Reporting and Analyzing Liabilities

CHAPTER 10
REPORTING AND ANALYZING LIABILITIES

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
CPA AACSB L CPA AACSB L AACSB
Item LO LOD Bloom’s Item LOD Bloom’s Item LOD Bloom’s CPA
O O
True-False Statements
1. 1 M C F AN 11. 1 E K F AN 21. 3 E K F AN
2. 1 E K F AN 12. 1 M K F AN 22. 3 M K F AN
3. 1 M C F AN 13. 2 E K F AN 23. 3 M K F AN
4. 1 E C F AN 14. 2 M K F AN 24. 4 M C F AN
5. 1 M K F AN 15. 2 M K F AN 25. 4 M K F AN
6. 1 M C F AN 16. 2 M K F AN 26. 4 M C F AN
7. 1 M K F AN 17. 2 M K F AN 27. 4 M C F AN
8. 1 M K F AN 18. 3 M C F AN 28. 4 H C F AN
9. 1 E K F AN 19. 3 M K F AN 29. 4 E K F AN
10. 1 M K F AN 20. 3 M K F AN
Multiple Choice Questions
F AN F AN 72 F AN
30. 1 H C 51. 1 H K 3 M K
.
F AN 1, F AN 73 F AN
31. 1 M K 52. H K 3 H K
3 .
F AN 1, F AN 74 F AN
32. 1 H AP 53. H K 3 H AP
3 .
F AN F AN 75 F AN
33. 1 H AP 54. 2 M C 3 E K
.
F AN F AN 76 4 F AN
34. 1 M K 55. 2 M C H C
.
F AN F AN 77 4 F AN
35. 1 M K 56. 2 M C M AP
.
F AN F AN 78 4 M F AN
36. 1 H C 57. 2 E K AP
.
F AN F AN 79 4 E F AN
37. 1 H AP 58. 2 M K K
.
38. 1 M C 59. 2 M C AP
.
39. 1 M C 60. 2 M AP C
.
F AN 61 F AN 82 4 M F AN
40. 1 E AP 2 H AP AP
. .
F AN 62 F AN 83 4 H F AN
41. 1 M AP 2 M C K
. .
42. 1 H AP 2 M K K
. .
43. 1 M AP 2 H C C
. .
F AN 65 F AN 86 4 E F AN
44. 1 M AP 2 E K C
. .
45. 1 M AP 2 M K K
. .
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
10 - 2 Test Bank for Financial Accounting: Tools for Business Decision Making, Seventh Canadian Edition
46. 1 M C 2 M K AP
. .
47. 1 M AP 3 M K AP
. .
48. 1 E AP 3 M K AP
. .
49. 1 M AP 3 E C AP
. .
50. 1 E K 3 E K AP
. .
LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting P = Professional & Ethical Behaviour CM = Communication
AACSB: AN = Analytic E = Ethics CM = Communication
10 - 3 Reporting and Analyzing Liabilities
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Bloom’ CPA AACSB L LO Bloom’ CPA AACS L LO Bloom’ CP
Item LO LOD Item Item AACSB
s O D s B O D s A
Exercises
93. 1 E AP F AN 102. 2 M AP F AN 111. 4 E AP F AN
94. 1 M AP F AN 103. 2 M AP F AN 112. 4 M AP F AN
95. 1 M AP F AN 104. 2 H AP F AN 113. 4 M AP F AN
96. 1 E AP F AN 105. 3 E AP F AN 114. 4 M AP F AN
97. 1 H AP F AN 106. 3 M AP F AN 115. 4 M AP F AN
98. 2 M AP F AN 107. 3 M AN F AN 116. 4 M AP F AN
99. 2 E AP F AN 108. 3 E C F AN 117. 4 M AP F AN
100 F AN F AN AP F AN
2 M AP 109. 3 M AP 118. 4 M
.
101 F AN AP F AN
2 M AP 110. 3 H
.
Matching
119 1- E, K F AN
. 4 M
Short-Answer Essay
120 F, P AN,E F AN C F
1 M E 123. 4 E C 126. 4 M AN,CM
.
121 F AN F,C AN
1 H AN 124. 4 H C
. M
122 F,C AN,C F AN
2 E C 125. 4 M C
. M M
CPA Questions
127 F AN F AN AN
1 M C 129. 3 M AN 131. 4 H AN F
.
128 F AN F AN
1 H AN 130. 4 M K
.
LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting P = Professional & Ethical Behaviour CM = Communication
AACSB: AN = Analytic E = Ethics CM = Communication
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 9. TF 34. MC 42. MC 50. MC 97. Ex
2. TF 10. TF 35. MC 43. MC 51. MC 119. Ma
3. TF 11. TF 36. MC 44. MC 52. MC 120. SAE
4. TF 12. TF 37. MC 45. MC 53. MC 121. SAE
5. TF 30. MC 38. MC 46. MC 93. Ex 127. CP
6. TF 31. MC 39. MC 47. MC 94. Ex 128. CP
7. TF 32. MC 40. MC 48. MC 95. Ex
8. TF 33. MC 41. MC 49. MC 96. Ex
13. TF 54. MC 59. MC 64. MC 99. Ex 104. Ex
14. TF 55. MC 60. MC 65. MC 100. Ex 119. Ma
15. TF 56. MC 61. MC 66. MC 101. Ex 122. SAE
16. TF 57. MC 62. MC 67. MC 102. Ex
17. TF 58. MC 63. MC 98. Ex 103. Ex
18. TF 22. TF 68. MC 72. MC 105. Ex 109. Ex
19. TF 23. TF 69. MC 73. MC 106. Ex 110. Ex
20. TF 52. MC 70. MC 74. MC 107. Ex 119. Ma
21. TF 53. MC 71. MC 75. MC 108. Ex 129. CP
24. TF 77. MC 84. MC 91. MC 116. Ex 130. CP
25. TF 78. MC 85. MC 92. MC 117. Ex 131. CP
26. TF 79. MC 86. MC 111. Ex 118. Ex
27. TF 80. MC 87. MC 112. Ex 119. Ma
28. TF 81. MC 88. MC 113. Ex 124. SAE
29. TF 82. MC 89. MC 114. Ex 125. SAE
76. MC 83. MC 90. MC 115. Ex 126. SAE
Type: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA
CHAPTER LEARNING OBJECTIVES
1. Account for current liabilities. A current liability is a debt that will be paid (1) from existing current assets
or through the creation of other current liabilities, and (2) within one year or operating cycle. An example of
a current liability is an operating line of credit that results in bank indebtedness. Current liabilities also
include sales taxes, payroll deductions, and employee benefits, all of which the company collects on
behalf of third parties. Other examples include property tax and interest on notes or loans payable, which
must be accrued until paid. The portion of non-current debt that is due within the next year must be
deducted from the non-current debt and reported as a current liability.
All of the above are “certain” or determinable liabilities. Provisions are “uncertain” liabilities that are
recorded because their outcome is considered probable and can be measured. A contingent liability is an
uncertain liability that is not recorded because it does not meet the two conditions necessary for
recognition as a provision or because its outcome cannot be determined. The terms and nature of each
recorded provision and contingent liability should be described in the notes accompanying the financial
statements unless the probability of an outflow of resources arising from a contingent liability is remote.
2. Account for instalment notes payable. Long-term notes payable are usually repayable in a series of
instalment payments. Each payment consists of (1) interest on the unpaid balance of the note, and (2) a
reduction of the principal balance. These payments can be either (1) fixed principal payments plus interest
or (2) blended principal and interest payments. With fixed principal payments plus interest, the reduction of
principal is constant but the cash payment and interest expense decrease each period as the principal
decreases. With blended principal and interest payments, the reduction of principal increases while the
interest expense decreases each period. In total, the cash payment (principal and interest) remains
constant each period.
3. Identify the requirements for the financial statement presentation and analysis of liabilities. In the
income statement, interest expense (finance cost) is reported as “other revenues and expenses.” In the
statement of financial position, current liabilities are usually reported first, followed by non-current
liabilities. Within the current liability section, items are listed in the order they fall due. Typically bank
indebtedness (operating lines of credit) is listed first, followed by accounts payable and other types of
payables followed by unearned revenue and the current portions of any loans.
The liquidity of a company may be analyzed by calculating the current ratio, in addition to the receivables
and inventory turnover ratios. The solvency of a company may be analyzed by calculating the debt to total
assets and times interest earned ratios. Another factor to consider is the impact of unrecorded debt, such
as operating lease obligations, when interpreting these ratios.
4. Account for bonds payable (Appendix 10A). When bonds are issued, the Cash account is debited and
the Bonds Payable account is credited for the issue price of the bonds.
Bond discounts and bond premiums represent the difference between a face value and price of the bonds.
They are amortized to interest expense over the life of the bonds using the effective-interest method of
amortization. Amortization is calculated as the difference between the interest paid and the interest
expense. Interest paid is calculated by multiplying the face value of the bonds by the coupon interest rate.
Interest expense is calculated by multiplying the carrying amount of the bonds (which is equal to their
present value at that time) at the beginning of the interest period by the market interest rate when the
bonds were issued. The amortization of a bond discount increases interest expense and the bond’s
carrying amount. The amortization of a bond premium decreases interest expense and the bond’s carrying
amount.
When bonds are retired at maturity, Bonds Payable is debited and Cash is credited. There is no gain or
loss at retirement.
TRUE-FALSE STATEMENTS
1. Amounts available to be drawn in the future from an operating line of credit improve a company’s liquidity.
2. Property tax payable is classified as a non-current liability because it is related to property, which is a non-
current asset.
3. If a company’s fiscal year is the same as the calendar year used for property tax purposes, there should be
no prepaid property tax on its year-end financial statements but there may be a property tax liability.
4. If drawing on an operating line of credit results in a negative cash balance, a current liability known as bank
indebtedness results.
5. Interest expense on a bank loan payable is only recorded at maturity.
6. When a business sells an item and collects Harmonized Sales Tax (HST) on it, a current liability arises.
7. Payroll liabilities include the employer’s share of CPP contributions and EI premiums.
8. Provisions are liabilities of uncertain timing or amount, along with some uncertainty as to whether the liability
will have to be paid.
9. A contingent liability may materialize in the future because of something that happened in the past.
10. Under IFRS, contingent liabilities should be recorded in the accounts if there is a remote possibility that the
contingency will actually occur.
11. A financial liability means there is a contractual obligation to pay cash in the future.
12. Unearned revenue is a financial liability.
13. While short-term notes are generally repayable in full at maturity, most long-term notes are repayable in a
series of periodic payments called instalments.
14. Long-term notes payable can only have floating interest rates.
15. Secured notes are often also referred to as mortgages.
16. Unsecured notes are issued against the general credit of the borrower.
17. Instalment payments consist of a mix of interest on the unpaid balance of the loan and a reduction of the
loan principal.
18. The classification of a liability as current or non-current is important because it may affect the evaluation of
a company’s liquidity.
19. The debt to total assets ratio measures the percentage of the total assets provided by creditors.
20. “Off-balance-sheet financing” refers to a situation where liabilities are recorded in the income statement
instead of the statement of financial position.
21. Interest (finance) expenses are separately reported in the “other gain and revenues” section of the income
statement.
22. The terms of an operating line of credit and a notes (loans) payable are disclosed in the notes to the
financial statements.
23. Detailed information such as a list showing the amounts of non-current debt that is scheduled to be paid off
in each of the next five years should be disclosed in the notes to the financial statements.
24. The face value of a bond is the amount of principal and interest due at the maturity date.
25. All transactions between bondholders and other investors must be recorded by the issuing corporation.
26. If the market interest rate at the date of a bond issue is greater than the coupon interest rate, the bond will
be issued at a premium.
27. If bonds are issued at a discount, the issuing corporation will pay a principal amount that is less than the
face amount of the bonds on the maturity date.
28. Amortization of a bond premium decreases interest expense recorded by the issuer.
29. The effective-interest method is required for companies reporting under IFRS, but optional for companies
using ASPE if other methods do not result in material differences.
ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans.
1. T 9. T 17. T 25. F
2. F 10. F 18. T 26. F
3. T 11. T 19. T 27. F
4. T 12. F 20. F 28. T
5. F 13. T 21. F 29. T
6. T 14. F 22. T
7. T 15. T 23. T
8. F 16. T 24. F
MULTIPLE CHOICE QUESTIONS
30. The entry to record interest expense on a bank loan payable is a

