,440 3,435 13,005 674,055
Oct. 31/15 16,440 3,370 13,070 660,985
Nov. 30/15 16,440 3,305 13,135 647,850
Dec. 31/15 16,440 3,239 13,201 634,649
Jan. 31/16 16,440 3,173 13,267 621,382
Feb. 29/16 16,440 3,107 13,333 608,049
Mar. 31/16 16,440 3,040 13,400 594,649
Apr. 30/16 16,440 2,973 13,467 581,182
May 31/16 16,440 2,906 13,534 567,648
June 30/16 16,440 2,838 13,602 554,046
July 31/16 16,440 2,770 13,670 540,376
Aug. 31/16 16,440 2,702 13,738 526,638
Sept. 30/16 16,440 2,633 13,807 512,831
Aug. 31 Interest Expense ($700,000 × 6% × 1/12) ......... 3,500

Bank Loan Payable ($16,440 – $3,500) ............ 12,940
Cash ......................................................... 16,440
Sept. 30 Interest Expense

[($700,000 – $12,940) × 6% × 1/12] .................. 3,435
Bank Loan Payable ($16,440 – $3,435) ............ 13,005
Cash ......................................................... 16,440


(c) Note that instalment schedule is not required. It is included for information only.
(B) (C)
Cash Expense of Principal Principal
Monthly Payment (D) × 6% × ($700,000 ÷ Balance
Interest Period (B) + (C) 1/12 48) (D) – (C)
Issue Date $700,000
Aug. 31/15 $18,083 $3,500 $14,583 685,417
Sept. 30/15 18,010 3,427 14,583 670,834
Oct. 31/15 17,937 3,354 14,583 656,251
Nov. 30/15 17,864 3,281 14,583 641,668
Dec. 31/15 17,791 3,208 14,583 627,085
Jan. 31/16 17,718 3,135 14,583 612,502
Feb. 29/16 17,646 3,063 14,583 597,919
Mar. 31/16 17,573 2,990 14,583 583,336
Apr. 30/16 17,500 2,917 14,583 568,753
May 31/16 17,427 2,844 14,583 554,170
June 30/16 17,354 2,771 14,583 539,587
July 31/16 17,281 2,698 14,583 525,004
Aug. 31/16 17,208 2,625 14,583 510,421
Sept. 30/16 17,135 2,552 14,583 495,838
Aug. 31 Interest Expense ($700,000 × 6% × 1/12) ............ 3,500

Cash ($3,500 + $14,583) .......................... 18,083
Sept. 30 Interest Expense

[($700,000 – $14,583) × 6% × 1/12] ..................... 3,427
Cash ......................................................... 18,010

PROBLEM 10-4B
(a)
Interest
Semi-annual Cash Expense Reduction of Principal
Dec. 31, 2014 $1,000,000
June 30, 2015 $90,000 $40,000 $50,000 0950,000
Dec. 31, 2015 088,000 38,000 50,000 0900,000
June 30, 2016 086,000 36,000 50,000 0850,000
Dec. 31, 2016 084,000 34,000 50,000 0800,000
(b) 2014
Dec. 31 Cash ....................................................................... 1,000,000
Mortgage Payable .......................................... 1,000,000
(c) 2015
June 30 Interest Expense ..................................................... 40,000
Cash .............................................................. 90,000

Cash .............................................................. 088,000
(d) BEAUMONT BUILDING SUPPLIES LIMITED

December 31, 2015
Liabilities
Current liabilities
Current portion of mortgage payable ............................... $100,000
Mortgage payable ............................................................ 800,000*
* $900,000 – $100,000 = $800,000 or see Dec. 31, 2016 balance.

