Question

Name SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 1) Explain the difference between current and long-term liabilities. 2) Explain known current liabilities. 3) Discuss the types of estimated liabilities. 4) Discuss how to account for contingent liabilities. 5) Breathe Therapeutic Company is located in Medicine Hat, Alberta and is a retailer of massage supplies. Beginning inventory is $70,000, and Breathe uses the perpetual inventory system. Complete the journal entries on the following dates, including 5% GST as applicable. Oct-01 Oct-12 Breathe purchases $40,000 of merchandise from Robyn Massage Corp for cash. Breathe sells $52,000 of massage products to a customer on credit terms n/45. The merchandise cost $40,000. The customer pays for the October 12th sale. Breathe remits the appropriate amount of GST to the government for the month of October Oct-31 Nov-10 6) On November 16, 2015, Williams Industrial gave Phillip Co. a 90-day, 8%, $80,000 note payable to extend a past due account payable. 6) Prepare the journal entry for Williams Industrial to record payment of the note on Feb 14, 2016. Williams Industrial recorded a December 31st year end adjusting entry 7) 7) On November 16, Predator Company borrowed $112,000 from DT Bank. The loan had an interest rate of 10% and was due in 90 days. Predator Company's fiscal year-end is December 31. Prepare the journal entry to record the payment of the note on Predator's books.

Answer 1

1) Due date when the liability is obliged to pay cause difference between current and long term liabilities (i.e.) any liability due to pay within 12 months or one year from the closing date of financial statements are considered as current liabilities (Example - Accounts payable, Taxes payable, wages payable). Any liability due to pay more than 12 month time period from the closing date of financial statements are considered as long term liabilities (Example - Bond payable after an year, Note payable after an year, Lease payable after an year)

2) Liabilities which are known to oblige on a certain date or known to pay in near future, as of the closing date of financial statements are known current liabilities. In other words, if company knows the amount, date and the party to whom it owes, then it refers to known current liabilities. Example - accounts payable arise out of any contract or purchase transaction has a specific supplier name, date and amount to oblige.

3) Liability which has been estimated to arise in future, but definite amount is not known results in estimated liability. Different type of estimated liabilities include warranty related, retirement related and government tax related. Warranty related refers to the amount or % of sales estimated to arise under warranty liability. Retirement related refers to the amount invested today for long term and return on that investment is unknown as of today and it can only be estimated. Government tax related includes any bill which has not been passed as of book closing date and amount can be estimated based on last year history only.

4) Contingent liability can be accounted based on desired outcome of an event or an estimate arrived at (i.e.) estimate either based on last year trend of the company or based on the trend in the industry. Example - any law suit can be accounted based on desired outcome or the progress of the case law; warranty can be accounted based on the last year trend.

5) Attached are the journal entries including GST:

Credit Debit 40,000 2,000 42,000 54,600 Date Account Title 01-Oct Dr Inventory Dr GST Clearing (5% of $ 40,000) Cr Cash 12-OctDr Accounts Receivable Cr GST Clearing (5% of $ 52,000) Cr Sales Revenue 12-OctDr Cost of goods sold Cr Inventory 31-Oct Dr Cash Cr Accounts Receivable 10-Nov Dr GST Clearing ($2600 - $ 2000) Cr Cash 2,600 52,000 40,000 40,000 54,600 54,600 600 600

6) As William recorded year end entry for Dec 31st, Interest pertains to period 16th Nov - 31st Dec (45 days) exists in "Interest payable" account and "Interest expense" account being debited only for remaining 45 days (1st Jan - 14th Feb)

Journal entry as below:

Date Account Title Debit Credit 14-Feb Dr Note Payable 80,000 Dr Interest Expense ($80000*8%*(45/360) 800 Dr Interest Payable ($80000*8%* (45/360) 800 Cr Cash 81,600 Assume 360-day time period for the year and not 365 days

7) Interest expense for 45 days (i.e.) from 16th Nov thru 31st Dec will get accounted as part of Dec 31st Year End entry and payment entry gets recorded on 14th Feb as below:

Credit Debit 1,400 1,400 Date Account Title 31-Dec Dr Interest Expense ($112000* 10%*(45/360) Cr Interest Payable ($112000*10%* (45/360) 14-Feb Dr Note Payable Dr Interest Expense ($112000*10%*(45/360) Dr Interest Payable ($112000*10%*(45/360) Cr Cash 112,000 1,400 1,400 114,800

Assume 360-day time period for the year.