Chapter 11 Current Liabilities and Contingencies

Chapter 11 Current Liabilities and Contingencies Copyright © 2014 Pearson Canada Inc. 11-1

Chapter 11 Current Liabilities and Contingencies

• Problems

P11-1. Suggested solution:

Item Liability Financial or non-financial obligation? Explanation

• Accounts payable F
• Warranties payable N Obligation is to deliver

goods or services

• USD bank loan F
• Bank overdraft F
• Sales tax payable N Obligation is not contractual

in nature

• Notes payable F
• Unearned revenue N Obligation is to deliver

goods or services

• Finance lease obligation F
• HST payable N Obligation is not contractual

in nature

• Bank loan F
• Bonds payable F
• Obligation under customer

loyalty plan N Obligation is to deliver goods or services

• Income taxes payable N Obligation is not contractual

in nature

P11-2. Suggested solution:

To be classified as a liability, the item must: i) be a present obligation; ii) have arisen from a past event; and iii) be expected to result in an outflow of economic benefits. This is an “and” situation as all three criteria must be present before a liability is recorded. The precise amount of the obligation need not be known, provided that a reliable estimate can be made of the amount due.Provisions are liabilities in which there is some uncertainty as to the timing or amount of payment.

Trade accounts payable meet the criteria of a liability as set out below:

• Present obligation: The debtor is presently contractually obliged to pay for goods or services

received.

• Past event: The trade payable arose from a good or service the debtor previously received or

consumed.Intermediate Accounting Vol 2 Canadian 2nd Edition Lo Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 11 Current Liabilities and Contingencies Copyright © 2014 Pearson Canada Inc. 11-2

• Outflow of economic benefits: Trade payables are typically settled in cash—an outflow of

economic benefits.

P11-3. Suggested solution:

• Provisions are liabilities in which there is some uncertainty as to the timing or amount of

payment.

• Financial liabilities are contracts to deliver cash or other financial assets to another party.

They differ from non-financial liabilities as the latter category is typically settled through the provision of goods or services.

• A non-exhaustive list of financial liabilities includes accounts payable; bank loans; notes

payable; bonds payable; and finance leases. A non-exhaustive list of non-financial obligations includes warranties payable; unearned revenue; and income taxes payable.

P11-4. Suggested solution:

a. The three broad categories of liabilities are:

• Financial liabilities held for trading
• Other financial liabilities
• Non-financial liabilities

b.

• Held-for-trading liabilities are initially recognized at fair value.
• Other financial liabilities are initially reported at fair value minus the transaction costs

directly resulting from incurring the obligation.

• The initial measurement of non-financial liabilities depends on their nature. For instance,

warranties are recorded at management’s best estimate of the downstream cost of meeting the entity’s contractual obligations, while prepaid magazine subscription revenue is valued at the consideration initially received.c.

• Held-for-trading liabilities are subsequently recognized at fair value.
• Other financial liabilities are subsequently measured at amortized cost using the effective

rate method.

• Non-financial liabilities are subsequently measured at the initial obligation less the

amount earned to date or satisfied to date through performance. For example, a publisher that received $750 in advance for a three-year subscription and has delivered the magazine for one year would report an obligation of $500 ($750 – $250).

Chapter 11 Current Liabilities and Contingencies Copyright © 2014 Pearson Canada Inc. 11-3

P11-5. Suggested solution:

Item Liability Current or non-current liability, or potentially both?Explanation

• Accounts payable C
• Warranties payable B The obligation that is expected to be

settled within one year of the balance sheet date is current, the balance non- current

• Deposits B The classification of the deposit as

current or non-current depends upon the expected settlement date. If less than one year after the balance sheet date, the obligation is classified as current

• Bank overdraft C
• Sales tax payable C
• Bank loan maturing in five

years was in default during the year; before year-end, the lender grants a grace period that extends 12 months after the balance sheet date N The obligation is reported as a non- current liability because the grace period was granted before the balance sheet date and extends twelve months after year- end

• Five-year term loan,

amortized payments are payable annually B The principal portion of the payments due within one year of the balance sheet date are classified as current, the balance as non-current

• Unearned revenue B The classification of the obligation as

current or non-current depends upon when revenue is the expected to be recognized. If less than one year after the balance sheet date, the obligation is classified as current

• Finance lease obligation B The principal portion of the payments

due within one year of the balance sheet date are classified as current, the balance as non-current

• HST payable C
• 90-day bank loan C
• Bond payable that matures

in two years N The obligation is reported as non-current as the maturity date is two years after the balance sheet date

• Obligation under customer

loyalty plan B The classification of the obligation as current or non-current depends upon the

Chapter 11 Current Liabilities and Contingencies Copyright © 2014 Pearson Canada Inc. 11-4

expected redemption date. If less than one year after the balance sheet date, the obligation is classified as current

• Income taxes payable C
• Bank loan that matures in

five years that is currently in default C

• Three-year bank loan that

matures six months after the balance sheet date C

P11-6. Suggested solution:

Summary journal entries

• Dr. Inventory 10,000

Dr. HST recoverable ($10,000 × 12%) 1,200 Cr. Accounts payable ($10,000 + $1,200) 11,200

• Dr. Equipment ($20,000 + $500) 20,500

Dr. HST recoverable ($20,500 × 12%) 2,460 Cr. Accounts payable ($20,500 + $2,460) 22,960

• Dr. Cash [$15,000 × (1 + 12%)] 16,800

Cr. Sales 15,000 Cr. HST payable ($15,000 × 12%) 1,800 Dr. Cost of goods sold ($15,000 x 50%) 7,500 Cr. Inventory 7,500

• Dr. Accounts receivable [$20,000 × (1 + 12%)] 22,400

Cr. Sales 20,000 Cr. HST payable ($20,000 × 12%) 2,400 Dr. Cost of goods sold ($20,000 x 50%) 10,000 Cr. Inventory 10,000

• Dr. Accounts payable 22,960

Cr. Cash 22,960

• Dr. HST payable ($12,000 + $1,800 + $2,400) 16,200

Cr. HST recoverable ($8,000 + $1,200 + $2,460) 11,660 Cr. Cash ($16,200 – $11,660) 4,540