PROBLEM 10-5B
(B) (C)
(A) Interest Principal (D)
Cash Expense Reduction Balance
Period Payment (D) × 13% (A) – (B) (D) – (C)
April 1, 2013 $100,000
March 31, 2014 $ 33,619 $13,000 $ 20,619 79,381
March 31, 2015 33,619 10,320 23,299 56,082
March 31, 2016 33,619 7,291 26,328 29,754
March 31, 2017 33,619 *3,865 29,754 0
Total $134,476 $34,476 $100,000
* adjusted for rounding error
(b)
April 1/13 Cash ................................................... 100,000
Loan Payable .............................. 100,000
(c)
March 31/14 Loan Payable ...................................... 20,619
Interest Expense.................................. 13,000
Cash ............................................ 33,619
March 31/15 Loan Payable ...................................... 23,299

Interest Expense.................................. 10,320
Cash ............................................ 33,619


(d) SKI HILL
March 31, 2015
Liabilities
Current liabilities
Current portion of 13% loan payable $26,328
Loan payable, 13%, due in 2017
($56,082 – $26,328) 29,754
(e) Had the repayment of the loan been in fixed principal payments, the instalment
schedule would have been as follows.
(A) (B) (C)

Cash Interest Principal (D)
Payment Expense Reduction Balance
Period (B) + (C) (D) × 13% ($100,000 ÷ 4) (D) – (C)
April 1, 2013 $100,000
March 31, 2014 $ 38,000 $13,000 $ 25,000 75,000
March 31, 2015 34,750 9,750 25,000 50,000
March 31, 2016 31,500 6,500 25,000 25,000
March 31, 2017 28,250 3,250 25,000 0
Total $132,500 $32,500 $100,000
As can be seen, the total amount of the interest expense over the term of the loan
would be slightly lower as the fixed principal payments earlier in the term of the loan
are larger than with the blended payments demonstrated in (a) above.

PROBLEM 10-6B
(a) 1. Current liabilities Property tax payable $ 4,000

($12,000 × 4/12)
2. Current liabilities Interest payable 150

($30,000 × 6% × 1/12)
Bank loan payable 30,000
($35,000 – $5,000)
3. Current liabilities Accounts payable 7,000
4. Current liabilities Sales tax payable 750

($15,000 × 5%)
5. Current liabilities Unearned revenue 25,000
6. Current liabilities Salaries payable 3,617

[($10,000 × 4/5 days) – $495
– $178 – $3,710]
CPP payable 990
($495 + employer share $495)
EI payable 427
[$178 + employer share $249 (1.4 × $178)]
Income tax payable 3,710
7. Not a liability
(contingent liability) Not reported on statement of financial position.
Disclosed only in the notes to the financial
statements
8. Not a liability (current asset) Not a liability. This amount would be classified as an
Income Tax Receivable of $25,000 in the Current
Assets section of the statement of financial position.
The company overpaid its income tax and can now
expect to receive a refund ($80,000 - $55,000 =
$25,000).
9. Current liabilities Debt due within one year 15,000

Non-current liabilities Non-current liabilities 135,000
($150,000 – $15,000)
10. Not a liability Since the operating line of credit has not yet been
drawn on, it would be disclosed only in the notes to the financial statements (see (b))
and not recorded

(b) The notes should disclose information on the bank loan payable, including the
interest rate and repayment term. The notes should also disclose pertinent details
regarding the environmental lawsuit, including management’s assessment of the
likely outcome. Details of Iqaluit’s non-current debt should be disclosed including
interest rates, maturity dates, conversion privileges, and any assets pledged as
collateral.
Details of the operating line of credit terms and maximum balance should be
disclosed in the notes to the financial statements even though no funds have yet
been drawn.

PROBLEM 10-7B
(a)
(in USD millions) 2012 2011
1. Current ratio $5,863 $6,545

= 1.3:1 = 2.2:1
$4,415 $2,911
2. Receivables $14,547 $14,236

turnover = 33.3 times = 35.8 times
$449 + $426 $426 + $370
2 2
3. Inventory $7,654 $6,240

turnover = 2.9 times = 2.9 times
$2,695 + $2,498 $2,498 + $1,798
2 2
4. Debt to total $22,774 $23,330

= 48.2% = 47.7%
assets $47,282 $48,884
5. Times interest $(677)+$(236)+$177 $4,537+$2,287+$199

