financial accounting tools for business decision making solutions 7e chapter 10

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

CHAPTER 10
REPORTING AND ANALYZING LIABILITIES
LEARNING OBJECTIVES
1.
2.
3.
4.

Account for current liabilities.
Account for instalment notes payable.
Identify the requirements for the financial statement presentation and analysis of
liabilities.
Account for bonds payable (Appendix 10A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO

BT Item LO

BT Item LO BT
Questions

Item LO

BT

1.

1

K

5.

1

C

9.

2

C

13.

3

C

2.

1

C

6.

1,2

C

10.

2

C

14.

3

C

3.

1

C

7.

2

K

11.

3

K

15.

3

C

4.

1

C

8.

2

C

12.

3

C

16.

4

K

AP

13.

4

AP

Item LO

BT

17.

4

C

17.

4

AP

Brief Exercises
1.

1

AP

5.

1

AN

9.

2

2.

1

AP

6.

2

AN

10.

3

K

14.

4

AP

3.

1

AP

7.

2

AP

11.

3

AP

15.

4

AP

4.

1

AP

8.

2

AP

12.

3

AN

16.

4

AP

1.

1

AN

4.

1

C

7.

2

AN

10.

3

AN

13.

4

AP

2.

1

AP

5.

2

AP

8.

3

AP

11.

4

AN

14.

4

AP

3.

1

AP

6.

2

AP

9.

3

AN

12.

4

AP

Exercises

Problems: Set A and B
1.

1,3

AP

3.

2

AP

5.

2,3

AP

7.

3

AN

9.

4

AP

2.

1,3

AP

4.

2,3

AP

6.

1,3

K

8.

3

AN

10.

3,4

AP

1.

1,3

AP
2,3

AP

Accounting Cycle Review
Cases
1.

3

AN

3.

3

S

5.

3

S

2.

3

AN

4.

3

S

6.

3

AN

7.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

Legend: The following abbreviations will appear throughout the solutions manual
file.
LO

Learning objective

BT

Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes

Difficulty:

Time:
AACSB

CPA CM
cpa-e001

cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006

Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.

Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation

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Financial Accounting, Seventh Canadian Edition

ANSWERS TO QUESTIONS
1.

Accounts payable and short-term notes payable are both forms of credit
used by a business to acquire the items or services 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.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

2.

An operating line of credit, or credit facility, is used by a business to
overcome short-term cash demands or temporary cash shortfalls that
invariably happen during the operating cycle. It is not usually intended to be
a permanent type of financing and is generally used for operations. When
needed, the funds are used and then repaid as the liquidity improves and
cash becomes available from operations. Short-term bank loans are also
liabilities of the business and are often structured in such a way to deal with
short-term cash needs of the business. Short-term bank loans could be
used to finance inventory and accounts receivable. Bank loans are for
specific amounts that have structured terms for the repayment of the
principal.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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3.

Financial Accounting, Seventh Canadian Edition

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.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

4.

Unearned revenue should be recognized when sales of gift cards are made
to customers. When a gift card is presented to pay for items or services
received by the customer, the unearned revenue is reduced and the sales
or service revenue increased. If there is a legally permissible expiration
date on the gift card, once that date is reached, any unused balances on

gift cards should be recognized as revenue and the related unearned
revenue eliminated.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

5.

When determining whether an uncertain 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 of the liability 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 uncertain liability will be
disclosed in the notes to the financial statements. An uncertain liability that
is disclosed rather than recorded is known under IFRS as a contingent
liability. On the other hand, if the company is reporting under ASPE, the
probability needs to be “likely” ASPE does not use the term “provision”

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Financial Accounting, Seventh Canadian Edition

Q 5 (continued)
If the liability is recorded it is referred to as a, contingent liability and there
is no special term for just having the contingency disclosed in a note to the
financial statements rather than recording it. This is a higher level of
probability that the standard used in IFRS.
LO 1 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

6.

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.

LO 1,2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

7.

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.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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8.

Financial Accounting, Seventh Canadian Edition

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.

LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

9.

(a)

A student choosing the floating rate loan will initially pay a lower
interest rate, but if the prime lending rate changes so does the interest
rate that is charged on the balance of the loan. Since the loan
repayment typically takes several years, a floating interest rate
reduces the risk to the financial institution and provides a market 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.

LO 2 BT: C Difficulty: C Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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10.

Financial Accounting, Seventh Canadian Edition

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.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

11.

(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.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

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. In all three ratios, an
increase in the ratio demonstrates an improvement.
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. In the case of debt to total assets ratio, an increase in the ratio is
often interpreted as a deterioration in solvency, while for the times interest
earned ratio, an increase demonstrates an improvement.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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13.

