financial accounting tools for business decision making 6e solution manual chapter 10

Included in current liabilities would be the principal portion of any loans or debt that will be paid in the next year.. The main difference between the two types of notes is that long-t

CHAPTER 10 Reporting and Analyzing Liabilities

ASSIGNMENT CLASSIFICATION TABLE

Brief Exercises Exercises

A Problems

10, 11, 12, 8, 9, 10 1A, 2A, 4A,

5A, 6A, 7A, 8A, 10A

1B, 2B, 4B, 5B, 6B, 7B, 8B, 10B

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

4A Prepare instalment payment schedule; record and

present instalment note

5A Prepare instalment payment schedule; record and

present instalment note

*10A Calculate present value; prepare amortization

schedule; record and present bond transactions

4B Prepare instalment payment schedule; record and

present instalment note

5B Prepare instalment payment schedule; record and

present instalment note

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Difficulty Level

Time Allotted (min.)

*10B Calculate present value; prepare amortization

schedule; record and present bond transactions

ANSWERS TO QUESTIONS

1 Accounts payable and short-term notes payable are both forms of credit used by a business to acquire the items they need to operate Both represent obligations of the business to repay amounts in the future and are therefore considered to be liabilities However, an account payable is normally for a shorter period of time (e.g., 30, 60, 90 days) than a note payable A note payable usually provides for a longer period of time

to settle the amount owing

A note payable involves a more formal arrangement than an account payable A note payable is an obligation in written form and will provide documentation if legal action is required to collect the debt As well, a note payable often requires the payment of interest because it is generally used when credit is to be granted for a longer period of time than for an account payable

2 An operating line of credit, or credit facility, is used by a business to overcome term cash demands or temporary cash shortfalls that invariably happen during the operating cycle It is not usually intended to be a permanent type of financing and is generally used for operations When needed, the funds are used and then repaid as the liquidity improves and cash becomes available from operations Bank loans on the other hand are structured in such a way to deal with more short-term or long-term cash needs of the business Longer type loans are used to finance the purchase of property, plant, and equipment and short-term bank loans would be used to finance inventory Bank loans are for specific amounts that have structured terms for the repayment of the principal

short-3 Disagree The company only serves as a collection agent for the taxing authority It does not keep and report sales tax as revenue; it merely forwards the amount paid by the customer to the government Therefore, until it is remitted to the government, sales tax is reported as a current liability on the statement of financial position

4 A difference exists in the timing of the incurrence of the expense for property tax and the timing of the payment of the property tax bills Due to this difference, at any reporting period, the balance can shift from a liability when the property tax bill is received, to a prepayment when it is paid In addition, an expense must be recorded as the property tax prepayment is used up

5 The difference between (a) gross pay (the total amount an employee earned in salary

or wages) and net pay stems from the payroll deductions deducted from the gross pay

of an employee Some of the deductions are mandatory, such as income tax, and some are optional such as donations to charities In turn, the difference between (b) deductions withheld from an employee (i.e., deducted from an employee’s pay), and employee benefits, is the employee benefits are paid by the employer only They are not part of the employee’s gross earnings These employer paid benefits include required payments for CPP and EI, for example

Answers to Questions (Continued)

6 When determining whether a contingent liability should be accrued as a provision, management must first assess the level of uncertainty concerning the outcome of a future event that will confirm either the existence or the amount payable or both Under IFRS, if the outcome of a future event is probable and a reasonable estimate can be made of the amount expected to be paid, the amount will appear as a current liability

on the statement of financial position Probable, in this case means “more likely than not” which is normally interpreted to mean that there is more than a 50% probability of occurring The details of the reasons for the accrual will also be outlined in the financial statement notes If the outcome is not probable or if the amount cannot be reasonably estimated, the details of the contingent liability will be disclosed in the notes to the financial statements On the other hand, if the company is reporting under ASPE, the probability needs to be “likely.” This is a higher level of probability that the standard used in IFRS