= N/A = 35.3 times
earned $177 $199

(b) During the year Barrick’s liquidity has deteriorated. It has a lower current ratio (1.3:1 in
2012 compared to 2.2:1 in 2011). The company’s receivables are being collected more
slowly as evidenced by the receivables turnover ratio which decreased from 35.8 times
in 2011 to 33.3 times in 2012, but inventory turnover remains the same each year.
When compared to the industry average, Barrick has a much lower current ratio and
inventory turnover ratio, but its receivables turnover ratio is significantly ahead of the
industry average.
In 2012, the company’s solvency deteriorated because the company was not profitable
that year. The debt to total assets ratio worsened from 47.7% in 2011 to 48.2% in
2012. This ratio remains significantly higher (worse) than other companies in the
industry as the industry average is only 20.6%. Barrick showed a strong times interest
earned ratio of 35.3 times in 2011 which was almost double that of its industry peers
for that year, but one year later the company was unable to cover its interest due to a
loss that year.
(c) In providing disclosure of the extent of any contingent liabilities stemming from
pending litigation, Barrick is providing additional information which is otherwise not
available from the numeric portion of the financial statements. Notes describing the
potential for losses that could be incurred in the future through the settlement of
outstanding litigation give the users of the financial statements insight into the potential
for cash outflows in the future. These potential outflows could negatively affect profits
and the cash position of the business and, as a result, have a negative impact on
Barrick’s solvency. Although it is not unusual for a public company to have several
legal cases pending at any one time, due to the potentially adverse effect of
settlements, this information is worthy of scrutiny by the users of the financial
statements.

PROBLEM 10-8B
(a) When reviewing the liquidity ratios for the two companies, we can see that the current
ratios are similar although slightly lower than the industry average. The receivables
turnover ratio shows that Grab ’N Gab is turning its receivables over faster than Chick
’N Lick, which indicates that the company is able to convert sales to cash more
quickly. However, Chick ’N Lick is moving its inventory faster than Grab ’N Gab, as
indicated by the inventory turnover ratio. I would be more likely to lend money to Chick
‘N Lick because of its higher inventory turnover. In a fast food industry, inventory
turnover is the most important ratio. This is especially true when you note that a
receivables turnover ratio of 38 times (365 ÷ 38 = 10 days) is still excellent, even if it is
lower than that of its competition. Fast food businesses are, after all, primarily cash
businesses.
(b) In reviewing the solvency of these two companies, we see that Chick ’N Lick’s debt to
total assets ratio is the better of the two companies. However, although Grab ’N Gab
has a higher debt to total assets ratio, its higher times interest earned ratio of 10 times
indicates that the company is able to support this level of debt. Chick ’N Lick’s times
interest earned ratio is significantly lower than Grab ’N Gab’s and somewhat lower
than the industry average. Nonetheless, the company does not appear to be having
solvency problems as it is carrying less debt and still has reasonable interest
coverage. Based on this analysis, I would not be significantly concerned about the
solvency of either business.

PROBLEM 10-5B
*PROBLEM 10-9B
(a) Delta Limited – issued at par or 100 with coupon rate 5%:
2015
Jan. 1 Cash .................................................................... 200,000
Bonds Payable ............................................ 200,000
(b)
Cash ............................................................ 10,000
(a) Founders Corp. – issued at a discount price 94 with coupon rate 3%:
2015
Jan. 1 Cash ($200,000 × .94) ......................................... 188,000
Bonds Payable ............................................ 188,000
(b)
Bonds Payable ($9,400 – $6,000) ............... 3,400
Cash ($200,000 × 3%) ................................ 6,000
(a) Grand Inc. – issued at a premium price 108 with coupon rate 7%:
2015
Jan. 1 Cash ($200,000 × 1.08) ....................................... 216,000
Bonds Payable ............................................ 216,000
(b)
Bonds Payable ($14,000 – $10,800) .................... 3,200
Cash ($200,000 × 7%) ................................ 14,000
(c) As seen in parts (a) and (b), Delta is the only company that issued bonds at par. This
occurred because its coupon rate matched the market rate of interest, both at 5% and
therefore the interest expense it records is equal to the interest paid. In the case of
Founders since its coupon rate of 3% allows it to pay less interest than the market rate
of interest, it must issue the bond at a discount and receive less than the face value of
the bond at the date of issuance. The discount is the mechanism that the investor uses
to obtain a return on the bond equal to the market interest rate. The difference between
the $188,000 Founders received and the amount that will be paid at the maturity of the
bond of $200,000 will be allocated to interest expense over the term of the bond. This
will make the interest expense greater than the amount of interest paid. In the case of
Grand, since its coupon rate of 7% forces it to pay more interest than the market rate of
interest, it will issue the bond at a premium and receive more than the face value of the
bond at the date of issuance. The difference between what Grand received which is
$216,000 and the amount that will be paid at the maturity of the bond of $200,000 will
be allocated to interest expense over the term of the bond and reduce the expense. This
will make the interest expense less than the amount of interest paid.