Financial Accounting, Seventh Canadian Edition

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. This type of financing is extremely flexible because interest
charges are only incurred for the actual amount of cash borrowed for the
needed period of time when there is a cash shortfall from daily operations.
As a consequence, the business does not incur the constant charge for
interest on a long-term bank debt or mortgages and can save on interest
costs. The liquidity issues of a business can therefore be effectively dealt
with using an operating line of credit.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

14.

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 income.
Alternatively, a company with a low debt to total assets may find itself in
financial difficulty if it does not have sufficient net income to cover required
interest payments. Therefore, it is important to interpret these two ratios in
conjunction with one another.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

15.

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.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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*16.

Financial Accounting, Seventh Canadian Edition

(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 publicly 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 publicly.. 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.

LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*17.

(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 by 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 cash
interest paid.

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Financial Accounting, Seventh Canadian Edition

Q 17 (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 minus a portion relating to the amortization of
the premium thereby making it lower than the interest paid.

LO 4 BT: C Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
(a)
Oct.

1

Cash ($6,000 + $780).............................................
Sales .............................................................
Sales Tax Payable ($6,000 × 13%) ...............

6,780

Cash ($6,000 + $899).............................................
Sales .............................................................
Sales Tax Payable [($6,000 × 5%) +
($6,000 × 9.975%)] .....................................

6,899

6,000
780

(b)
Oct.

1

6,000

899

LO 1 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-2
(a)
Apr. 30

Property Tax Expense ($36,000 ÷ 12 × 4) ................
Property Tax Payable ........................................

12,000

Property Tax Payable ................................................
Property Tax Expense ($36,000 ữ 12 ì 2.5) .............
Prepaid Property Tax ($36,000 ÷ 12 × 5.5) ...............
Cash..................................................................

12,000
7,500
16,500

Property Tax Expense ...............................................
Prepaid Property Tax ........................................

16,500

12,000

(b)

July 15

36,000

(c)
Dec. 31

16,500

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-3
(a)

(b)

(c)

Aug. 24

Aug. 24

Sept. 3

Salaries Expense ................................................... 15,000
Employee Income Tax Payable .....................
CPP Payable .................................................
EI Payable .....................................................
Cash ($15,000 – $6,258 – $743 – $282) .......
Employee Benefits Expense ...................................
CPP Payable .................................................
EI Payable .....................................................

1,138

Employee Income Tax Payable ..............................
CPP Payable ($743 + $743) ...................................
EI Payable ($282 + $395) .......................................
Cash ($6,258 + $1,486 + $677) .....................

6,258
1,486
677

6,258
743
282
7,717
743
395

8,421

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-4
(a)

July

1

(b) (1) Aug. 1

(2) Aug. 31
(3) Sept. 1
(4) Oct.

(c)

Oct.

1

1

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

250

Interest Expense ....................................................
Interest Payable.............................................

250

Interest Payable .....................................................
Cash ..............................................................

250

Interest Expense ....................................................
Cash ..............................................................

250

60,000
250

250
250

Bank Loan Payable ................................................ 60,000
Cash .............................................................

250

60,000

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-5
IFRS
a) Record and disclose a provision
(likely is a higher level of probability than probable,
liability, which in turn, is more likely than not)
b) Not recorded, disclose only
c) Not recorded nor disclosed
d) Not recorded, disclose only
e) Not recorded, disclose only

ASPE
Record and disclose a contingent

Not recorded, disclose only
Not recorded nor disclosed
Not recorded, disclose only
Not recorded, disclose only

LO 1 BT: AN Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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.

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-7
(a)

(b)

[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]

$50,000 × 7% = $3,500
$13,500 – $3,500 = $10,000
$12,800 – $2,800 = $10,000 or same as [2] as fixed principal reduction
$40,000 – $10,000 = $30,000 (or $2,100 ÷ 7% = $30,000)
$10,000 fixed principal reduction [6] + $2,100 = $12,100
$10,000 fixed principal reduction

$30,000 [4] – $10,000 [6] = $20,000
$11,400 – $1,400 = $10,000 fixed principal reduction or $20,000 [7] – $10,000
$10,700 – $700 = $10,000 fixed principal reduction
$10,000 – $10,000 = $0

The current portion of the note at the end of period 3 is the amount of
principal reduction in the next year (period 4), which is $10,000. This leaves
$10,000 ($20,000 less current portion of $10,000) as the non-current
portion of the debt.