7 Shoppers must report details of any outstanding claims or possible claims even though the amount of any claim cannot be reasonably determined This disclosure helps the readers of the financial statements assess any future possible consequences that might come about concerning these potential claims Since they cannot be measured, the amounts cannot be recorded as provisions Unrecorded claims or possible claims are contingent liabilities

8 Current liabilities include those payments that are going to be due for payment in one year from the financial statement date Non-current liabilities are to be paid beyond that period Included in current liabilities would be the principal portion of any loans or debt that will be paid in the next year Consequently, care must be taken to disaggregate balances of such non-current loans or mortgages to ensure that the current portion of the debt is properly classified as a current liability

9 Long-term instalment notes are similar to short-term notes in that they both provide written documentation of a debtor’s obligation to the lender The main difference between the two types of notes is that long-term instalment notes have maturities that extend beyond one year and have principal repayments included in the periodic payments required by the note

For both types of notes, interest expense is calculated by multiplying the outstanding principal balance by the interest rate However, because a portion of the principal balance is usually repaid periodically throughout the term of a long-term instalment note, the outstanding principal balance will change (decrease) In contrast, the principal balance does not change throughout the term of a short-term note

Answers to Questions (Continued)

10 Instalment notes usually require the borrower to pay down a portion of the principal

through fixed periodic payments relating to the principal along with any interest that was due at that time Each time a payment is made, a constant amount of principal repayment is deducted from the note The total payment amount will decline over time

as the interest expense portion decreases due to reductions in the principal amount of the note

An instalment note with a blended principal and interest payment is repayable in equal periodic amounts and results in changing amounts of interest and principal being applied to the note The total payment remains the same over the life of the note but the portion applied to the principal increases over time as the interest portion decreases due to reductions in the principal amount of the note

11 It is a blended payment pattern Instalment notes with blended principal and interest

payments are repayable in equal periodic amounts, including interest Instalment notes payable with fixed principal payments are repayable in equal principal periodic amounts, plus interest

12 (a) A student choosing the floating rate loan will initially pay less interest, but as the

prime lending rate changes so does the amount of interest that is charged on the balance owed on the loan Since the loan repayment is typically several years in length, this changing of interest rate reduces the risk to the financial institution to get a proper return on their loan to the student With the fixed interest rate, the initial interest rate paid is higher, but the rate does not change over the term of the loan (b) If, in the view of the student, interest rates are expected to rise, the fixed rate of interest is the better choice On the other hand, if interest rates are expected to remain steady or fall, the variable rate loan would be the better choice

13 Doug is incorrect because the amount of interest paid each month will decrease as

payments are made and the outstanding (remaining) principal balance decreases The amount of interest is calculated as a percentage of the outstanding principal amount Because the monthly cash payment remains constant, over time, greater portions of the payment will be applied to the principal thereby more rapidly reducing the balance

of the mortgage

Answers to Questions (Continued)

14 (a) Current liabilities should be presented in the statement of financial position with

each major type shown separately They are normally listed in order of maturity, although other listing orders are also possible The notes to the financial statements should indicate the terms, including interest rates, maturity dates, and other pertinent information such as assets pledged as collateral

(b) The nature and the amount of each non-current liability should be presented in the statement of financial position or in schedules included in the accompanying notes

to the statements The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral

15 Liquidity ratios measure the short-term ability of a company to repay its maturing

obligations Ratios such as the current ratio, receivables turnover, and inventory turnover can be used to assess liquidity

Solvency ratios measure the ability of a company to repay its total debt and survive over a long period of time Ratios that are commonly used to measure solvency include debt to total assets and times interest earned ratios

16 An operating line of credit, or credit facility, is used by a business to overcome

short-term cash demands that invariably happen during the operating cycle It is not usually intended to be a permanent type of financing and is generally used for operations When needed, the funds are used and then repaid as the liquidity improves and cash becomes available from operations As a consequence, the business does not incur the constant charge for interest on a long-term debt loan and can save on interest costs The liquidity issues of a business can therefore be effectively dealt with using an operating line of credit