*PROBLEM 10-9B (Continued)
(d) Balance in Bonds Payable account December 31, 2015:
Delta Limited:
No premium or discount Dec. 31, 2015 $200,000
Founders Corp:
Plus amortization of bond discount 3,400
Balance Dec. 31, 2015 $191,400
Grand Inc.:
Less amortization of bond premium 3,200
Balance Dec. 31, 2015 $212,800

PROBLEM 10-5B
*PROBLEM 10-10B


($1,000,000 × 0.50257) (n = 20, i = 3.5%) $502,570
($1,000,000 × 3% × 14.21240) (n = 20, i = 3.5%) 426,372
value tables, calculators, or a spreadsheet program is used to determine the present
value. When using a calculator, students will likely determine the first amount above to
be $928,938.
(b) PONASIS CORPORATION

Bond Discount Amortization
(A) (B) (E)

Semi- (C) (D)
Interest to Be Interest Bond
annual Discount Unamortized
Paid Expense Carrying
Interest Amortization Discount
(6% × 6/12 = (7% × 6/12 Amount
Periods (A) – (B) (D) – (C)
3%) = 3.5%) ($1,000,000 – D)
July 1/14 $71,058 $928,942

Jan.1/15 $30,000 $32,513 $2,513 68,545 931,455
July 1/15 30,000 32,601 2,601 65,944 934,056
Jan.1/16 30,000 32,692 2,692 63,252 936,748

*PROBLEM 10-10B (Continued)
(c) 2014
July 1 Cash ........................................................... 928,942
Bonds Payable ................................... 928,942
Note: Interest would also be recorded January 1, 2014 and July 1, 2014 (not illustrated
here)
2015
(d) Dec. 31 Interest Expense ....................................... 32,692
Bonds Payable ................................. 2,692
Interest Payable ............................... 30,000
(e)
PONASIS CORPORATION
December 31, 2015
Liabilities
Current Liabilities
Interest payable ........................................................................... $ 30,000
Bonds payable, due 2024 ........................................................... 936,748
Total liabilities ..................................................................... $966,748
2016
(f) Jan. 1 Interest Payable ........................................ 30,000
Cash ................................................. 30,000

BYP 10-1 FINANCIAL REPORTING
(a) Shoppers Drug Mart shows the following current and non-current liabilities on its
consolidated balance sheet at December 29, 2012:
Current liabilities:
Bank indebtedness
Commercial paper
Accounts payable and accrued liabilities
Income taxes payable
Dividends payable
Current portion of long-term debt
Provisions
Associate interest
Long-term debt
Other long-term liabilities
Provisions
Deferred tax liabilities
(b) The bank indebtedness that appears on Shopper’s balance sheet does not necessarily
represent a bank account with a negative balance that can be offset or paid off with a
bank account balance with a positive balance at the same financial institution. The bank
indebtedness in this case consists primarily of lines of credit drawn on by various
stores. Although the cash balance appearing on the balance sheet seems available
immediately for paying off the bank indebtedness, it is very likely that immediate cash
demands require that a substantial balance of cash be in place to make quick
payments, for example to take advantage of a purchase discount.
(c) Commercial paper is a very liquid means of obtaining financing for Shoppers when cash
is needed. The use of this type of debt is very flexible and for very short periods of time
(90 days) allowing Shoppers to find more permanent sources of financing if it is deemed
necessary and appropriate. Because the interest rate on commercial paper is floating,
the risk to Shoppers is reduced as it is not committed to any particular interest rate for a
long period of time.