(a) debit to interest expense and credit to note payable.
(b) debit to note payable and credit to interest revenue.
(c) debit to interest payable and credit to interest revenue.
(d) debit to interest expense and credit to interest payable.
31. Which of the following statements is true?

(a) If any portion of a non-current liability is to be paid in the next year, the entire debt should be classified as a
current liability.
(b) “Current maturities of non-current debt” refers to the amount of interest on notes payable that must be paid
in the current year.
(c) Even though current and non-current debt must be shown separately on the statement of financial position,
it is not necessary to prepare a journal entry to recognize this.
(d) A non- current liability is an obligation that is expected to be paid within one year.
Use the following information to answer questions 32–33.
Angel Eyes Corporation operates on a calendar year basis. The company is in its first year of operations and
received its annual property tax bill on March 31 for $21,000. The bill is due May 1. Even though the company
records adjusting entries on a monthly basis, no entries related to property taxes have been recorded.
32. The March 31 entry to record property tax should be

(a) debit property tax expense $5,250 and credit property tax payable $5,250.
(b) debit property tax expense $21,000 and credit property tax payable $21,000.
(c) debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credits to
property tax payable and cash for $15,750 and $5,250, respectively.
(d) debits to prepaid property tax and property tax expense for $15,750 and $5,250, respectively and credit to
property tax payable for $21,000.
Solution: $21,000 / 12 x 3 = $5,250
33. Assuming appropriate adjusting entries were completed for the April month end, what entry should be
recorded for the payment on May 1?
(a) debit prepaid property tax $21,000 and credit cash $21,000
(b) debits to prepaid property tax and property tax expense for $14,000 and $7,000, respectively and credit to
cash for $21,000
(c) debits to prepaid property tax and property tax payable for $14,000 and $7,000, respectively and credit to
cash $21,000
(d) debit property tax payable $15,750 and credit to cash $15,750.
Solution: $21,000 – $5,750 – $1,750 = $14,000; $5,750 + $1,750 = $7,000
34. Which of the following statements is false?

(a) Notes payable usually require the borrower to pay interest.
(b) Notes payable are sometimes used instead of accounts payable.
(c) Most notes and bank loans are non-interest bearing.
(d) Notes payable reflect a promise to repay a specified amount of money either at a fixed future date or on
demand.
35. Under IFRS, which of the following would most likely be classified as a current liability?
(a) mortgage payable
(b) bonds payable
(c) bank indebtedness
(d) contingent liability
36. Failure to record a liability will probably

(a) result in overstated net income.
(b) result in overstated total liabilities and shareholders’ equity.
(c) have no effect on net income.
(d) result in overstated total assets.
37. McMichael Exhibits Inc. received its annual property tax bill for $26,200 in January. It was paid when due
on March 31. McMichael Exhibits year end is Dec 31. The Dec 31 balances should be
(a) $6,550 for Prepaid Property Tax; $19,650 for Property Tax Expense.
(b) $0 for Prepaid Property Tax; $0 for Property Tax Payable.
(c) $6,550 for Prepaid Property Tax; $6,550 for Property Tax Payable.
(d) $2,183 for Prepaid Property Tax; $24,017 for Property Tax Expense.
38. Roofer’s Inc. had an operating line of credit of $100,000 and overdrew its bank balance to result in a
negative cash balance of $33,000 at year-end. This would be reported in the statement of financial position as
(a) a current liability of $33,000.
(b) a non-current liability of $67,000.
(c) a current asset of $67,000.
(d) a current asset of $(33,000).
39. Interest expense on a note payable, with interest due at maturity, is

(a) always equal to zero.
(b) accrued over the life of the note.
(c) only recorded at the time the note is issued.
(d) only recorded at maturity when the note is paid.
Use the following information for questions 40–41.
On January 1 of this year, Gertoni Lenders agrees to lend Ester Corp. $150,000. Ester Corp. signs a $150,000,
6%, 9-month loan. Interest is due at maturity.
40. The entry made by Ester Corp. on January 1 to record the receipt of the loan is
(a) Interest Expense............................................................................ 6,750
Cash.............................................................................................. 145,500
Bank Loan Payable................................................................. 150,000
(b) Cash.............................................................................................. 150,000
(c) Cash.............................................................................................. 150,000
Interest Expense............................................................................ 6,750
(d) Cash.............................................................................................. 150,000

Interest Payable...................................................................... 6,750
41. What entry will Ester Corp. make to repay the loan on September 30, assuming no further adjusting entries
have been made since June 30?
(a) Bank Loan Payable........................................................................ 156,750
Cash....................................................................................... 156,750
(b) Bank Loan Payable........................................................................ 150,000
Interest Payable............................................................................. 6,750
Cash....................................................................................... 156,750
(c) Interest Expense............................................................................ 3,375
Bank Loan Payable........................................................................ 150,000
Cash....................................................................................... 153,375
(d) Interest Payable............................................................................. 4,500
Bank Loan Payable ....................................................................... 150,000
Cash....................................................................................... 156,750
Solution: Interest payable = $150,000 x.06 x 6/12 = $4,500; Interest expense = $150,000 x.06 x 3/12 = $2,250
Use the following information for questions 42–43.
On October 1, 2018, Mekhi’s Golf Service Limited borrows $80,000 from Rigor Bank by signing a 3-month,
$80,000, 4% bank loan. Interest is due the first of each month.
42. What adjusting entry is required at December 31, 2018?

(a) Interest Payable............................................................................. 800
Interest Expense..................................................................... 800
(b) Interest Expense............................................................................ 800
Interest Payable...................................................................... 800
(c) Interest Expense............................................................................ 267
Interest Payable...................................................................... 267
(d) Interest Expense............................................................................ 267
Bank Loan Payable................................................................. 267
Solution: ($80,000 x.04 / 12 = $267
43. The entry by Mekhi’s Golf Service to record payment of the loan and accrued interest on January 1, 2019 is
(a) Bank Loan Payable........................................................................ 83,200
Cash....................................................................................... 83,200
(b) Bank Loan Payable........................................................................ 80,000
Interest Payable............................................................................. 267
Cash....................................................................................... 80,267
(c) Bank Loan Payable........................................................................ 80,000
Interest Payable............................................................................. 800
Cash....................................................................................... 80,800
(d) Bank Loan Payable........................................................................ 80,000
Interest Expense............................................................................ 800
Cash....................................................................................... 80,800
44. A customer paid a total of $8,960 for a purchase, including 13% HST (Harmonized Sales Tax). How much
was the HST?
(a) $8,960
(b) $8,000
(c) $1,075
(d) $1,031
Solution: ($8,960 / 1.13 x.13) = $1,031)
45. On January 1, 2018, Junction Limited, a calendar-year company, issued $160,000 of notes payable, of
which $65,000 is due on January 1 for each of the next four years. The proper statement of financial position
presentation on December 31, 2018, is
(a) Current Liabilities, $160,000.
(b) Non-current Liabilities, $160,000.
(c) Current Liabilities, $65,000; Non-current Liabilities, $95,000.
(d) Current Liabilities, $95,000; Non-current Liabilities, $65,000.
46. Harmonized Sales Tax (HST) collected by a retailer are expenses

(a) of the retailer.
(b) of the customers.
(c) of the government.
(d) that are not recognized by the retailer until they are submitted to the government.
Use the following information to answer questions 47–48.
The following totals for the month of April were taken from the payroll register of Branson Corp.:
Gross salaries.................................. $26,850
CPP withheld................................... 1,330
Employee income taxes withheld..... 5,785
Medical insurance deductions.......... 930
EI withheld....................................... 478
Union dues withheld......................... 446
47. The journal entry to record payment of the net payroll would include a
(a) debit to Salaries Payable for $17,881.
(b) debit to Salaries Payable for $15,300.
(c) debit to Salaries Payable for $21,065.
(d) credit to Cash for $26,850.
Solution: ($26,850 – $1,330 – $5,785 – $930 – $478 – $446) = $17,881
48. The journal entry to record the accrual of the employee’s portion of Canada Pension Plan (CPP) would
include a
(a) debit to CPP Payable of $1,330.
(b) debit to CPP Expense of $1,330.
(c) credit to Employee Benefits Expense of $1,330.
(d) credit to CPP Payable of $1,330.
49. If interest is due at maturity, a $50,000, 4%, 9-month note payable requires an interest payment of
(a) $1,500.
(b) $222.
(c) $167.
(d) $2,000.
Solution: $50,000 x.04 / 12 x 9 = $1,500
50. A financial liability is a

(a) contractual obligation to receive cash in the future.
(b) contractual obligation to pay cash in the future.
(c) contractual obligation to issue common shares in the future.
(d) contractual obligation to issue a mortgage payable.
51. One example of a liability that is not a financial liability is

a) notes payable.
b) unearned revenue.
c) bonds payable.
d) financial lease.
52. Under IFRS, if a company can determine a reasonable estimate of an expected loss from a lawsuit and it is
probable it will lose the suit, it should
(a) disclose the basic facts regarding the suit in the notes to its financial statements.
(b) accrue the loss.
(c) neither disclose in the notes nor accrue the loss.
(d) pay the amount estimated.
53. Under ASPE, a contingent liability is recorded in the accounting records

(a) if it is likely that a future event will confirm that a liability has been incurred and the amount of the related
loss can be estimated.
(b) if the contingency has not already been disclosed in the notes to the financial statements.
(c) if the amount can be estimated, but the possibility of occurrence is remote.
(d) under no circumstances.