17 A company’s debt to total asset ratio should be measured in terms of its ability to

manage its debt A company may have a high debt to total asset ratio but still be able to meet its interest payments because of high profits Alternatively, a company with a low debt to total assets may find itself in financial difficulty if it does not have sufficient profit

to cover required interest payments Therefore, it is important to interpret these two ratios in conjunction with one another

18 A company with significant operating leases has obligations that are reported in the

notes to the financial statements rather than on the statement of financial position This

is referred to as off-balance sheet financing The existence of these off-balance sheet forms of financing highlights the importance of including the information contained in the notes in any analysis of a company’s solvency These notes also help the financial statement user forecast the amount of the future cash outflows that will occur to satisfy these lease commitments

Answers to Questions (Continued)

19 (a) A bond is a form of a long-term note payable They are similar in that both have

fixed maturity dates and pay interest The most significant difference between a note payable and a bond is that bonds are often traded on the stock exchange, whereas few notes are In addition, bonds tend to be issued for much larger amounts than notes Because of these differences, generally only large companies use bonds as a form of debt financing

(b) When it comes to large sums of money, a business would consider the issue of shares or bonds for obtaining the necessary cash Both would be traded on the stock exchange Bonds are classified as debt on the statement of financial position and common shares are classified as equity Bonds require principal and interest payments; common shares do not have to be repaid The board of directors may choose to pay dividends to the common shareholders, however

20 Investors paid more than the face value of the bond; therefore, the market interest rate

must have been less than the coupon interest rate Investors are willing to pay more for a bond that offers a coupon rate of return greater than the rate offered in the market The demand for this bond then causes the price to increase above its face value

21 (a) When a bond is sold at a discount, the proceeds received are less than the face

value of the bond because the stated rate of interest that the bond offers is lower than the market interest rate This has made the bond less attractive to investors who will increase the return they get from the bond buy paying less than its face value The bond discount is considered to be an additional cost of borrowing This additional cost of borrowing should be recorded as additional interest expense over the term of the bond through a process called amortization Initially, the discount is recorded by showing the Bond Payable at an amount lower than its face value but over time, this account is increased (credited) so that it will be equal

to its face value by the time it matures The offsetting debit is made to interest expense This is the additional interest expense incurred by the company for selling a bond at a discount When interest is actually paid, this amount is added to interest expense So interest expense will consist of a portion that is paid and a portion relating to the amortization of the discount thereby making it greater than the interest paid

Answers to Questions (Continued)

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

a portion that is paid and a portion relating to the amortization of the premium thereby marking it lower than the interest paid

SOLUTIONS TO BRIEF EXERCISES

($6,000 × 9.975%)] 899

BRIEF EXERCISE 10-2

(a)

Apr 30 Property Tax Expense ($36,000 ÷ 12 × 4) 12,000

Property Tax Payable 12,000 (b)

July 15 Property Tax Payable 12,000

Property Tax Expense ($36,000 ÷ 12 × 2.5) 7,500 Prepaid Property Tax ($36,000 ÷ 12 × 5.5) 16,500 Cash 36,000 (c)

Dec 31 Property Tax Expense 16,500

Prepaid Property Tax 16,500

BRIEF EXERCISE 10-3

(a) Aug 22 Salaries Expense 15,000

Income Tax Payable 6,258

CPP Payable 743

EI Payable 267

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

EI Payable 374

(c) Sept 1 Income Tax Payable 6,258 CPP Payable ($743 + $743) 1,486 EI Payable ($267 + $374) 641

Cash ($6,258 + $1,486 + $641) 8,385 BRIEF EXERCISE 10-4 (a) July 1 Cash 60,000 Bank Loan Payable 60,000 (b) (1) Aug 1 Interest Expense ($60,000 × 5% × 1/12) 250