BYP 10-2 COMPARATIVE ANALYSIS
(a)
in millions Shoppers Jean Coutu
1. Current ratio $2,765.0 $421.9

= 1.2:1 = 1.6:1
$2,334.9 $265.3
2. Receivables $10,781.8 = 22.4 times $2,468.0 = 12.2 times

turnover $469.7 + $493.3 $199.6 + $206.5
2 2
3. Inventory $6,609.2 $2,169.0

turnover $2,148.5 + 2,042.3 $190.1 + $166.2
2 2
4. Debt to $3,150.4 $281.9

= 42.2% = 20.2%
total assets $7,473.7 $1,392.7
5. Times $608.5 + $214.8 +

interest $57.6 = 15.3 times $558.4 + $78.9 + $2.0 = 320 times
earned $57.6 $2.0
(b) Liquidity: Comparing the ratios related to liquidity, Jean Coutu on an overall basis is
more liquid than Shoppers and their industry with the exception of receivables turnover.
Its current ratio is excellent. While its receivables turnover ratio is not as strong as either
that of Shoppers or the industry, its inventory turnover ratio is far superior, at 12.2 times
(30 days).

BYP10-2 (Continued)
(b) (Continued)
Solvency: The higher a company’s percentage of debt to total assets is, the greater the
risk that this company may be unable to meet its maturing obligations. Shoppers’ debt to
total assets ratio of 42.2% is higher (worse) than that of the industry average of 30.6%
and more than double that of Jean Coutu. However, it is well able to handle this level of
debt, as evidenced by its high times interest earned ratio of 15.3 which is well in excess
of the industry average of 6.5 times. The times interest earned ratio provides an
indication of a company’s ability to meet interest payments. Jean Coutu’s debt to total
assets is low at 20.2% which means that it is primarily financed by equity. Its times
interest earned ratio is consequently extremely high.

BYP 10-3 COMPARING IFRS AND ASPE
(a) Two key ratios that Matthew could use to assess Fly Fast’s solvency in comparison to
that of East Jet are the debt to total asset ratios and the times interest earned ratio. The
following is a summary of the results of these two ratios for each of the two companies.
($ in thousands) East Jet Fly Fast
($832,172 + $1,222,993) ÷ ($120,000 + $270,000) ÷

Total debt to assets ($1,268,710 + $ 2,294,134) ($317,178 + $573,533)
= 57.7% = 43.8%
($136,720 + $59,947 + ($34,180 + $14,986 +

Times interest earned
$60,164) ÷ $60,164 $9,876) ÷ $9,876
Fly Fast appears to be less burdened with debt as compared to East Jet. Only 43.8% of
its assets are leveraged compared to 57.7% for East Jet. The times interest earned ratio
is also better, at 6.0 times compared to 4.3 for East Jet. This implies that Fly Fast is the
more solvent of the two companies and in a better position to pay its interest payments.
(b) The main difference between IFRS and ASPE is that with IFRS there is increased
likelihood that a liability will be recognized on the statement of financial position. The
requirement for recognition of a provision is “more likely than not” for IFRS rather than
“likely” under ASPE. Specifically, ASPE indicates that a contingent liability should be
recognized when the chance of occurrence is higher than under IFRS, where a provision
should be recognized when the chance of occurrence is greater than 50%.
This difference could cause East Jet to recognize liabilities that Fast Fly did not
recognize. Matthew could also review the notes to the financial statements to identify
any contingencies that did not meet recognition criteria but only the disclosure criteria
under ASPE.

BYP 10-4 CRITICAL THINKING CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.
Current Assets: 2015 2014 Average

Cash $ 2,000 $10,000 $6,000
Accounts receivable 20,000 5,000 12,500
Merchandise inventory 30,000 7,500 18,750
52,000 22,500 37,250
Property, plant and equipment, net 60,000 50,000

Total assets $112,000 $72,500
Current liabilities:
Accounts payable $ 30,930 $16,550
Non-current liabilities 40,000 30,000
Total liabilities $ 70,930 $46,550
Profit before taxes and interest $24,000 (1) $20,000 (2)