(a) With fixed principal payments on a long-term note payable, the principal portion increases each period.
(b) With fixed principal payments on a long-term note payable, the interest portion decreases each period.
(c) With fixed principal payments on a long-term note payable, the interest portion does not change each
period.
(d) With fixed principal payments on a long-term note payable, the interest portion increases each period.
55. Which of the following statements is false?

(a) With blended principal and interest payments, the equal periodic payments result in the interest portion
increasing each period.
(b) With blended principal and interest payments, the equal periodic payments result in the principal portion
increasing each period.
(c) With blended principal and interest payments, the equal periodic payments result in the interest portion
decreasing each period.
(d) With blended principal and interest payments, the equal periodic payments are constant each period.
56. When a long-term note payable with a fixed interest rate has fixed principal payments, it means that
(a) the periodic payment amount is fixed.
(b) the periodic payment increases over time.
(c) the periodic payment decreases over time.
(d) no conclusion can be made on the periodic payment.
57. Interest rates on notes and loans are usually stated as a(n)
(a) monthly rate.
(b) daily rate.
(c) semi-annual rate.
(d) annual rate.
58. A long-term note secured by collateral maybe referred to as a

(a) premium.
(b) debenture.
(c) bond.
(d) mortgage.
59. As blended principal and interest payments are made on a long-term loan,
(a) the interest portion increases and the principal portion decreases.
(b) the interest and principal portions remain the same.
(c) the interest portion decreases and the principal portion increases.
(d) both the interest portion and the principal portion decrease.
60. A five-year, 4%, $80,000 note payable is issued on January 1. Terms include fixed annual principal
payments of $16,000, plus interest on the outstanding balance. The entry to record the first instalment payment
will include a
(a) debit to Notes Payable of $16,000.
(b) credit to Interest Expense of $3,200.
(c) credit to Notes Payable of $12,800.
(d) debit to Cash of $16,000.
61. On March 1, Brutto Corp. issues a 3 year 5%, $60,000 note payable. The terms of the note include monthly
blended principal and interest payments of $1,799. The entry to record the second instalment payment will
include a
(b) debit to Cash of $1,799.
(c) debit to Interest Expense of $250.
(d) credit to Interest Expense of $244.
Solution: ($1,799 – (($60,000 – $1,549) x.05 x 1/12 = $244) = $1,555; $1,549 = ($1,799 – ($60,000 x.05 x 1/12
= $250))
62. On March 2, Conroy and Conrad Inc. obtained a loan for $120,000 for 5 years at 7%. Payments are
$2,000. What type of loan is this considered to be?
a) fixed principal payments
b) blended principal payments
c) floating principal payments
d) prime principal payments
63. Long-term notes may have

a) fixed rates of interest only.
b) floating interest rates only.
c) no interest rates.
d) fixed or floating interest rates.
64. With fixed principal payments, the interest ___ each period as the principal ___.
a) decreases, decreases
b) increases, increases
c) increases, decreases
d) decreases, increases
65. Instalments can be paid

a) monthly.
b) quarterly.
c) semi-annually.
d) all of the above
66. With fixed principal loans, principal payments and interest are repayable in
a) equal periodic amounts plus interest.
b) varying periodic amounts plus interest.
c) equal periodic amounts including interest.
d) varying periodic amounts including interest.
67. Blended principal and interest payments are repayable in

a) equal periodic amounts plus interest.
b) varying periodic amounts plus interest.
c) equal periodic amounts including interest.
d) varying periodic amounts including interest.

(a) Liquidity ratios measure a company’s long-term ability to pay debt.
(b) Solvency ratios measure a company’s ability to repay current debt.
(c) A high liquidity ratio generally indicates that a company has a greater ability to meet its current obligations.
(d) Solvency ratios measure a company’s ability to survive on a short-term basis.

(a) Current liabilities are generally presented on the statement of financial position in order of liquidity, but IFRS
allows presentation in reverse order of liquidity as well.
(b) Current liabilities are listed in order of descending dollar value.
(c) All companies are prohibited to report current liabilities in reverse order of liquidity.
(d) Current liabilities are listed in order of ascending dollar value.
70. The relationship between current assets and current liabilities is

(a) useful in determining profitability.

(b) useful in evaluating a company’s liquidity.
(c) useful in evaluating a company’s solvency.
(d) useful in determining the amount of a company’s non-current debt.
71. Liquidity ratios measure a company's

(a) operating cycle.
(b) revenue-producing ability.
(c) short-term debt-paying ability.
(d) long-range solvency.
72. A measure of a company's solvency is the

(a) inventory turnover ratio.
(b) current ratio.
(c) times interest earned ratio.
(d) asset turnover ratio.
73. The times interest earned ratio is calculated by dividing

(a) net income by interest expense.
(b) net income plus income tax expense by interest expense.
(c) net income plus interest expense by interest expense.
(d) net income plus interest expense plus income tax expense by interest expense.
74. Last year, Hadley Bakery’s income statement reported the following: net income, $325,600; interest
expense, $81,400; and income tax expense, $113,960. The company’s times interest earned ratio is
(a) 5.0 times.
(b) 6.4 times.
(c) 4.0 times.
(d) 4.6 times.
Solution: ($325,600 + $81,400 + $113,960) / $81,400 = 6.4 x
75. Off-balance sheet financing usually is found in connection with

(a) finance leases.
(b) operating leases.
(c) both finance and operating leases.
(d) neither finance nor operating leases.

(a) The carrying amount of bonds issued at a discount will initially be higher than the face value.
(b) The carrying amount of a bond is its face value less any unamortized premium or plus any unamortized
discount.
(c) The carrying amount of a bond is its face value plus any unamortized premium or less any unamortized
discount.
(d) The carrying amount of bonds issued at a premium will initially be lower than the face value.
77. If a bond has a face value of $10,000, a 6% coupon interest rate and a 4% market interest rate, then the
semi-annual interest payment will be
(a) $600.
(b) $400.
(c) $200.
(d) $300.
Solution: $10,000 x.06 x 6/12 = $300
78. On March 1, Brutto Corp. issues a 3 year, 5%, $60,000 note payable. The terms of the note include
monthly blended principal and interest payments of $1,799. The entry to record the first instalment payment will
include a
(b) debit to Cash of $1,799.
(c) credit to Interest Expense of $3,000.
(d) debit to Interest Expense of $250.
Solution: $60,000 x.05 x 1/12 = $250
79. Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer
are called
(a) early retirement bonds.
(b) redeemable bonds.
(c) options.
(d) debentures.
80. A bond with a face value of $100,000 and a quoted price of 102.25 would have a selling price of
(a) $ 97,800.
(b) $100,000.
(c) $102,250.
(d) $122,250.
Solution: $100,000 x 1.0225= $102,250
81. If the market interest rate is 4.5%, a $100,000, 5.6%, 10-year bond that pays interest semi-annually would
sell at an amount
(a) less than face value.
(b) equal to the face value.
(c) greater than face value.
(d) that cannot be determined.
82. $8 million, 6%, 10-year bonds are issued at less than face value. Interest will be paid semi-annually. When
calculating the market price of the bond, the present value of
(a) $480,000 received for 10 periods must be calculated.
(b) $240,000 received for 10 periods must be calculated.
(c) $240,000 received for 20 periods must be calculated.
(d) $480,000 received for 20 periods must be calculated.
Solution: $8 million x.03 = $240,000 semi-annual interest to be received for 20 periods (10 years x 2 times per
year)
83. $2 million, 6%, 10-year bonds are issued when the market rate is 8%. Interest will be paid quarterly. When
calculating the issue price of the bond, the interest rate to be used to calculate the present value of the face
amount and the present value of the periodic interest payments is
(a) 4%.
(b) 8%.
(c) 6%.
(d) 2%.
84. The market interest rate is often called the

(a) stated interest rate.
(b) effective interest rate.
(c) contractual interest rate.
(d) coupon interest rate.
85. When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal
to the amount of the
(a) interest paid over the life of the bond.
(b) interest paid over the life of the bond plus the amount of premium amortized.
(c) interest paid over the life of the bond minus the amount of premium amortized.
(d) premium.
86. The carrying amount of a bond not issued at face value will always move
(a) towards the face value.
(b) away from the face value.
(c) upwards.
(d) downwards.
87. For bond amortization, private companies reporting under ASPE

(a) must use the effective-interest method.
(b) are not allowed to use the effective-interest method.
(c) may use any amortization method they wish, as long as the results do not differ materially from the
effective-interest method.
(d) may use any amortization method they wish, regardless of the results.
88. The journal entry to record the issue of bonds at a discount will include a
(a) debit to Cash for the face amount of the bonds.
(b) debit to Cash for the face amount of the bonds plus the amount of the discount.
(c) debit to Cash for the face amount of the bonds minus the amount of the discount.
(d) credit to Cash for the face amount of the bonds.
Use the information below to answer questions 89–90.
Coldwater Inc. issues $575,000 of 4%, 8-year bonds for cash proceeds of $502,774. The market interest rate
is 6%. Interest is paid semi-annually.
89. To the nearest dollar, how much bond interest expense is recorded on the first interest date?
(a) $11,500
(b) $15,083
(c) $17,250
(d) $3,583
Solution: $502,774 x.03= $15,083
90. To the nearest dollar, what is the carrying amount of the bonds after the first interest payment?
(a) $ 506,357
(b) $ 507,802
(c) $ 499.191
(d) $ 575,000
Solution: (($502,774 x.03) – ($575,000 x 0.02) = $3,583 + $502,774 = $506,357
91. How much is the discount or premium on the bond?

(a) $575,000 premium
(b) $72,226 premium
(c) $502,747 discount
(d) $72,226 discount
Solution: $575,000 – $502,774 = $72,226 discount
92. When a bond is issued at a discount, the amount of interest expense for an interest period is calculated by
(a) multiplying the carrying amount times the market interest rate.
(b) multiplying the carrying amount times the coupon interest rate.
(c) multiplying the face amount of the bonds by the coupon interest rate.
(d) multiplying the face amount of the bonds by the market interest rate.
ANSWERS TO MULTIPLE CHOICE QUESTIONS
Item Ans. Item Ans. Item Ans. Item Ans.