Cash 250

(2) Aug 31 Interest Expense 250

Interest Payable 250

(3) Sept 1 Interest Payable 250

Cash 250

(4) Oct 1 Interest Expense 250

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

Cash 60,000

BRIEF EXERCISE 10-5

a) Record and disclose (likely is a higher level Record and disclose

of probability than more likely than not)

BRIEF EXERCISE 10-6

a) The advantage of the fixed interest rate option is that the rate will not change during the

10 year period, regardless of what happens to interest rates in the future One could view this feature as a disadvantage in that a decline in interest rates will not result in a

reduction of interest costs In order to lock in the interest rate for such a long period of time, the monthly instalment payment and the amount of interest is higher

The disadvantage of the fixed interest rate option becomes the advantage of the floating interest rate option When interest rates decline, the loan interest and the monthly

instalment payment are reduced The disadvantage is that if interest rates increase, the opposite will occur

b) Students generally have limited income upon graduation and so the additional risk of possible increases in instalment payments for student loans should be avoided The fixed interest rate is recommended Alternately, choosing the floating rate makes the initial monthly payments smaller, during the time when earnings may be at their lowest As long

as rates do not increase too much, it could be the less expensive alternative

[5] $10,000 fixed principal reduction [6] + $2,100 = $12,100

[6] $10,000 fixed principal reduction

(B) Interest Expense (D) × 7% ÷

12 mos

(C) Reduction

of Principal ($300,000 ÷ 120)

(D) Principal Balance (D) – (C) Nov 30, 2014

Mortgage Payable 2,500 Cash 4,250

2015

Jan 31 Interest Expense 1,735

Mortgage Payable 2,500 Cash 4,235

BRIEF EXERCISE 10-9 (Continued)

(b) Blended principal and interest payment

Monthly

Interest

Period

(A) Cash Payment

(B) Interest Expense (D) × 7% ÷

12 mos

(C) Reduction

of Principal (A) – (B)

(D) Principal Balance (D) – (C) Nov 30, 2014

Dec 31, 2014

Jan 31, 2015

$3,483 3,483

$1,750 1,740

$1,733 1,743 01476.73

$300,000 298,267 296,524 22,000

2014

Nov 30 Cash 300,000

Mortgage Payable 300,000 Dec 31 Interest Expense 1,750

Mortgage Payable 1,733 Cash 3,483

2015

Jan 31 Interest Expense 1,740

Mortgage Payable 1,743 Cash 3,483

non-BRIEF EXERCISE 10-11

(in USD millions)

(a) Current ratio

(a) Debt to total assets Improvement

Times interest earned Deterioration

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

*BRIEF EXERCISE 10-13

(a) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 2.5% (5% × 6/12)

Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12)

Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods

Present value of $15,000 received each of 10 periods

(b) Key inputs: Future value (FV) = $500,000

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

Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12)

Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods

Present value of $15,000 received each of 10 periods

Present value (issue price) of the bonds (rounded to $500,000) $500,000

This is rounded because we know that there would be no

discount or premium because the market and stated rate are equal

(c) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 3.5% (7% × 6/12)

Interest payment (PMT) = $15,000 ($500,000 × 6% × 6/12)

Number of semi-annual periods (n) = 10 (5 years × 2)

Present value of $500,000 received in 10 periods

Present value of $15,000 received each of 10 periods

Note to the instructor: Rounding discrepancies may arise depending on whether present

value tables, calculators, or a spreadsheet program is used to determine the present value

*BRIEF EXERCISE 10-14

Bond Premium Amortization

(B) Interest Expense (5% × 6/12

= 2.5%)

(C) Premium Amor- tization (A) – (B)

(D) Unamor- tized Premium (D) – (C)

(E) Bond Carrying Amount ($500,000 + D)

Interest Expense (6% × 6/12

= 3%)

Bond Carrying Amount ($500,000)

(B) Interest Expense (7% × 6/12

= 3.5%)

(C) Discount Amortization (A) – (B)

(D) Unamortized Discount (D) – (C)

(E) Bond Carrying Amount ($500,000 – D)