(1) $100,000 – $50,000 – $26,000
(2) $50,000 – $20,000 – $10,000

BYP10-4 (Continued)
Please note that when calculating turnover ratios, amounts from the current and prior year
statement of financial position are averaged. However, if the prior year amount is not
available, we use the current year amount only.
in thousands 2015 2014
1. Current ratio $52,000 $22,500

= 1.7:1 = 1.4:1
$30,930 $16,550
2. Receivables $100,000 = 8.0 times $50,000 = 10.0 times

turnover $12,500 $5,000
3. Inventory $50,000 $20,000

turnover $18,750 $7,500
4. Debt to $70,930 $46,550

= 63.3% = 64.2%
total assets $112,000 $72,500
5. Times
interest $24,000 = 10.0 times $20,000 = 13.3 times
earned $2,400 $1,500
Although Jim might conclude that profitability and liquidity has improved, a closer scrutiny of
all ratios reveals issues with the liquidity and solvency of Atlas Limited. The current ratio has
increased from 1.4:1 to 1.7:1 in 2015 but this was due to the high levels of accounts
receivable and inventory. The receivable turnover has deteriorated substantially from 10
times in 2014 to only 8 times in 2015. Fortunately, the inventory turnover has remained
unchanged at 2.7 times for both years. Atlas needs to improve its collection of receivables.
Furthermore, Jim needs to keep in mind that some cash has been retained by negotiating an
interest only loan that will end in 2017. This advantage will not continue forever.
From a solvency point of view, Atlas has a very similar debt to total assets ratio in both years
but the ratio remains rather high given that more than 60% of the company’s assets have
been purchased with debt financing. In addition, Atlas’ times interest earned ratio had
diminished from 13.3 times in 2014 to 10 times in 2015 indicating less capability to pay the
interest on the loan. Furthermore, it is likely that the existing loan is secured by the plant and
equipment. The loan now represents 67% of the plant and equipment balance, up from 60%
of the year before. This increase arises because the carrying value of plant and equipment is
declining.

BYP10-4 (Continued)
Some of the underlying causes for the slowdown in the turnover of accounts receivable might
be that Atlas has given its customers too generous terms for payment, possibly to improve
sales or there has been a lack of attention paid to delinquent accounts.
In looking at the income statement, the banker will notice that gross profit did not rise as
much as sales. This is due in part to the fact that cost of goods sold is now 50% of sales in
2015 compared to 40% of sales in 2014. Also although sales have doubled, operating
expenses more than doubled and lastly it appears that the interest rate on the loan has risen
to 6% from 5%. These factors which have decreased profitability will concern the banker.
A final area of concern from the point of view of the banker will be the future settlement of the
contingent liability stemming from the lawsuit launched against Atlas. Although no amount
could be accrued for this contingency as no reasonable estimate could be arrived at, the
mere mention of this looming potential obligation will rightly bring doubt as to Atlas’ ability to
deal with any related payments in the near future.

BYP 10-5 ETHICS CASE
(a) The stakeholders in this situation include:

Shareholders
Lenders and other creditors
Employees
Management
(b) Currently, operating lease payments are treated as rent expense. The details of the
amount of the future payments under the lease contract are reported in the notes to the
financial statements. On the other hand, a finance lease is treated as a means of
financing the acquisition of the asset and so the asset being leased is added to the
assets and the total obligations under the lease appear in the liabilities section of the
statement of financial position. Payments on finance lease obligations are treated as
part interest expense and part debt repayment. A finance lease causes increased
interest expense and debt on the financial statements and so the debt to total assets
ratio and the times interest earned ratio are adversely affected.
(c) While management does have a choice of structuring a lease agreement as an

operating or finance lease, it is unethical on the part of management to deliberately
structure a transaction for the sole purpose of keeping debt off the financial statements.
This behaviour could be construed as a type of financial engineering which is designed
to deceive others and remove obligations that occur as a result of a transaction. In this
case, management must meet some specific financial conditions with respect to its debt
covenants with the bank. Following through with the plan might put the bank at a
disadvantage in obtaining recourse under its loan agreement with Crown Point Inc.
(d) Analysts are not fooled by financial engineering involving leases. Notwithstanding the
application of the current rules surrounding the capitalization of leases, analysts will
make the necessary adjustments to the financial results to interpret the impact of the
treatment of operating versus finance leases.