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Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-8
(a)

(b)

[1]
[2]
[3]

[4]
[5]
[6]
[7]
[8]
[9]
[10]

$50,000 × 7% = $3,500
$12,195 fixed cash payment
$12,195 [2] – $2,891 = $9,304 or $41,305 – $32,001
$12,195 fixed cash payment
$12,195 [4] – $9,955 = $2,240 or $32,001 × 7%
$32,001 – $9,955 = $22,046
$12,195 fixed cash payment
$12,195 [7] – $1,543 = $10,652 or $22,046 [6] – $11,394 = $10,652
$12,195 fixed cash payment
$11,394 – $11,394 = $0

The current portion of the note at the end of period 3 is the amount of
principal reduction in the next year (period 4), which is $10,652 [8]. This
leaves $11,394 ($22,046 [6] less current portion of $10,652) as the noncurrent portion of the debt.

LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-9
(a)

Fixed principal payment
(A)
Cash
Payment
(B) + (C)

Monthly
Interest
Period

(B)
Interest
Expense
(D) ì 4% ữ
12 months

(C)
Reduction of
Principal
($300,000 ÷
120)

(D)
Principal
Balance
(D) ̶ (C)

Nov. 30, 2017

$300,000

Dec. 31, 2017

$3,500

$1,000

$2,500

297,500

Jan. 31, 2018

3,492

992

2,500

295,000

2017

Nov. 30

Cash .........................................................................

300,000

Mortgage Payable ............................................
Dec.

31

300,000

Interest Expense .......................................................

1,000

Mortgage Payable .....................................................

2,500

Cash.................................................................

3,500

2018
Jan.

31

Interest Expense .......................................................

992

Mortgage Payable .....................................................

2,500

Cash.................................................................

3,492

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-9 (CONTINUED)
(b)

Blended principal and interest payment

Monthly
Interest
Period

Nov. 30, 2017
Dec. 31, 2017
Jan. 31, 2018
2017
Nov. 30

Dec.

31

2018
Jan. 31

(A)
Cash
Payment

(B)
Interest
Expense
(D) ì 4% ữ
12 mos.

$3,037
3,037

$1,000
993

(C)

Reduction
of Principal
(A) – (B)
$2,037
2,044
01476.73

(D)
Principal
Balance
(D) – (C)
$300,000
297,963
295,919
22,000

Cash ..................................................................
Mortgage Payable .....................................

300,000

Interest Expense ................................................
Mortgage Payable ..............................................
Cash..........................................................

1,000
2,037

Interest Expense ................................................
Mortgage Payable ..............................................

Cash..........................................................

993
2,044

300,000

3,037

3,037

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-10
a.
b.
c.
d.

e.

f.
g.
h.
i.
j.
k.

Non-current liability
Current liability
Current liability
Neither – any unused portion is not a liability and no balance is outstanding
but line of credit limits should be disclosed in the notes to the financial
statements
Current liability
Neither – obligations are reported in the notes to the financial statements
Non-current liability
Current liability
Neither – current asset
Current liability for the $5,000 due next year. The remaining $70,000
balance is a non-current liability.
Neither – because the outcome has a remote probability, it is neither
recorded nor disclosed

LO 3 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10-11
(in $ millions)
(a)

Current ratio

$443
=
$423

(b) Debt to total
assets
(c)

1.0:1

=

$1,014
=
$1,563

Times interest earned =

64.9%

$76 + $19 + $28
$19

=

6.5 times

LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-12
(a)

Debt to total assets
Times interest earned

Improvement
Deterioration

(b)

Although Fromage’s debt to total assets ratio improved in 2018, 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 income before income tax and
interest relative to its interest expense than it did in the prior year.

LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

*BRIEF EXERCISE 10-13
(a)

The proceeds received from the issue of the bonds = face value of the
bonds X price.
$200,000 x 96 = $192,000

(b)

Interest expense on the first semi-annual interest payment = bond carrying
amount x effective interest rate x 6/12
$192,000 x 7% x 6/12 = $6,720

(c)

The semi-annual interest payment based on the coupon rate of 6% x face
value of the bonds x 6/12 = $200,000 x 6% x 6/12 = $6,000
The amortization of the bond discount is $6,720 less $6,000 or $720
The amortization of the bond discount is added to the bond carrying
amount of $192,000 making the carrying amount after the first interest
payment $192,720.

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 10-14
(a)

The proceeds received from the issue of the bonds = face value of the
bonds X price.
$100,000 x 109 = $109,000

(b)

Interest expense on the first semi-annual interest payment = bond carrying
amount x effective interest rate x 6/12
$109,000 x 3% x 6/12 = $1,635

(c)

The semi-annual interest payment based on the coupon rate of 5% x face
value of the bonds x 6/12 = $100,000 x 5% x 6/12 = $2,500
The amortization of the bond premium is $2,500 less $1,635 or $865
The amortization of the bond premium is deducted from the bond carrying
amount of $109,000 making the carrying amount after the first interest
payment $108,135.

LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Chapter 10
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Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 10-15
(a)

Key inputs:

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

Present value of $500,000 received in 10 periods
($500,000 × 0.78120) (n = 10, i = 2.5%)
Present value of $15,000 received each of 10 periods
($500,000 × 3% × 8.75206) (n = 10, i = 2.5%)
Present value (issue price) of the bonds
(b)

Key inputs:

$390,600
131,281
$521,881

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
($500,000 × 0.74409) (n = 10, i = 3%)
$372,045
Present value of $15,000 received each of 10 periods
($500,000 × 3% × 8.53020) (n = 10, i = 3%)
127,953
Present value (issue price) of the bonds (rounded to $500,000) $500,000
This is rounded because we know that there would be no
discount or premium because the market and stated rate are equal
(c)

Key inputs:

Future value (FV) = $500,000
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
($500,000 × 0. 70892) (n = 10, i = 3.5%)
Present value of $15,000 received each of 10 periods
($500,000 × 3% × 8.31661) (n = 10, i = 3.5%)
Present value (issue price) of the bonds

$354,460
124,749
$479,209

Note to the instructor: Rounding discrepancies may arise depending on whether
present value tables, calculators, or spreadsheet programs are used to determine
the present value.
LO 4 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 10-16
(a)

CARVEL CORP.
Bond Premium Amortization

Semiannual
Interest
Periods
Jan. 1/18
July 1/18

Jan. 1/19

(A)
Interest
Payment
(6% ×
6/12 =
3%)
$15,000
15,000

(B)
Interest
Expense
(5% × 6/12
= 2.5%)

$13,047
12,998

(b)

(C)
Premium
Amortization
(A) – (B)

$1,953
2,002

(D)
Unamortized
Premium
(D) – (C)
$21,881
19,928
17,926

(E)
Bond
Carrying
Amount
($500,000 + D)
$521,881
519,928
517,926

CARVEL CORP.

Semiannual
Interest
Periods
Jan. 1/18
July 1/18
Jan. 1/19

Interest
Payment
(6% ×
6/12 =

3%)
$15,000
15,000

Interest
Expense
(6% × 6/12
= 3%)

$15,000
15,000

Bond
Carrying
Amount
($500,000)
$500,000
500,000
500,000

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Chapter 10
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 10-16 (CONTINUED)
(c)

Semiannual
Interest
Periods
Jan. 1/18
July 1/18
Jan. 1/19

CARVEL CORP.
Bond Discount Amortization
(A)
Interest to Be
Paid
(6% × 6/12 =
3%)

$15,000
15,000

(B)
Interest
Expense
(7% × 6/12
= 3.5%)

(C)
Discount
Amortization

(A) – (B)

$16,772
16,834

$1,772
1,834

(D)
Unamortized
Discount
(D) – (C)
$20,791
19,019
17,185

(E)
Bond
Carrying
Amount
($500,000 – D)
$479,209
480,981
482,815

LO 4 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Chapter 10

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 10-17
(a)
Jan.

July

1

1

Dec. 31

Cash ...........................................................
Bonds Payable ...................................

521,881

Interest Expense .........................................
Bonds Payable ............................................
Cash ...................................................

13,047
1,953

Interest Expense .........................................
Bonds Payable ............................................
Interest Payable..................................

12,998
2,002

Cash ...........................................................
Bonds Payable ...................................

500,000

Interest Expense .........................................
Cash ...................................................

15,000

Interest Expense .........................................
Interest Payable..................................

15,000

Cash ...........................................................
Bonds Payable ...................................

479,209

Interest Expense .........................................
Bonds Payable ...................................

Cash ...................................................

16,772

Interest Expense .........................................
Bonds Payable ...................................
Interest Payable..................................

16,834

521,881

15,000

15,000

(b)
Jan.

July

1

1

Dec. 31

500,000

15,000

15,000

(c)
Jan.

July

1

1

Dec. 31

479,209

1,772
15,000

1,834
15,000

LO 4 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO EXERCISES
EXERCISE 10-1

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Assets

Liabilities

+
NE
NE
+
NE
NE
+
NE

+
NE
+
+
+
+
+
+
-

Shareholders’
Equity
NE
NE
NE
+
NE
+

Revenues

Expenses

NE
NE
NE
NE
+
NE

NE
NE
NE
+

NE
NE
+
NE
NE
+
+
+
NE
NE

Net
Income
NE
NE
NE
+
NE
+

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