30. d 46. b 62. a 78. d
31. c 47. a 63. d 79. b
32. a 48. d 64. a 80. c
33. c 49. a 65. d 81. c
34. c 50. b 66. a 82. c
35. c 51. b 67. c 83. d
36. a 52. a 68. c 84. b
37. b 53. a 69. a 85. c
38. a 54. b 70. b 86. a
39. b 55. a 71. c 87. c
40. b 56. c 72. c 88. c
41. d 57. d 73. d 89. b
42. c 58. d 74. b 90. a
43. b 59. c 75. b 91. d
44. d 60. a 76. c 92. a
45. c 61. a 77. d
EXERCISES
Ex. 93
Your friend, Malaya Claire, recently opened a retail shoe store. She knows she needs to pay sales tax but isn't
sure how much. The GST and PST are calculated by the cash register. The GST rate is 5% and the PST rate
is 8%. Sales, before taxes, for the first month of operations based on the cash register reports were $125,000.
All sales are for cash, debit card, or bank credit card. Cost of goods sold is 50% of sales and a perpetual
inventory system is used.
Instructions
(a) Calculate the amount of GST and PST.
(b) Prepare the journal entry to record the sales and sales taxes, and cost of goods sold.
Solution 93 (10–15 min.)

(a) GST: $125,000 × 5% = $ 6,250
PST: $125,000 × 8% = $10,000
(b) Cash.............................................................................................. 141,250

Sales Tax Payable ($6,250 + $10,000)................................... 16,250
Sales Revenue....................................................................... 125,000
Cost of Goods Sold ($125,000 × 50%).......................................... 62,500

Inventory................................................................................. 62,500
Ex. 94
On April 1, Aces Corporation borrows $160,000 from Rigor Bank by signing an 8-month, 3%, bank loan.
Interest is due at maturity.
Instructions
Prepare the entries listed below associated with the bank loan on the books of Aces Corporation. Its year end
is June 30.
(a) The entry on April 1 when the loan was received.
(b) Any adjusting entries necessary on June 30. Assume no other interest accrual entries have been made.
(c) The entry to record repayment of the loan at maturity.
Solution 94 (10 min.)

(a) Apr 1 Cash............................................................................ 160,000
Bank Loan Payable.............................................. 160,000
(b) Jun 30 Interest Expense ($160,000  3%  3/12)................... 1,200

Interest Payable.................................................... 1,200
(c) Dec 1 Bank Loan Payable..................................................... 160,000

Interest Payable.......................................................... 1,200
Interest Expense ($160,000 x 3% x 5/12).................... 2,000
Cash..................................................................... 163,200
Ex. 95
On June 1, Babar Corporation borrows $40,000 from the bank by signing a 2-month, 4.5%, bank loan. Interest
is due at the beginning of each month, commencing July 1.
Instructions
Prepare the entries listed associated with the bank loan on the books of Babar Corporation.
(a) Prepare the entry on June 1 when the loan was received.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements.
Assume no other interest accrual entries have been made.
(c) Prepare the entry to record the payment of the interest on July 1.
(d) Prepare the entry to record repayment of the loan at maturity on August 1.

(a) Jun 1 Cash............................................................................ 40,000
Bank Loan Payable.............................................. 40,000
(b) Jun 30 Interest Expense ($40,000  4.5% x 1/12)................... 150

Interest Payable.................................................... 150
(c) Jul 1 Interest Payable.......................................................... 150

Cash..................................................................... 150
(d) Aug 1 Bank Loan Payable..................................................... 40,000

Interest Expense ($40,000  4.5% x 1/12)................... 150
Cash..................................................................... 40,150
Ex. 96
Jancy Corporation had cash sales of $150,000 for the month of August. Sales are subject to 13% harmonized
sales tax (HST). Prepare the entry to record the sales.
Cash.............................................................................................. 169,500
Sales Revenue....................................................................... 150,000
Sales Tax Payable ($150,000 x 13%)..................................... 19,500
Ex. 97
Fantastic Fashions has just completed its first quarter of operations. Below are transactions that have not yet
been recorded. Prepare the journal entries listed below.
Jan 1 Pre-tax cash sales amounted to $75,000. HST is collected on all sales at a rate of 13%.
Jan 15 Signed a three month note for $12,000 to extend amounts owing on account to Trendy Taste Inc.
Interest is 6% annually and due at maturity.
Mar 1 Received the annual property tax bill for $7,500 payable on June 1.
Apr 1 Paid salaries of $10,000; of this amount $495 is CPP, $178 is EI and $3,465 is for income taxes
(record the employer portion as well).
Apr 15 Paid the note due.
Apr 29 A customer sued Fantastic Fashions for $200,000. Legal counsel has advised that it is unlikely
damages will be awarded.
Jun 1 Paid the property taxes bill in full.
Solution 97
Jan 1 Cash ($75,000 + $9,750)........................................................ 84,750

Sales................................................................................ 75,000
Sales Tax Payable ($75,000 x 13%)................................ 9,750
Jan 15 Accounts Payable—Trendy Taste Inc..................................... 12,000

Notes Payable—Trendy Taste Inc................................... 12,000
Mar 1 Property Tax Expense ($7,500 x 2/12).................................... 1,250

Property Tax Payable....................................................... 1,250
Apr 1 Salaries expense.................................................................... 10,000

CPP Payable.................................................................... 495
EI Payable........................................................................ 178
Employee Income Tax Payable........................................ 3,465
Cash................................................................................ 5,862
Apr 1 Employee benefit expense...................................................... 744

CPP Payable.................................................................... 495
EI Payable........................................................................ 249
Apr 15 Notes Payable........................................................................ 12,000

Interest Expense (12,000 x 6% x 3/12)................................... 180
Cash................................................................................ 12,180
Apr 29 No provision should be recorded or contingent liability disclosed because the probability of a loss is
not probable or possible.
Jun 1 Property Tax Payable............................................................. 1,250

Property Tax Expense ($7,500 x 3/12).................................... 1,875
Prepaid Property Tax ($7,500 x 7/12)..................................... 4,375
Cash................................................................................ 7,500
Ex. 98
On December 31, 2018, Industrial Exporters issues a $365,000, 6%, 20-year mortgage. The terms require
monthly payments of $2,615 (principal and interest – blended payment).
Instructions
Prepare the journal entry for Jan 31, 2019 to record the first monthly payment. Include your calculations.
Jan 31 Interest Expense............................................................... 1,825
Mortgage Payable............................................................ 790
Cash.......................................................................... 2,615
To record mortgage payment
Calculations:
$365,000  6% x 1/12 = $1,825 interest
$2,615 – $1,825 = $790 principal repayment
Ex. 99
On January 1, 2018, Barney Inc. issues a $480,000, 4%, 15-year note payable. The terms require semi-annual
fixed principal payments of $16,000 plus applicable interest.
Instructions:
Prepare the journal entry at Dec 31, 2018 to record the second semi-annual payment. Include your
calculations.
Solution 99
Dec. 31 Interest Expense [($480,000 – $16,000)  4% x 6/12]..... 9,280
Notes Payable.................................................................. 16,000
Cash.......................................................................... 25,280
To record note payment
Ex. 100
On December 31, 2018, Rabin Realty Limited issues a 10-year, 6%, $200,000 mortgage payable to finance the
construction of a building. The terms provide for monthly instalment payments at the end of each month,
commencing January 31, 2019.
Instructions
(a) Record the issue of the mortgage payable on December 31, 2018.
(b) Record the first two instalment payments on January 31, 2019 and February 28, 2019, assuming the
payment is (1) a fixed principal payment of $1,667, and (2) a blended principal and interest payment of
$2,220. Round your answers to the nearest dollar.
Solution 100
(a)
Dec 31, 2018 Cash............................................................................ 200,000
Mortgage Payable................................................ 200,000
(b) (1)
Jan 31, 2019 Mortgage Payable....................................................... 1,667
Cash ($1,667 + $1,000)........................................ 2,667
Feb 28, 2019 Mortgage Payable....................................................... 1,667

Interest Expense [($200,000 – $1,667) x 6% x 1/12]... 992
Cash ($1,667 + $992)........................................... 2,659
(b) (2)
Jan 31, 2019 Mortgage Payable ($2,220 – $1,000).......................... 1,220
Cash..................................................................... 2,220
Feb 28, 2019 Mortgage Payable ($2,220 – $994)............................. 1,226

Interest Expense [($200,000 – $1,220) x 6% x 1/12]... 994
Cash..................................................................... 2,220
Ex. 101
The following instalment payment schedule is for a long-term instalment note payable:
Interest Period Cash Payment Interest Expense Reduction of Principal Principal Balance
Issue date $120,000.00
1 $28,487.57 $7,200.00 $21,287.57 98,712.43
2 28,487.57 $5,922.75 22,564.82 76,147.61
3 28,487.57 $4,568.86 23,918.71 52,228.89
4 28,487.57 $3,133.73 25,353.84 26,875.06

5 28,487.57 $1,612.50 26,875.06 0.00
Instructions
(a) Is this a fixed principal or blended principal and interest payment schedule?
(b) Assuming payments are made annually, what is the interest rate on the note?
(c) Prepare the journal entry to record the first instalment payment.
(d) What are the current and non-current portions of the note at the end of period 1?
Solution 101
(a) This is a blended interest and payment schedule. Note that the cash payment is constant each period
while the interest and principal amounts change.
(b) The annual interest rate is 6% ($7,200 ÷ $120,000).
(c) Mortgage Payable.......................................................................... 21,287.57

Interest Expense............................................................................ 7,200.00
Cash....................................................................................... 28,487.57
(d) Current portion = $22,564.82

Non-current portion = $76,147.61
Total liability = $22,546.82 + $76,147.61 = $98,712.43
Ex. 102
On January 1, Wonder Water borrowed $300,000 for 5 years at 4.5% to finance expansion. Fixed principal
payments are to be made quarterly beginning Mar 1. Below is an instalment schedule for Wonder Water.
WONDER WATER
INSTALMENT PAYMENT SCHEDULE- FIXED PRINCIPAL PAYMENTS
Interest
Cash Pmt Interest Expense Reduction of Principal Principal
Period
Jan 1 300,000
Mar 1 ? 3,375 5,000 295,000
Jun 1 8,319 ? 5,000 ?
Sep 1 ? 3,263 ? 285,000
Dec 1 ? ? 5,000 ?
Instructions
(a) Determine the missing values (round to the nearest dollar).
(b) Prepare the journal entries for the payments made on March 1 and Sept 1.
Solution 102
(a)
Interest Period Cash Pmt Interest Expense Reduction of Principal Principal
Jan 1 300,000
Mar 1 8,375 (1) 3,375 5,000 295,000
Jun 1 8,319 3,319 (2) 5,000 290,000 (3)
Sep 1 8,263 (4) 3,263 5,000 285,000
Dec 1 8,206 (6) 3,206 (5) 5,000 280,000 (7)
(1) $300,000 x 4.5% x 3/12 = $3,375; $3,375 + $5,000 = $8,375

(2) $295,000 x 4.5% x 3/12 = $3,319
(3) $295,000 – $5,000 = $290,000
(4) $5,000+ $3,263 = $8,263
(5) $285,000 x 4.5% x 3/12 = $3,206
(6) $3,206 +$5,000 = $8,206
(7) $285,000 – $5,000 = $280,000
(b)
Mar 1 Interest Expense..................................................................... 3,375
Loan Payable.......................................................................... 5,000
Cash................................................................................ 8,375
Sep 1 Interest Expense..................................................................... 3,263