$16,772 16,834

$1,772 1,834

$20,791 19,019 17,185

$479,209 480,981 482,815

*BRIEF EXERCISE 10-15

(a)

Jan 1 Cash 521,881

Bonds Payable 521,881 July 1 Interest Expense 13,047

Bonds Payable 1,953 Cash 15,000

Dec 31 Interest Expense 12,998

Bond Payable 2,002 Interest Payable 15,000

(b)

Jan 1 Cash 500,000

Bonds Payable 500,000 July 1 Interest Expense 15,000

Dec 31 Interest Expense 16,834

Bond Payable 1,834 Interest Payable 15,000

SOLUTIONS TO EXERCISES

EXERCISE 10-1

Assets Liabilities Shareholders’

EXERCISE 10-2

(a)

Mar 17 Cash 56,000

Sales 50,000 Sales Tax Payable ($2,500 + $3,500) 6,000

May 1 Property Tax Expense ($52,800 ÷ 12 × 4) 17,600

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

Prepaid Property Tax ($52,800 ÷ 12 × 6) 26,400

Property Tax Payable 17,600

Cash 52,800

Aug 15 Salaries Expense 81,000

CPP Payable 4,010

EI Payable 1,442 Income Tax Payable 16,020 Pension Payable 6,400 Cash 53,128

15 Employee Benefits Expense 6,029

CPP Payable 4,010

EI Payable 2,019 Oct 1 Cash 100,000

Bank Loan Payable 100,000

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

Cash 333

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

Cash 333

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

Interest Payable 333

Interest Payable 6,250 Bank Loan Payable 250,000

Interest Payable ($3,125 + $6,250) 9,375 Cash 259,375 (b) TD Bank

(1) Oct 1, 2014 Notes Receivable 250,000

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

Interest Revenue 3,125 ($250,000 × 5% × 3/12)

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

Interest Revenue 6,250 Cash 259,375

Interest Receivable ($3,125 + $6,250) 9,375 Notes Receivable 250,000

EXERCISE 10-4

(a) It would be appropriate for Walmart to accrue a liability as a provision, rather than only disclose the item as a contingent liability when a reasonable estimate can be made of the amount of the claim and when a payment to the claimant in the lawsuit is “more likely than not” to occur

(b) If Walmart were reporting under ASPE, the probability of the contingent liability becoming

a liability needs to be “likely” before it is accrued as a provision The probability level required is higher than that used under IFRS, which is “more likely than not.”

(B) Interest Expense (D) × 5% × 6/12

(C) Reduction

of Principal ($150,000 ÷ 20)

(D) Principal Balance (D) – (C) Dec 31, 2014

June 30, 2015

Dec 31, 2015

$11,250 11,063 01

$3,750 3,3,,5$3,563

$7,500 7,500 01476.73

$150,000 142,500 135,000 22,000Issue of Mortgage

2014 Dec 31 Cash 150,000

Mortgage Payable 150,000

First Instalment Payment

2015 June 30 Interest Expense ($150,000 × 5% × 6/12) 3,750

Mortgage Payable 7,500 Cash 11,250 Second Instalment Payment

Dec 31 Interest Expense

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

EXERCISE 10-5 (Continued)

(a) and (b) (Continued)

(2) Blended principal and interest payment

Semi-annual

Interest

Period

(A) Cash Payment

(B) Interest Expense (D) × 5% × 6/12

(C) Reduction

of Principal (A) – (B)

(D) Principal Balance (D) – (C) Dec 31, 2014

June 30, 2015

Dec 31, 2015

$9,622 9,622 01

$3,750 3,603 0

$5,872 6,019 01476.73

$150,000 144,128 138,109 22,000Issue of Mortgage

2014 Dec 31 Cash 150,000

Mortgage Payable 150,000

First Instalment Payment

2015 June 30 Interest Expense

($150,000 × 5% × 6/12) 3,750 Mortgage Payable 5,872 Cash 9,622 Second Instalment Payment