BYP 10-6 “ALL ABOUT YOU” ACTIVITY
(a) Most student loan programs require repayment and begin charging interest as soon as
the student has finished school. The options offered by the Canada Student Loan
Program are:
• Start making interest payments as soon as the student finishes school
• Add the amount of interest for the first six month grace period to the loan principal
and make regular loan payments
• Pay six months of interest as a lump sum before making regular loan payments
The length of time to repay the loan can vary up to 114 months (if you take advantage
of the grace period) or up to 120 months if you don’t. You can also choose a shorter
repayment period. One can also request an extension to 174 months (with grace
period) or 180 months (without grace period).
(b) The answer will depend on the prime rate. This solution uses a prime rate of 3%.
With a fixed rate the monthly loan payments are:
Option Monthly Payment # of Months Note

Start interest payments when $303.32 120
school finishes
Add grace period interest to $326.33 114 Interest of $1,000
loan added to loan
Pay six months interest as a $313.78 114 Lump sum of $1,000 to
lump sum be paid
(c) The answer will depend on the prime rate. This solution uses a prime rate of 3%. With a
floating rate the monthly loan payments are:
Option Monthly Payment # of Months Note

school finishes
Add grace period interest to $289.80 114 Interest of $687.50
loan added to loan
Pay six months interest as a $282.05 114 Lump sum of $687.50
lump sum to be paid

BYP10-6 (Continued)
(d) For a loan to be repaid in five years (60 months) the monthly repayment options are:
(1) Fixed Rate: Option Monthly Payment # of Months Note

school finishes
Add grace period interest to $574.92 54 Interest of $1,000
loan added to loan
Pay six months interest as a $552.81 54 Lump sum of $1,000 to
lump sum be paid
(2) Floating Rate: Option Monthly Payment # of Months Note

school finishes
Add grace period interest to $538.07 54 Interest of $687.50
loan added to loan
Pay six months interest as a $523.67 54 Lump sum of $687.50
lump sum to be paid

BYP 10-7 SERIAL CASE
(a) The balance of the mortgage payable at November 25, 2015 is $46,718 as calculated
below.
(B)
Interest (C) (D)
of
Monthly Cash (D) × 5% Principal Balance
Interest Period Payment × 1/12 (A) – (B) (D) – (C)
June 25, 2015 Balance $49,050

July 25, 2015 $667 $204 $463 48,587
Aug. 25, 2015 667 202 465 48,122
Sept. 25, 2015 667 201 466 47,656
Oct. 25, 2015 667 199 468 47,188
Nov. 25, 2015 667 197 470 46,718
(b) The balance of the mortgage payable at November 25, 2015 of $46,718 will increase
by $25,000 to a total of $71,718 after the mortgage is renegotiated.
Nov. 26, 2015 Bank Indebtedness ...................................... 25,000

Mortgage Payable ................................ 25,000

BYP10-7 (Continued)
(c)
(B)
Interest (C) (D)
of
Monthly Cash (D) × 4% Principal Balance
Interest Period Payment × 1/12 (A) – (B) (D) – (C)
Nov. 25, 2015 Balance $71,718

Dec. 25, 2015 $1,320 $239 $1,081 70,637
Jan. 25, 2016 1,320 235 1,085 69,552
Feb. 25, 2016 1,320 232 1,088 68,464
Mar. 25, 2016 1,320 228 1,092 67,372
Apr. 25, 2016 1,320 225 1,095 66,277
May 25, 2016 1,320 221 1,099 65,178
June 25, 2016 1,320 217 1,103 64,075
July 25, 2016 1,320 214 1,106 62,969
Aug. 25, 2016 1,320 210 1,110 61,859
Sept. 25, 2016 1,320 206 1,114 60,745
Oct. 25, 2016 1,320 202 1,118 59,627
Nov. 25, 2016 1,320 199 1,121 58,506
Dec. 25, 2016 1,320 195 1,125 57,381
Jan. 25, 2017 1,320 191 1,129 56,252
Feb. 25, 2017 1,320 188 1,132 55,120
Mar. 25, 2017 1,320 184 1,136 53,984
Apr. 25, 2017 1,320 180 1,140 52,844
May 25, 2017 1,320 176 1,144 51,700
June 25, 2017 1,320 172 1,148 50,552