Loan Payable.......................................................................... 5,000
Cash................................................................................ 8,263
Ex. 103
On January 1, Marvelous Metals borrowed $1,200,000 at 7% for 15 years to begin the development of a new
mine. Blended principal payments must be made on the first day of each month.
Instructions
(a) Complete the instalment schedule listed below (round to the nearest dollar).
(b) Assuming the year end is March 31, prepare the necessary adjusting entry.
(c) Prepare the journal entries for the payments made on May 1 and June 1.
MARVELOUS METALS
INSTALMENT PAYMENT SCHEDULE- BLENDED PRINCIPAL PAYMENTS
Interest Expense
Interest Period Cash Pmt Reduction of Principal Principal
Jan 1 1,200,000
Feb 1 10,785 ? 3,785 1,196,215
Mar 1 ? ? 3,807 ?
Apr 1 10,785 6,956 ? ?
May 1 10,785 ? ? 1,184,727
Jun 1 ? ? ? ?
Solution 103
(a)
Interest Expense
Interest Period Cash Pmt Reduction of Principal Principal
(D x 7% x 1/12)
Jan 1 1,200,000
Feb 1 10,785 7,000 (1) 3,785 1,196,215
Mar 1 10,785 6,978 (2) 3,807 1,192,408 (3)
Apr 1 10,785 6,956 3,829 (4) 1,188,579 (5)
May 1 10,785 6,933 (6) 3,852 (7) 1,184,727
Jun 1 10,785 6,911 (8) 3,874 (9) 1,180,853 (10)
(1) $1,200,000 x 7% x 1/12 = $7,000

(2) $1,196,215 x 7% x 1/12 = $6,978
(3) $1,196,215 – $3,807 = $1,192,408
(4) $10,785 – $6,956 = $3,829
(5) $1,192,408 – $3,829 = $1,188,579
(6) $1,188,579 x 7% x1/12 = $6,933
(7) $10,785 – $ 6,933 = $3,852
(8) $1,184,727 x 7% x 1/12 = $6,911
(9) $10,785 – $6,911 = $3,874
(10) $1,184,727 – $3,874 = $1,180,853
(b)
Mar 31 Interest Expense..................................................................... 6,956
Interest Payable............................................................... 6,956
(c)
May 1 Interest Expense..................................................................... 6,933
Cash................................................................................ 10,785
Jun 1 Interest Expense..................................................................... 6,911

Cash................................................................................ 10,785
Ex. 104
On January 1, 2018 Calcium Inc. has the following two alternatives in regards to financing:
Loan A – $210,000, 4.5% for 5 years. Fixed principal payments of $21,000 due semi-annually on June 30 and
December 31.
Loan B – $210,000, 4.5% for 5 years. Blended principal payments of $23,685 due semi-annually on June 30
and December 31.
Instructions
(a) Prepare an instalment schedule for each alternative for June 30, and Dec 31.
(b) Which alternative will reduce the principal on the loan quicker in year 1?
(c) Which alternative will report the least interest expense on the income statement in year 1?
(d) If Calcium wanted to increase net income which alternative would you recommend?
Solution 104
(a)
CALCIUM INC.
INSTALMENT PAYMENT SCHEDULE- FIXED PRINCIPAL PAYMENTS (LOAN A)
Interest Interest Expense

Cash Pmt Reduction of Principal Principal
Period (D x 4.5% x 6/12)
Jan 1 210,000
Jun 30 25,725 4,725 21,000 189,000
Dec 31 25,253 4,253 21,000 168,000
Totals 50,978 8,978 42,000
CALCIUM INC.
INSTALMENT PAYMENT SCHEDULE- BLENDED PRINCIPAL PAYMENTS (LOAN B)
Interest Interest Expense

Cash Pmt Reduction of Principal Principal
Period (D x 4.5% x 6/12)
Jan 1 210,000
Jun 30 23,685 4,725 18,960 191,040
Dec 31 23,685 4,298 19,387 171,653
Totals 47,370 9,023 38,347
(b) Loan A will reduce principal balance to $168,000 which is lower than the balance outstanding under Loan B
of $171,653.
(c) Loan A will report the least interest of $8,978. Loan B will report a higher interest expense of $9,023.
(d) To increase net income, Calcium would want to report fewer expenses; therefore, Loan A will report a lower
amount of interest expense in regards to financing. Principal repayments are not reflected on the income
statement.
Ex. 105
National Supplies Corporation has the following selected accounts at December 31, 2018 after posting
adjusting entries:
Accounts Payable........................................................ $ 85,250
Bank Loan Payable, 3-month...................................... 125,000
Accumulated Depreciation—Equipment...................... 22,000
Notes Payable, 5-year, 4%.......................................... 75,000
Employee Benefits Expense........................................ 7,000
Interest Payable.......................................................... 10,400
Mortgage Payable....................................................... 165,000
Sales Tax Payable....................................................... 16,000
Instructions
(a) Prepare the current liability section of National Supplies’ statement of financial position, assuming $24,000
of the mortgage is payable next year.
(b) Comment on National Supplies’ liquidity, assuming total current assets are $225,000.

(a)
NATIONAL SUPPLIES CORPORATION
Statement of Financial Position (partial)
December 31, 2018
Current Liabilities
Current portion of long-term debt................................................... $ 24,000
Bank loan payable, 3-month.......................................................... 125,000
Accounts payable.......................................................................... 85,250
Sales tax payable.......................................................................... 16,000
Interest payable............................................................................. 10,400
Total current liabilities............................................................. $260,650
(b) The liquidity position looks unfavourable reflecting a current ratio of 0.86 : 1. The current assets of
$225,000 are not sufficient to meet the company’s current obligations of $260,650 when due. There is a
shortfall of $35,650.
Ex. 106
The following information is available from the 2018 financial statements of Alpha Inc. and Omega Ltd.:
(in millions)
Alpha Inc. Omega Ltd.
Income tax expense........................................... $ 361 $ 766
Interest expense................................................. 480 1,423
Net income......................................................... 654 948
Total assets........................................................ 24,750 37,525
Total current liabilities......................................... 5,970 14,109
Total liabilities..................................................... 16,485 31,816
Instructions
(a) Based on the information given, calculate the following ratios for each company:
1. Debt to total assets
2. Times interest earned
(b) What conclusion concerning each company’s long-run solvency can be drawn from these ratios?

(a) Alpha Inc. Omega Ltd.
1. Debt to total assets: $16,485 ÷ $24,750 $31,816 ÷ $37,525
= 66.7% = 84.8%
2. Times interest earned: $654 + $361 + $480 $948 + $766 + $1,423

$480 $1,423
= $1,495 ÷ 480 = $3,137 ÷ $1,423
= 3.1 times = 2.2 times
(b) Generally, businesses prefer to maintain a lower debt to total assets ratio and a higher times interest
earned ratio. Since Alpha’s debt ratio is 27% [(84.8% – 66.7%) ÷ 66.7%] lower than Omega’s ratio and
Alpha’s times interest earned ratio is 41% [(3.1 – 2.2) ÷ 2.2] higher than Omega’s, it can be concluded that
Alpha is in a better position regarding long-run solvency than Omega. Omega’s debt load is extremely
high, and should be a cause for alarm.
Ex. 107
Village Home Products Ltd. sells furniture and appliances. It has been in business for many years and until
now has not had any short-term loans. It has approached Friendly Bank for an operating line of credit. Its
current ratio, receivable turnover, and inventory turnover for the past 2 years are presented below. You are the
credit manager dealing with the application.
Instructions
Comment on the ratios presented in terms of the application for the line of credit and also indicate what
additional information you would like to receive from the company.
2019 2018
Current ratio 1.6:1 1.2:1
Receivable turnover 5.2 7.5
Inventory turnover 6.8 9.4
Solution 107 (10–15 min.)

1. The fact that the current ratio increased initially seems positive.
2. However, the fact that the receivable and inventory turnovers have declined may indicate problems.
3. Current assets may include an increasing amount of inventory that may be subject to obsolescence.
This is supported by the decrease in the inventory turnover ratio.
4. The decrease in the receivable turnover may indicate an issue with receivable collections.
5. Other information that would be useful includes:

(a) industry averages for the ratios
(b) information on what makes up current assets and liabilities
(c) reasons for the change in ratios
(d) profitability information
Ex. 108
Below is a list of Accounts for Crib Inc. Beside each account determine if it is a Current Liability (C) or a Non-
current Liabilities (NC).
1. Accounts Payable
2. Notes Payable (due 9 months)
3. Bank Loan payable (due 16 months)
4. Unearned Revenue
5. Mortgage Payable (due in 20 years)
6. Salaries Payable
7. Sales Tax Payable
8. Current portion of Mortgage Payable
9. Notes payable (due in 12 months)
10. Operating Line of Credit
Solution 108
1. C
2. C
3. NC
4. C
5. NC
6. C
7. C
8. C
9. C
10. C
Ex. 109
Kahluha Manufacturers Inc. reported the following information in its financial statements:
KAHLUHA MANFACTURERS INC.

Statement of Financial Position
June 30
Assets......................................................................................... 2019 2018

Cash..................................................................................... $32,000 $29,000
Accounts receivable............................................................. 7,500 5,500
Prepaid Insurance................................................................ 1,100 1,450
Inventory............................................................................... 220,000 175,000
Building................................................................................. 145,000 155,000
Equipment............................................................................ 36,000 40,000
Total Assets................................................................................. $441,600 $405,950
Liabilities and shareholders’ equity

Accounts Payable................................................................. $ 12,500 $14,500
Notes Payable...................................................................... 10,000 0
Bonds Payable..................................................................... 145,000 95,000
Long-Term Debt................................................................... 116,000 175,000
Common shares................................................................... 25,000 25,000
Retained earnings................................................................ 133,100 96,450
Total liabilities and shareholders’ equity...................................... $441,600 $405,950
Revenue...................................................................................... $450,000 $300,000

Operating expenses.................................................................... 300,000 210,000
Income from operations............................................................... 150,000 90,000
Interest expense.......................................................................... 6,000 9,000
Income tax expense.................................................................... 36,000 20,250
Net income.................................................................................. $108,000 $60,750
Instructions
(a) Calculate the company’s debt to total assets and times interest earned ratios for each year.
(b) Determine if the change from 2018- 2019 is an improvement or deterioration.
(c) If industry averages for debt to total assets is 57% and times interest earned is 6 times, are Kahluha ratios
comparable?
Solution 109
(a) 2019 2018
Debt to total assets =(12,500+10,000+145,000+116,000) =(14,500+95,000+175,000)
441,600 405,950
= 64.2% = 70.1%
Times Interest Earned =(108,000+6,000+36,000) =(60,750+9,000+20,250)

6,000 9,000
= 25 times = 10 times
(b) Debt to total assets ratio is improving.