Dec 31 Interest Expense [($150,000

– $5,872) × 5% × 6/12] 3,603 Mortgage Payable 6,019 Cash 9,622

(c) Interest expense for the six month period ending June 30, 2015 is in the same amount

of $3,750 whether the payment is blended or based on fixed principal payments because for this first period, the amount of the principal balance of the loan is the same

at the initial amount of $150,000 Once the six month period is completed, the principal balance of the mortgage payable on which interest changes are applied changes by a different amount based on whether the principal payment is fixed or is blended with interest based on the repayment terms of the loan

(B) Interest Expense (D) × 6%

(C) Reduction

of Principal (A) – (B)

(D) Principal Balance (D) – (C) July 1, 2014

June 30, 2015

June 30, 2016

$4,909 4,909

$540

278

$4,369 4,631

$9,000 4,631

0

(b) 2014

(1) July 1 Cash 9,000

Notes Payable 9,000 (2) Dec 31 Interest Expense ($540 × 6/12) 270

Interest Payable 270 (3) 2015

June 30 Interest Expense 270

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

Interest Payable 139 After making the above entry the company would have two current liabilities relating to the note as follows:

Current liability

Non-current portion = $20,950.10 + $21,997.60 = $42,947.70

EXERCISE 10-8

(a) Current liabilities would likely include:

Accounts payable and accrued liabilities

Current portion of long-term debt

Income taxes payable

Provisions

Unearned revenue

Non-current liabilities would likely include:

Deferred income taxes

Long-term debt

Pension liabilities

Depending on when the liability will become due, some items listed above under current could instead be current As well, some items listed above as current could be non-current or portions of the balances could be non-current; examples include: Provisions and Unearned Revenue

non-EXERCISE 10-8 (Continued)

(b)

SHAW COMMUNICATIONS INC

Statement of Financial Position (partial)

August 31, 2012 (in thousands) Current liabilities

Accounts payable and accrued liabilities $ 811

Provisions 27

Income taxes payable 156

Unearned revenue 157

Current portion of long-term debt 451

Total current liabilities 1,602 Non-current liabilities

Long-term debt 4,812

Deferred income taxes 1,085

Pension liability 401

Total liabilities $7,900

(b) Current ratio for 2015:

Before:

$6,244

= 1.4:1

$4,503 After:

$6,244 - $1,000

= 1.5:1

$4,503 - $1,000 Paying off the $1 million improves Fruition’s current ratio from 1.4:1 to 1.5:1 This is because $1 million represents a greater percentage of the denominator than it does the numerator The greater percentage decrease to the denominator makes the ratio rise (c) Having access to an operating line of credit means that cash is available on a short-term basis and therefore the assessment of the company’s short-term liquidity is better than it first appeared Although the ability to access cash improves the liquidity position,

it does not necessarily mean that drawing down the operating line of credit will improve the current ratio If the unused line of credit were to be fully drawn down, Fruition’s current assets would increase by the addition of $4 million of cash At the same time, the current liabilities would increase by the addition of a $4 million bank loan payable

As is demonstrated in the calculation below, the current ratio would deteriorate to 1.2:1

$4,503 + $4,000

Buhler Industries Inc.’s debt to total assets ratio improved in 2012, with a decline from 40.2% to 35.8% The company’s times interest earned ratio increased from 6.2 times in

2011 to 6.6 times in 2012 This reveals an improvement in solvency

(b) Having access to an operating line of credit means that cash is available on a term basis Of the total line of credit available in the amount of $60 million, $13 million has been drawn down by the end of the 2012 fiscal year and is therefore included in the total liabilities of $89.83 million The amount drawn down of $13 million would be shown

short-as bank loan payable in the current liability section of the statement of financial position

It is not shown as non-current liability because it does not have a fixed payment date beyond one year from the end of the current year

