Test Bank For Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt

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Test Bank For Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt

CHAPTER 10 Current Liabilities and payroll


1. Account for determinable or certain current liabilities. Liabilities are present obligations arising from past events, to make future payments of assets or services. Determinable liabilities have certainty about their existence, amount, and timing—in other words, they have a known amount, payee, and due date. Examples of determinable current liabilities include operating lines of credit, notes payable, accounts payable, sales taxes, unearned revenue, current maturities of long-term debt, and accrued liabilities such as property taxes, payroll, and interest.

2. Account for uncertain liabilities. Estimated liabilities exist, but their amount or timing is uncertain. As long as it is likely the company will have to settle the obligation, and the company can reasonably estimate the amount, the liability is recognized. Product warranties, customer loyalty programs, and gift cards result in liabilities that must be estimated. They are recorded either as an expense (or as a decrease in revenue) or a liability in the period when the sales occur. These liabilities are reduced when repairs under warranty or redemptions occur. Gift cards are a type of unearned revenue as they result in a liability until the gift card is redeemed. As some cards are never redeemed, it is necessary to estimate the liability and make adjustments.

A contingency is an existing condition or situation that is uncertain, where it cannot be known if a loss (and a related liability) will result until a future event happens, or does not happen. Under ASPE, a liability for a contingent loss is recorded if it is likely a loss will occur and the amount of the contingency can be reasonably estimated. Under IFRS, the threshold for recording the loss is lower. It is recorded if a loss is probable. Under ASPE, these liabilities are called contingent liabilities, and under IFRS, these liabilities are called provisions. If it is not possible to estimate the amount, these liabilities are only disclosed. They are not disclosed if they are unlikely.

3. Determine payroll costs and record payroll transactions. Payroll costs consist of employee and employer payroll costs. In recording employee costs, Salaries Expense is debited for the gross pay, individual liability accounts are credited for net pay. In recording employer payroll costs, Employee Benefits Expense is debited for the employer’s share of CPP, EI, workers’ compensation, vacation pay, and any other deductions or benefits provided. Each benefit is credited to its specific current liability account.

4. Prepare the current liabilities section of the balance sheet. The nature and amount of each current liability and contingency should be reported in the balance sheet or in the notes accompanying the financial statements. Traditionally, current liabilities are reported first and in order of liquidity. International companies sometimes report current liabilities on the lower section of the balance sheet and in reverse order of liquidity.

5. Calculate mandatory payroll deductions (Appendix 10A). Mandatory payroll deductions include CPP, EI, and income taxes. CPP is calculated by multiplying pensionable earnings (gross pay minus the pay period exemption) by the CPP contribution rate. EI is calculated by multiplying insurable earnings by the EI contribution rate. Federal and provincial income taxes are calculated using a progressive tax scheme and are based on taxable earnings and personal tax credits. The calculations are very complex and it is best to use one of the CRA income tax calculation tools such as payroll deduction tables.


Exercise 1

Leung Properties Co. paid $5,600 for property taxes in the 2016 calendar year. In 2017, Leung receives its property tax bill on May 1 for $6,200 which is payable on June 30, 2017.


Calculate the prepaid or property taxes payable that Leung will report on its balance sheet if Leung’s year end is

a) February 28, 2017

b) May 31, 2017

c) September 30, 2017

d) December 31, 2017

Solution 1 (10 min.)

a) Property taxes payable ($5,600 x 2 ÷ 12) $ 933

b) Property taxes payable ($6,200 x 5 ÷ 12) $ 2,583

c) Prepaid property taxes ($6,200 x 3 ÷ 12) $ 1,550

d) Both Prepaid property taxes and property taxes payable are $ 0

Bloomcode: Application

Difficulty: Medium

Learning Objective: Account for determinable or certain current liabilities.

Section Reference: Determinable (Certain) Current Liabilities

CPA: Financial Reporting


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