Times interest earned ratio is also improving.
(c) Kahluha’s debt to total assets ratio is higher than the industry, which means they may have more debt or
less assets than the industry averages. Overall debt to total assets varies across industries because different
financing options are appropriate for different industries.
Kahluha’s times interest earned ratio is better than industry average, which means Kahluha has a greater
ability to meet interest payments as they come due than industry average.
Ex. 110
The following data (000’s) has been extracted from the year-end reports for Grant Corporation:
2019 2018
Interest expense $28 $30
Income tax 270 240
Net income (a) 600
Current assets 3,085 (b)
Total Assets (c) 3,600
Current Liabilities (d) 1,510
Total Liabilities 2,240 (e)
Total Shareholders’ Equity $1,760 $1,800
Current ratio 2.5:1 1.4:1
Debt to total assets 56.0% 50.0%
Times interest earned 34.75 times (f)
Instructions
Solve for the missing data.
Solution 110
(a) Net income: (NI): (NI + $270 +$28) / $28 = 34.75
NI = (34.75 x $28) - $270 - $28
NI = $675
(b) Current Assets (CA): CA/$1,510 = 1.4

CA = 1.4 x $1,510
CA =$2,114
(c) Total Assets (TA): TA = $2,240 + $1,760

TA = $4,000
(d) Current Liabilities (CL): CL = $3,085 / 2.5

CL = $1,234
(e) Total Liabilities (TL): TL = $3,600 - $1,800

TL = $1,800
(f) Times interest earned (TIE): TIE =($600 + $240 + $30) / $30
TIE = 29.0x
Ex. 111
On January 1, 2018, Supreme Industrial Corp. issued bonds with a face value of $1,000,000. The bonds have
a coupon interest rate of 5%, payable each July 1 and January 1.
Instructions
(a) Prepare the journal entry for the issue, assuming the bonds are issued at 98.5.
(b) Prepare the journal entry for the issue, assuming the bonds are issued at 104.5.

(a) Cash ($1,000,000 x 0.985)............................................................ 985,000
Bonds Payable........................................................................ 985,000
(b) Cash ($1,000,000 x 1.045)............................................................ 1,045,000

Bonds Payable........................................................................ 1,045,000
Ex. 112
On January 1, 2018, Ainsle Corp. issued $600,000, 7%, 10-year bonds. The bonds pay semi-annual interest
on July 1 and January 1. The market interest rate at the time of issue was 6%.
Instructions
(a) Calculate the issue price (round to nearest dollar).
(b) Record the issue of the bonds on Jan. 1.
(c) Record the first interest payment on July 1.

(a) Periodic interest payments $600,000 x 7% x 6/12 = $21,000
n = 10 x 2 = 20 periods i = 6% x 6/12 = 3%
Present value factor for the principal is 0.55368
Present value factor for the interest is 14.87747
$600,000 x 0.55368 = $332,208

$21,000 x 14.877478 = 312,427
Issue price $644,635
OR (using calculator) N 20 I 3 (6%/2) PMT -21000 FV -600000 CPT PV  644,632

(note that rounding discrepancies can sometimes arise between calculations using present value tables
and financial calculators)
(b) January 1, 2018

Cash............................................................................................... 644,635
Bonds Payable........................................................................ 644,635
To record sale of bonds
(c) July 1, 2018

Bonds Payable............................................................................... 1,661
Cash....................................................................................... 21,000
To record semi-annual payment of interest
$644,635 x 3% = $19,339
Ex. 113
On January 1, 2018, Pinehill Ltd. issued $500,000, 6%, 5-year bonds, when the market interest rate was 8%.
Interest is payable semi-annually on July 1 and January 1. The company has a calendar year end.
Instructions
(a) Using a financial calculator, calculate the issue price. Round to nearest dollar.
(b) Record the issue of the bonds.
(c) Record the first interest payment on July 1, 2018. Round to nearest dollar.

(a) (using financial calculator) N 10 I 4 (8%/2) PMT -15000 FV -500000 CPT PV  459,446
OR Periodic interest payments $500,000 x 6% x 6/12 = $15,000

n = 5 x 2 = 10, i = 8% x 6/12 = 4%
Present value factor for the principal = 0.675564
Present value factor for the interest = 8.11090
$500,000 x 0.67556 = $ 337,780

$15,000 x 8.11090 = 121,664
Issue price $459,444
(note that rounding discrepancies can sometimes arise between calculations using present value tables
and financial calculators)
(b) Jan 1 Cash................................................................................... 459,446

Bonds Payable............................................................ 459,446
(c) Jul 1 Interest Expense ($459,446 x 4%)..................................... 18,378

Bonds Payable............................................................ 3,378
Cash ($500,000 x 6% x ½).......................................... 15,000
Ex. 114
On January 1, 2018, North West Suppliers Ltd. issues $500,000, 6%, five-year bonds, with interest payable on
July 1 and January 1. Since the market interest rate is 5%, the bonds sell for $521,880.
Instructions
For the issue date and first semi-annual period, complete (A) through (E) in the table below and show your
calculations.
(A) (B) (C) (D) (E)

Interest Interest Expense Premium Unamortized Bond
Period to be Paid to be Recorded Amortization Premium Carrying amount

(A) (B) (C) (D) (E)
Interest Interest Expense Premium Unamortized Bond
Period to be Paid to be Recorded Amortization Premium Carrying amount
$21,880 $521,880
1 $15,000 $13,047 $1,953 19,927 519,927
(A) $500,000 × 6% x 6/12 = $15,000
(B) Market interest rate 5% x 6/12 = 2.5% semi-annual

2.5% × $521,880 (bond carrying amount) = $13,047
(C) Premium amortization = $15,000 – $13,047 = $1,953
(D) Unamortized premium = $21,880 – $1,953 = $19,927
(E) Bond carrying amount = $500,000 + $19,927 = $519,927
Ex. 115
Emery Trust Inc. issued $100,000, 5 year bond on January 1, 2018 paying 6% interest on a semi-annual basis
every January 1 and July 1.
Instructions
Using a financial calculator, prepare the first year journal entries for the bond issue and interest expense
assuming that the company uses the effective interest method, a market interest rate of 4% and has a year-
end of December 31, 2018.
Solution 115
Jan 1 Cash 108,983
Bonds Payable 108,983
To record the bond issue
(n=10, i=2, PMT=3,000, FV=$100,000)
Jul 1 Interest Expense 2,180

Bonds Payable 820
Cash 3,000
To record the payment of interest
($100,000 x 6% x 6/12 = $3,000)
($108,983 x 4% x 6/12 = $2,180)
Dec 31 Interest Expense 2,163

Bonds Payable 837
Interest Payable 3,000
To accrue year-end interest and amortization
($100,000 x 6% x 6/12 = $3,000)
($108,163 x 4% x 6/12 = $2,163)
Ex. 116
Emery Trust Inc. issued $100,000, 5 year bond on January 1, 2018 paying 4% interest on a semi-annual basis
every January 1 and July 1.
Instructions
Using a financial calculator, prepare the first year journal entries for the bond issue and interest expense
assuming that the company uses the effective interest method, a market interest rate of 6% and has a year-
end of December 31, 2018.
Solution 116
Jan 1 Cash 91,470
Bonds Payable 91,470
To record the bond issue
(n=10, i=3, PMT=2,000, FV=$100,000)
Jul 1 Interest Expense 2,744

Bonds Payable 744
Cash 2,000
To record the payment of interest
($100,000 x 4% x 6/12 = $2,000)
($91,470 x 6% x 6/12 = $2,744)
Dec 31 Interest Expense 2,766

Bonds Payable 766
Interest Payable 2,000
To accrue year-end interest and amortization
($100,000 x 4% x 6/12 = $2,000)
($92,214 x 6% x 6/12 = $2,766)
Ex. 117
Calculate the selling price for each of the following bonds:
(a) 5% bonds with a par value of $100,000 due in 5 years, paying interest on January 1 and July 1 each year,
issued at par.
(b) Bonds with face value of $500,000, due in 10 years, paying 7% interest semi-annually, issued at par.
(c) Bonds with a face value of $1,000,000 and a coupon rate of 10%, issued to yield 12%, due in 10 years,
paying interest semi-annually.
(d) 8% bonds with a par value of $5,000,000 due in 5 years, paying interest on January 1 and July 1 each
year, issued to yield 6%.
Solution 117
(a) Present value of principal $78,120
Present value of interest 21,880
$100,000
(b) Present value of principal $251,283