*EXERCISE 10-11

(a) The BC Provincial bonds were issued at a discount

(b) The Bank of Montreal bonds were issued at a premium

(c) One reason the prices of the two bonds differed is because a bond price is based on the market rate of interest not the coupon rate of interest Although the market rate of interest is very close in amount for two bonds, the coupon rate of interest for the Bank

of Montreal bond is almost double that of BC Provincial This difference in cash flow from the coupon or contractual interest rate would explain a large portion of the premium recorded on the issuance of the Bank of Montreal bond Also, investors probably believed there is a different credit risk level for each issuer of the bonds and this could have an effect on the selling prices of the bonds The lower the amount of risk, the higher will be the premium paid by the investor

Interest payable $ 10,000

Non-current liabilities

(f) Interest expense is calculated by multiplying the carrying value of the bonds by the market rate of interest With each semi-annual payment, the carrying amount of the bonds increases, from the semi-annual amortization of the discount, and consequently, the amount of interest expense increases

(g) The carrying amount of the bonds will be equal to the face value of the bonds of

$1,000,000 as the entire amount of the discount will have been amortized

*EXERCISE 10-14

(a) Key inputs: Future value (FV) = $1,000,000

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

Interest payment (PMT) = $25,000 ($1,000,000 × 5% × 6/12)

Number of semi-annual periods (n) = 20 (10 years × 2)

Present value of $1,000,000 received in 20 periods

Present value of $25,000 received each of 20 periods

Note to the instructor: Rounding discrepancies may arise depending on whether

present value tables, calculators, or a spreadsheet program is used to determine the present value

Cost of Goods Sold 24,000 Merchandise Inventory 24,000

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

Property Tax Payable 4,500

As we are now in the third month, expense 3 months of property taxes

12 Unearned Revenue 11,300

Service Revenue 10,000

13 Sales Tax Payable 5,800

Cash 5,800

16 CPP Payable ($1,340 + $1,340) 2,680

EI Payable ($468 + $655) 1,123 Income Tax Payable 5,515 Cash 9,318

31 Employee Benefits Expense 1,191

CPP Payable 792

EI Payable 399

PROBLEM 10-1A

PROBLEM 10-1A (Continued)

(b) Mar 31 Interest Expense 50

EI payable ($1,123 – $1,123 + $285 + $399) 684 Interest payable 50 Total current liabilities $35,388

(a) Sept 1 Merchandise Inventory 15,000

Accounts Payable 15,000

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

PROBLEM 10-2A (Continued)

Sept 1 Bal 12,000

Dec 31Bal 45,000 (c)

Bank loan payable $45,000 Notes payable 15,000

(a) Table not required but source for detailed calculations

Quarterly

Interest Period

Cash Payment

Interest Expense 8% × 3/12

Reduction of Principal

Principal Balance

2015

Mar 31 Interest Expense 18,333

Bank Loan Payable 83,333 Cash 101,666

PROBLEM 10-3A

PROBLEM 10-3A (Continued)

(d) Table not required but source for detailed calculations

Quarterly

Interest Period

Cash Payment

Interest Expense 8% × 3/12

Reduction of Principal

Principal Balance

2015

Mar 31 Interest Expense 18,509

Bank Loan Payable 76,051 Cash 94,560

(a)

Semi-annual

Interest Period

Cash Payment

Interest Expense 6.5% × 6/12

Reduction of Principal

Principal Balance

$700,000

0674,605

0648,385 621,313

0593,361

(b) 2014

June 30 Cash 700,000

Mortgage Payable 700,000 (c) 2014

Dec 31 Interest Expense 22,750

Mortgage Payable 25,395 Cash 48,145

2015

June 30 Interest Expense 021,925

Mortgage Payable 26,220 Cash 48,145

(d)

STARLIGHT GRAPHICS LTD

Statement of Financial Position (Partial)

June 30, 2015 Current liabilities

Current portion of mortgage payable $ 55,024*

(a)

Period

July 31 Notes Payable 8,333

Interest Expense 3,000 Cash 11,333 Oct 31 Notes Payable 8,333

Interest Expense 2,750 Cash 11,083

PROBLEM 10-5A