BYP10-7 (Continued)
(d)
2015 Dec. 25 Interest Expense ............................................. 239

Cash ...................................................... 1,320
2016 Jan. 25 Interest Expense ............................................. 235

Cash....................................................... 1,320
(e)
KOEBEL’S FAMILY BAKERY
June 30, 2016
Liabilities
Current liabilities
Current portion of 4% mortgage payable $13,523
($64,075 – $50,552)
Mortgage payable, 4%, due in 2020 $50,552

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
scanning, or otherwise without the prior written permission of John Wiley & Sons Canada,
Ltd.
(MMXIV xii F3)


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ASSIGNMENT CLASSIFICATION TABLE

1. Account for current 1, 2, 3, 4, 1, 2, 3, 4, 1, 2, 3, 4 1A, 2A, 6A 1B, 2B, 6B 1

2. Account for instalment 8, 9, 10, 6, 7, 8, 9 5, 6, 7 3A, 4A, 5A 3B, 4B, 5B 1, 6, 7

Solutions Manual 10-1 Chapter 10

ASSIGNMENT CHARACTERISTICS TABLE

1A Record and present current liabilities. Moderate 25-30

2A Record and present short-term notes. Moderate 30-40

3A Record instalment note. Moderate 30-40

4A Prepare instalment payment schedule; record and Moderate 30-40

5A Prepare instalment payment schedule; record and Moderate 30-40

6A Classify liabilities. Moderate 20-30

7A Analyze liquidity and solvency. Moderate 30-40

8A Analyze liquidity and solvency. Moderate 30-40

*9A Record bond transactions. Moderate 30-40

*10A Calculate present value; prepare amortization Moderate 30-40

1B Record and present current liabilities. Moderate 25-30

2B Record and present short-term notes. Moderate 30-40

3B Record instalment note. Moderate 30-40

4B Prepare instalment payment schedule; record and Moderate 30-40

5B Prepare instalment payment schedule; record and Moderate 30-40

6B Classify liabilities. Moderate 20-30

Solutions Manual 10-2 Chapter 10

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

7B Analyze liquidity and solvency. Moderate 30-40

8B Analyze liquidity and solvency. Moderate 30-40

*9B Record bond transactions. Moderate 30-40

*10B Calculate present value; prepare amortization Moderate 30-40

Solutions Manual 10-3 Chapter 10

2. An operating line of credit, or credit facility, is used by a business to overcome short-

Solutions Manual 10-4 Chapter 10

Answers to Questions (Continued)

Solutions Manual 10-5 Chapter 10

Answers to Questions (Continued)

Solutions Manual 10-6 Chapter 10

Answers to Questions (Continued)

Solutions Manual 10-7 Chapter 10

Answers to Questions (Continued)

Solutions Manual 10-8 Chapter 10

Answers to Questions (Continued)

Solutions Manual 10-9 Chapter 10

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

BRIEF EXERCISE 10-2

Solutions Manual 10-10 Chapter 10

BRIEF EXERCISE 10-3

(a) Aug. 22 Salaries Expense ...................................................... 15,000

(b) Aug. 22 Employee Benefits Expense ..................................... 1,117

(c) Sept. 1 Income Tax Payable ................................................. 6,258

BRIEF EXERCISE 10-4

(a) July 1 Cash ...................................................................... 60,000

(b) (1) Aug. 1 Interest Expense ($60,000 × 5% × 1/12)................ 250

(2) Aug. 31 Interest Expense .................................................... 250

(3) Sept. 1 Interest Payable ..................................................... 250

(4) Oct. 1 Interest Expense .................................................... 250

(c) Oct. 1 Bank Loan Payable ................................................ 60,000

Solutions Manual 10-11 Chapter 10

BRIEF EXERCISE 10-5

BRIEF EXERCISE 10-6

Solutions Manual 10-12 Chapter 10

BRIEF EXERCISE 10-7

(a) [1] $50,000 × 7% = $3,500

BRIEF EXERCISE 10-8

(a) [1] $50,000 × 7% = $3,500