$500,000
(c) Present value of principal $311,805

$885,301
(d) Present value of principal $3,720,470

Present value of interest 1,706,041
$5,426,511
Ex. 118
Harpers Group has $1,000,000 par value bonds with a coupon rate of 5% paid semi-annually. The bonds are
selling for $981,415.
Instructions
Using a financial calculator, determine the yield assuming the bonds mature in:
2 years
5 years
Solution 118
a)
PV = -$981,415
FV = $1,000,000
PMT = $1,000,000 x.025 = $25,000
N=4
CPT I/Y = 3.0%
b)
PV = -$981,415
FV = $1,000,000
PMT = $1,000,000 x.025 = $25,000
N = 10
CPT I/Y = 2.72%
MATCHING
119. Match the items below by entering the appropriate code letter in the space provided.
A. Operating line of credit F. Payroll deductions
B. Unsecured debt G. Times interest earned ratio
C. Mortgage H. Redeemable bonds
D. Market interest rate I. Contingent liabilities
E. Discount (on bonds payable) J. Financial liability
_____ 1. Bonds subject to retirement at a stated dollar amount prior to maturity at the option of the issuer
_____ 2. A long-term secured loan that pledges property as collateral
_____ 3. Pre-authorization by the bank to borrow money, up to a pre-set limit
_____ 4. Existing or possible obligations arising from past events
_____ 5. A measure of a company’s solvency
_____ 6. A form of financial instrument, represented by a contractual obligation to pay cash in the future
_____ 7. The rate investors demand for loaning funds to a corporation
_____ 8. Debt, such as notes or bonds, that has been issued against the general credit of the borrower
_____ 9. Occurs when the coupon interest rate is less than the market interest rate
_____10. Deductions from gross pay to determine the amount of a paycheque
ANSWERS TO MATCHING
1. H
2. C
3. A
4. I
5. G
6. J
7. D
8. B
9. E
10. F
SHORT-ANSWER ESSAY QUESTIONS
S-A E 120
Lucious Corporation maintains two separate accounts payable computer systems. One is known to all the
users, and is used to process payments to vendors. Employees enter the vendor code, or the name and
address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to
cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment
process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All
inquiries are made at the top management level, and very discreetly. No one but top management, the internal
audit staff, and the Board of Directors of the company is even aware of the second system.
Instructions
Is it ethical for a company to have a secret system like the one described? Explain.
Solution 120
Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact,
nearly all fraud and theft detection systems are secret. It is only the misuse of these systems, such as to obtain
unauthorized information, or to commit some other crime, that is unethical.
S-A E 121
Below is a list of independent situations:
1. A customer, John Doe, of Winkler Enterprises has sued for negligence in the amount of $500,000.
Winkler’s lawyers have advised that it is probable that the company will lose the case but could settle out of
court for $250,000.
2. An employee who was fired has filed a law suit against Gunderson Industries for wrongful dismissal.
Lawyers are defending the company but the outcome is uncertain.
3. Appliance Central manufactures and sells its over-the-range microwave with a 2-year warranty. In 2018 the
company sold $1,100 microwaves and based on history estimate an average of $40/microwave for
warranty repairs.
4. Arnprior Inc. has a year-end of October 31, 2018 and prepares and reports its financial statements on a
quarterly-basis. On November 5, 2018 the company’s manufacturing plant had a fire destroying a
substantial portion of the site.
Instructions
Discuss the type of liability, if any, and the way in which each should be treated/recorded under IFRS.
Solution 121
1. As it is probable that the company will lose the case and the amount can be reasonably estimated Winkler
Enterprises should record the estimated liability as a provision.
2. As the amount to be settled and the outcome is unknown this would be regarded as a contingent liability.
The company should disclose the contingent liability in the notes to the financial statements.
3. While the company does not know when the repairs will take place or exactly how much it will cost, these
costs are probable and can be estimated. The liability would be regarded as a provision. Appliance Central
should accrue the expense in the same period in which revenues were generated.
4. As the fire occurred after October 31, 2018 no entry would be recorded for the year end. (Instructor can
advise that this would be treated as a subsequent event and disclosed in the notes to the financial
statements).
S-A E 122
Your cousin Gerald runs a successful business, and now wants to borrow money to buy a new delivery van for
the business. He has never borrowed money from the bank before (always had interest-free loans from his
parents), and is confused after speaking to his loans officer, Mr Rich. He said he would be glad to lend Gerald
the money, but he needed to know if he wanted to pay the money back by paying monthly fixed principal
payments plus interest, or by paying monthly blended payments of principal and interest.
So he is asking you to explain this. “Does it make a difference how I repay the loan? I know I have to pay
interest, so what difference does the type of payment make? Will I pay more interest with one type, rather than
the other?”
Instructions
Explain to your cousin the difference between repaying a loan by fixed principal payments plus interest versus
blended payments.
Solution 122
First of all, it really doesn’t matter which way you go with this: you will pay approximately the same amount of
interest over the life of the loan. However, consumer loans such as this are generally repaid by making
blended payments. With blended payments, you pay the same amount each month, which makes it easier for
budgeting. Part of the payment goes to interest, and the rest goes to principal. As you go along, you will pay
less and less interest as the principal is reduced, thus more and more goes to pay off the principal.
With a fixed principal payments plus interest loan, this is exactly what it says. You will pay the same amount of
principal off each month. For instance, if you borrowed $27,000 for a three year term, you would pay
$27,000/36 = $750 on the principal each month, plus applicable interest. Again, as you go along and pay more
off the principal each month, the interest will reduce. This means that your payments will reduce as you go
along. You will start out paying larger payments than if it were a blended payment, but as time goes by, the
payments will become smaller.
S-A E 123
When determining the issue price of a bond using present value, what are the two components used in the
calculation?
Solution 123
One component is the periodic interest payments over the life of the bonds, discounted using the market
interest rate to calculate the present value. The other component is the present value of the face value to be
paid at maturity, also based on the market interest rate.
S-A E 124
Bonds can be issued at a discount, a premium or par. Identify any differences between the three types of
issues when using the effective interest method.
Solution 124
There are two areas that differ under the effective interest method:
1. BOND AMORTIZED COST
a) When a bond is issued at a discount the bond’s amortized cost increases to face value at maturity.
b) When a bond is issued at a premium the bond’s amortized cost decreases to face value at maturity.
c) When a bond is issued at par the bond’s amortized cost is equal to the face value at maturity.
2. INTEREST EXPENSE
a) When a bond is issued at a discount the periodic interest expense is greater than the interest payment.
b) When a bond is issued at a premium the periodic interest expense is less than the interest payment.
c) When a bond is issued at par the periodic interest expense is equal to the interest payment.
S-A E 125
Bonds are frequently issued at amounts higher or lower than face value. Describe how the market interest rate,
relative to the coupon interest rate, affects the selling price of bonds.
Solution 125
The market interest rate is often different from the coupon interest rate, and therefore bonds are frequently
issued at amounts higher or lower than face value. When the market interest rate is higher than the coupon
interest rate, investors can find better investments elsewhere, and consequently there is less demand for the
bonds. So to make the bonds more attractive, the issue price will be lowered and the bonds will be issued at a
discount. Conversely, if the market interest rate is lower than the coupon interest rate, there will be greater
demand for the bonds because of the higher interest rate. Thus, the issue price will be higher than face value
and the bonds will be issued at a premium.
S-A E 126
Sally Smith works for Peterson Press, a fairly large book publishing firm. Her best friend and rival, Molly
Murray, works for Lifeline Books, a smaller publisher. Both companies issued $100,000 in bonds on July 1.
Peterson's bonds were issued at a discount, while Lifeline's were issued at a premium. Molly sent Sally an
email the next day. She told Sally that it was obvious who the better publisher was—the market had shown its
preference! She reminded Sally again of her recent increase in salary as further proof of the superiority of
Lifeline Books.
Instructions
Draft a short note for Sally to send to Molly. Explain how such a result could occur.
Solution 126
Many answers are possible. The format should be fairly informal, and the point that a discount or premium is
not necessarily a judgement on the strength or weakness of a company should be addressed. A suggested
note follows:
Molly—
I can't believe that Lifeline can survive with people like you handling their money! I also can't
believe their lack of judgement in giving you a raise! Just kidding! Seriously, though, you can't
prove that Peterson is a bad company just by the bond price.
Our bonds were issued at a discount, not because of the market's evaluation of our company,
but because we underestimated interest rates. Lifeline got a premium because it overestimated
interest rates. You'll have to find some other evidence to prove your company is better (which
you can't, because it isn't.)
Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday?
How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans
change.
Sally
OBJECTIVE FORMAT QUESTIONS
127. Under IFRS, identify whether each of the following is a provision, contingent liability, or neither.
a) GHT Company Inc. purchased a historic building early this year and Choose an item.
renovations to the building are ongoing. An engineering company, hired by
GHT, has prepared a preliminary report stating there are likely structural issues
the company will need to address in the next year. Before the building can be
used it must pass inspection and this will not happen unless these issues are
resolved. They are not sure of the cost of reparation.
b) Goodfellow Motors Ltd. Noticed an error in one of their engine models, Choose an item.
GT35X. A recall has been issued to all of the car manufacturers who purchased
the GT35X model. The company is expecting to pay $4.7 million in repairs to fix
the issue.
c) A Long Ride Stable Inc. provides boarding and coaching services. Recently a Choose an item.
prize horse was injured while under their care. The owner has negotiated that A
Long Ride will need to pay 50% of the veterinary bills. The vet has not yet given
A Long Ride or the owner a quote.
d) Helga Cosmetics Inc. discovered their new organic face cream was not really Choose an item.
organic as the suppliers of the jojoba oil misrepresented their product. As a
result, Helga’s customers are unhappy and have filed a class action law suit.
e) True North Industries Ltd. offers a one-year warranty for every tent it sells. Choose an item.
On average for the last 2 years, 3% of all tents are returned under warranty.
The cost to fix an average repair is $35.
Solution 127
a) Contingent liability. The repairs, in this case, are highly probable but the amount is not yet determined.
Once the amount can be reasonably determined it can be recorded as a provision.
b) Provision. In this case, they are able to estimate the cost of the recall and the likelihood the costs will be
incurred is highly probable.
c) Contingent liability. The vet bill, in this case, is probable but the amount is not yet determined. Once the
amount can be reasonably estimated by the vet it can be recorded as a provision.
d) Contingent liability. In this case, a law suit has been filed; the cost is not yet determinable and could be
recovered from the supplier.
e) Provision. The existence of warranties give rise to the recognition of a provision as an obligation could
exist as soon as a sale occurs. Companies know the percentage of products, on average, that are
returned under warranty and the cost of the repairs; therefore, the cost of the repairs is both probable and
can be estimated so the amount should be recorded as a provision.
128. The current liabilities section of Boom Ltd.’s Statement of Financial Position is shown below.
Boom Ltd.
June 30, 2018
Current liabilities
Accounts payable $12,500
Provisions 2,500
Rent payable 3,875

Unearned revenue 7,500
Notes payable 15,000
Total current liabilities $41,375
Additional information:
1. The notes payable balance is for a 6-month loan taken by Boom on January 31, 2018. The loan is due
July 31, 2018. Interest (6%) and principal are due at maturity. No interest expense has yet been recorded
on this loan.
2. During 2017, 5% of the fireworks manufactured by Boom were returned due to faulty operation. This
percentage is normal and expected in this industry. The value shown under provisions for $2,500 is the
value of expected refunds the company will need to make for the period, based on 5% of sales in 2018.
3. During the period January 1 through June 30, unearned revenues were earned totalling $5,500. These
earned revenues are not reflected in the above statement.
4. While the following salaries and employee benefits have accrued for the month, they are not reflected in
the above statement:
Salaries accrued $10,000
CPP (employee share) $495
EI (employee share) $188
CPP (employer share) $495
EI (employer share) $263
Employee income tax payable $1,893
Instructions
Select all of the statements that are correct.
a) The current liabilities should include interest payable of $375.
b) The amount the company calculated under provisions should be zero as it is a contingent liability, not a
provision.
c) Unearned revenues as of June 30 should be $13,000.
d) Salaries payable on June 30 should be $7,424.
e) On June 30, the correct balance of current liabilities should be $47,691.
f) CPP payable as of June 30 will be $990.
g) The notes payable is correctly classified as a current liability.
Solution 128
a), d), f), and g) are correct while b), c), and e) are incorrect.
Students may find it easiest to prepare an adjusted Statement of Financial Position (partial) prior to answering
this question, as follows:
BOOM LTD.
June 30, 2018
Current liabilities Adjustments
Accounts payable $12,500 No change
Salaries payable 7,424 $10,000–$495–$188–$1,893
CPP payable 990 $495+$495
EI payable 451 $188+$263
Interest payable 375 $15,000x6%/12 x 5 months
Provisions 2,500 No change
Employee income tax payable 1,893 +$1,893
Rent Payable 3,875 No change
Unearned revenue 2,000 $7,500–$5,500

Notes payable 15,000 No change
Total current liabilities $47,008
b) The amount included as a provision for $2,500 is correct. Provisions are probable and can be estimated.
Since returns are a normal part of Boom’s business, they are probable. The historical record of 5% of units
sold returned provides a reasonable method of estimation in this case.
c) Unearned revenues should be $2,000. Unearned revenues would decrease by the revenues that have
been earned for the period. ($7,500 – $5,500 = $2,000).
e) As shown above, the current liabilities will be $47,008.
129. The following select data is shown for two backcountry lodges located in the Rocky Mountains, Alberta:
Spirit Creek Lodge Inc. and Big Mountain Lodge Ltd.:
Select financial data

For the period January 1 – December 31, 2018
Spirit Creek Lodge Inc. Big Mountain Lodge Ltd.

Interest expense $ 16,200 $ 58,000
Income tax expense 32,000 125,000
Net income 78,000 782,000
Total debt 135,000 1,628,500
Total assets 254,000 1,987,000
Instructions
a) The times interest earned ratios for Spirit Creek and Big Mountain are 4.8 times and 13.5 times,
respectively.
b) The debt to total assets ratio for Spirit Creek and Big Mountain are 53.1% and 82.0%, respectively.
c) Although Big Mountain is more indebted than Spirit Creek, Big Mountain can more easily cover its interest
payments than Spirit Creek.
d) Both Spirit Creek’s debt to total assets ratio and times interest earned ratio are better than Big Mountain’s.
e) Big Mountain’s debt position is likely not concerning as the company has sufficient income to cover
interest payments on debt.
f) It would be acceptable for Spirit Creek to assume more debt considering their low debt to total assets ratio.
g) Spirit Creek is in a better position in terms of solvency than Big Mountain.
Solution 129
b), c), and e) are correct.
a) In order to calculate times interest earned the numerator is EBIT (Earnings Before Interest and Taxes);
therefore, income tax expense and interest expense must be added back to net income. Spirit Creek
Times Interest Earned = ($78,000+$32,000+$16,200) ÷ $16,200 = 7.8 times; Big Mountain = ($782,000+
$125,000+$58,000) ÷ $58,000 = 16.7 times.
d) Spirit Creek’s debt to total assets ratio is higher than Big Mountain’s ratio (53.1% to 82.0%). Spirit Creek’s
debt to total assets = $135,000 ÷ $254,000 = 53.1%. Big Mountain’s debt to total assets = $1,628,500 ÷
$1,987,000 = 82.0%. However, Big Mountain can cover their interest payments better because that
company’s times interest earned ratio is higher (see the answer to item a) above).
f) Having a low debt to total assets ratio is just one consideration when structuring the relationship between
a company’s debt and equity levels. Just because a company has a low debt to total assets ratio does not
mean it can take on more debt especially if its times interest earned ratio is low. So both the debt to total
assets ratio and the times interest earned ratio need to be considered when taking on more debt.
g) Neither company is necessarily better off. Spirit Creek has less debt while Big Mountain has a higher times
interest earned ratio which indicates that it is more capable of paying interest on its debt.
*130. Select all of the following statements that are correct.

a) The term market interest rate has the same meaning as the terms effective interest rate and yield.
b) If a bond is sold at face value, the coupon interest rate will be equal to the market interest rate.
c) If a bond is sold at a discount, the interest expense recorded will include only the interest payments on the
principal.
d) It is more common for companies to sell bonds at face value than at a discount or premium.
e) The following chart depicts the relationship between the coupon rate and market interest rates for bonds:
Market Interest Sell at discount
Rate 3%
Coupon Interest Market Interest Sell at face value

Rate 4% Rate 4%
Market Interest Sell at premium

f) Rate payment
The journal entry to record the interest 6% on a bond issued at a premium will include a debit to
Interest Expense, a debit to Bonds Payable, and a credit to Cash.
Solution 130
a), b), and f) are correct.
c) When a company issues bonds at a discount, both the discount and the interest payments are considered
a cost of borrowing and are recorded as interest expense. Since the interest payments are based on the
coupon interest rate which was lower than the going market interest rate, the company did not receive the
full face value of the bond when they were issued. If the market interest rate and the coupon interest rate
were equal, the company would have received the full face value of the bond when they were issued.
Therefore, the difference between the face value and the price is a cost of borrowing.
d) It is more common for companies to sell bonds at a discount or premium. Market interest rates fluctuate on
a daily basis. By the time a company has printed its bond certificates and sells these on the market, it is
likely the market interest rate will be different than the coupon interest rate stated on the bond.
e) This chart does not correctly depict the relationship between the coupon interest rate and the market
interest rate. If the market interest rate is lower than the coupon interest rate, the company will be able to
sell the bond at a premium as the investor will be receiving higher interest payments with their bond
investment than they would if they invested in the market. If the market interest rate is higher than the
coupon interest rate, the company will need to sell the bonds at a discount as an investor could earn more
if they purchase other financial instruments than if they buy the bonds. The chart shows that a bond will be
sold for face value if the market interest rate is equal to the coupon interest rate, which is correct.
131. The following bond amortization schedule prepared for Bailey Investments Inc. relates to a 5-year bond
issue with a face value of $500,000 that was sold on January 1, 2018 for which interest payments are made
semi-annually on June 30 and December 31.
Bailey Investments Inc.

Bond Amortization Schedule
Bond
Interest Interest Interest Discount Unamortized Carrying
Period Payment Expense Amortization Discount Amount
01-Jan-18 $ 20,277 $479,723
30-Jun-18 $17,500 $19,189 $1,689 18,588 481,412
31-Dec-18 17,500 19,256 1,756 16,832 483,168
30-Jun -19 17,500 19,327 1,827 15,005 484,995
31-Dec-19 17,500 19,400 1,900 13,105 486,895
30-Jun -20 17,500 19,476 1,976 11,129 488,871
31-Dec-20 17,500 19,555 2,055 9,074 490,926
30-Jun-21 17,500 19,637 2,137 6,937 493,063
Instructions
a) The interest payment on December 31, 2023 will be $17,500.
b) The coupon rate on the bond is 8% per annum.
c) The bond carrying amount on December 31, 2022, after the interest payment will be $500,000
d) After the interest payment of June 30, 2022, the unamortized discount balance will be $2,403 (rounded to
the nearest dollar)
e) The bond was issued at a premium.
f) The market interest rate is 8%.
g) The amount of cash received on the issuance of the bond was $500,000.
h) The interest expense for the six month period ending December 31, 2021 is $17,500.
Solution 131
c), d), and f) are correct.
a) The bond matures on December 31, 2022; therefore, the interest will be zero.
b) The coupon rate is 7% per annum. The coupon rate is determined by dividing the annual interest payment
by the face value of the bond issue.
Semi-annual interest payment = $17,500
Annual interest payment = $17,500 x 2 = $35,000
Coupon rate = $35,000/$500,000 = 7%
d) Is correct, refer to completed table below
e) The bond was issued at a discount. The face value of $500,000 is more than the cash proceeds from the
bond sale of $479,723. The bond was sold at a discount of $20,277.
f) Is correct. The market interest rate can be calculated using the information on the amortization table that
was given: $19,189 ÷ $479,723 = 4% x 2 = 8% annual rate.
g) The amount the company received on issuance of the bond was the discounted value of $479,723. Since
the market interest rate was higher than the bond coupon rate, investors would not pay the full face value
of the bond.
h) The semi-annual interest payable is $17,500 but the interest expense is based on the bond carrying
amount multiplied by the semi-annual market rate (8%/2 = 4%). Here is a full amortization schedule for the
bond issue. The interest expense for the six month period ending December 31, 2021 is $19,723. An
alternative is to take the carrying amount at June 30, 2021 $493,063 x 4% = $19,723 rounded to the
nearest dollar.
Bailey Investments Inc.

Bond Discount Amortization Schedule
Interest Interest Interest Discount Unamortized Bond Carrying
Period Payment Expense Amortization Discount Amount
01-Jan-18 $20,277 $479,723
30-Jun-18 $17,500 $19,189 $1,689 18,588 481,412
31-Dec-18 17,500 19,256 1,756 16,832 483,168
30-Jun-19 17,500 19,327 1,827 15,005 484,995
31-Dec-19 17,500 19,400 1,900 13,105 486,895
30-Jun-20 17,500 19,476 1,976 11,129 488,871
31-Dec-20 17,500 19,555 2,055 9,074 490,926
30-Jun-21 17,500 19,637 2,137 6,937 493,063
31-Dec-21 17,500 19,723 2,223 4,714 495,286
30-Jun-22 17,500 19,811 2,311 2,403 497,597
31-Dec-22 17,500 $19,903* 2,403 0.00 500,000
*Rounded by $1
LEGAL NOTICE
Copyright © 2017 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.

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CHAPTER 10

REPORTING AND ANALYZING LIABILITIES

LOD: E = Easy M = Medium H = Hard

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

LOD: E = Easy M = Medium H = Hard

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Type: TF = True-False MC = Multiple Choice Ma = Matching

CHAPTER LEARNING OBJECTIVES

5. Interest expense on a bank loan payable is only recorded at maturity.

12. Unearned revenue is a financial liability.

15. Secured notes are often also referred to as mortgages.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

30. The entry to record interest expense on a bank loan payable is a

31. Which of the following statements is true?

Use the following information to answer questions 32–33.

32. The March 31 entry to record property tax should be

34. Which of the following statements is false?

36. Failure to record a liability will probably

39. Interest expense on a note payable, with interest due at maturity, is

Use the following information for questions 40–41.

(d) Cash.............................................................................................. 150,000

Use the following information for questions 42–43.

42. What adjusting entry is required at December 31, 2018?

46. Harmonized Sales Tax (HST) collected by a retailer are expenses

Use the following information to answer questions 47–48.

50. A financial liability is a

51. One example of a liability that is not a financial liability is

53. Under ASPE, a contingent liability is recorded in the accounting records

54. Which of the following statements is true?

55. Which of the following statements is false?

58. A long-term note secured by collateral maybe referred to as a

d) prime principal payments

63. Long-term notes may have

65. Instalments can be paid

67. Blended principal and interest payments are repayable in

68. Which of the following statements is true?

69. Which of the following statements is true?

70. The relationship between current assets and current liabilities is

(a) useful in determining profitability.

71. Liquidity ratios measure a company's

72. A measure of a company's solvency is the

73. The times interest earned ratio is calculated by dividing

75. Off-balance sheet financing usually is found in connection with

76. Which of the following statements is true?

84. The market interest rate is often called the

87. For bond amortization, private companies reporting under ASPE

Use the information below to answer questions 89–90.

Solution: $502,774 x.03= $15,083

91. How much is the discount or premium on the bond?

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans.

Solution 93 (10–15 min.)

(b) Cash.............................................................................................. 141,250

Cost of Goods Sold ($125,000 × 50%).......................................... 62,500

Solution 94 (10 min.)

(b) Jun 30 Interest Expense ($160,000  3%  3/12)................... 1,200

(c) Dec 1 Bank Loan Payable..................................................... 160,000

Solution 95 (10 min.)