Question

The following are selected transactions of Pendlebury Department Store Ltd. (PDSLO for the current year ending December 31. PDSL is a private company operating in the province of Manitoba.

1. On February 2, PDSL purchased goods having cash discounts terms of 2/10, n/30 from Hashmani Limited for $46,000. Purchases and accounts payable are recorded using the periodic system in net amounts after cash discounts. The invoice was paid on February 26.

2. On April 1, PDSL purchased a truck for $50,000 from Schuler Motors Limited, paying $5,000 cash and signing a one year, 8% note for the balance of the purchase price.

3. On May 1, PDSL borrowed $83,000 from First Provincial Bank by signing a $92,000 non-interest bearing note due one year from May 1

4. On June 30 and December 31, PDSL remitted cheques for $19,000 each as instalments on its current year tax liability.

5. On August 14, PDSL’s board of directors declared a $13,000 cash dividend that as payable on September 10 to shareholders of record on August 31.

6. On December 5, PDSL received $750 from Jefferson Ltd. as a deposit on a trailer that Jefferson is using for an office move. The deposit is to be returned to Jefferson after it returns that trailer in good condition on January 15.

7. On December 10, PDSL purchased new furniture and fixtures for $8,000 on account. Provincial sales tax of 8% and GST of 5% were charged by the supplier on the purchase price.

8. During December, cash sales of $79,000 were recorded, plus 8% provincial sales tax and 5% GST that must be remitted by the 15th day of the following month. Both taxes are levied on the sale amount to the customer.

9. PDSL’s lease for its store premises calls for a $2,500 monthly rental payment plus 3% of net sales. The payment is due one week after month end.

10. PDSL was advised during the month of December that it is legally required to restore the area (considered a land improvement) surrounding one of its new store parking lots, when the store closed in 12 years. PDSL estimates that the fair value of this obligation at December 31 is $46,000

11. The corporate tax return indicated taxable income of $205,000. PDSL’s income tax rate is 20%.

Instructions:

A) Prepare all the journal entries that are necessary to record the above transactions when they occurred and any adjusting journal entries (except for depreciation expense) related to the transactions that would be required to present financial statements on December 31 in accordance with GAAP. Date each entry.

B) Identify the current liabilities that will be reported on PDSL's December 31 statement of financial position, and indicate the amount of each one.

C) Prepare the journal entries for transactions 7 and 8 above if the 8% sales tax was applied on the purchase or sale amount plus the GST.

D) Why is the liabilities section of the statement of financial position of primary significance to bankers?

E)How are current liabilities related to current assets?

F) Comment on any differences that would apply in your accounting treatment for parts (A) through (C) if Pendlebury had followed IFRS.

Answer 1

Solution: A Particulars Date Amount Amount $46,000 Purchases A/C Dr Feb 2nd $920 $45,080 To Purchase Discount A/C To Accounts Payable A/C (To Record Purchase with the cash discount) Feb 26th Account Payable A/C Dr Purchase Discount A/C Dr $45,080 $920 Discount is reveresed because it can be availed if payment is made within 10 days $46,000 To Cash A/C (To Record payment made for the purchases) $50,000 April 1st Truck A/C Dr $5,000 To Down Payment A/C To 8% Notes Payable A/C (To Record purchase of truck on notes payable) $45,000 Bank A/C Dr Discount on notes payable A/C Dr $83,000 May 1st $9,000 $92,000 To Notes Payable A/C (To Record loan taken on non interest notes payable) June 30th Tax Liablity A/C $19,000 $19,000 To Bank A/C (To Record Income tax payment on 30th June) Dec 31st Tax Liablity A/C $19,000 $19,000 To Bank A/C (To Record Income tax payment on 31st Dec) $13,000 Aug 14th Dividend Declared A/C Dr $13,000 To Dividend Payable A/C (To Record dividend declared) Sept 30th Dividend Payable A/C Dr $13,000 $13,000 To Bank A/C |(To Record payment of dividend)

Cash A/C Dr $750 Dec 5th $750 To Refundable Deposit A/C |(To Record receipt of refundable deposit) Dec 10th Furniture & Fixture A/C Dr $9,040 $9,040 $8,000+ ($ 8,000 X 8%) + ($ 8,000 X 5%) To Cash A/C (To Record purchase of furniture and fixture) Dec 31st Cash A/C Dr $89,270 $79,000 $6,320 $3,950 To Sales Revenue A/C To Sales Tax A/C To GST A/C |(To Record Sales Revenue) Dec 31st Rent Expense A/C Dr $4,870 To Rent Payable A/C (To Record Rent Payable) $4,870 $2,500+ ($ 79,000 X 3%) Dec 31st Legal Expense A/C Dr $46,000 To Legal Liability A/C |(To Record contigent expenses incurred) $46,000 $41,000 Dec 31st Income Tax Expense A/C Dr $41,000 $2,05,000 X 20% To Tax Liability A/C |(To Record income tax expense incurred) $2,700 Dec 31st Interest Expense A/C Dr $2,700 8% X $ 45,000 X 9/12 To Interest accrued A/C (To Record interest accrued on the 8% notes payable)

Solution: B Financial Statement for the year ended 31st December Particulars Amount Amount Current Liabilities $38,000 $750 $2,700 $6,320 $3,950 Tax Liabilities Refundable Deposit 8% Interest Accrued on Notes Payable 8% Provisional Tax 5% GST $4,870 Rent Expense $41,000 Income Tax Expense $97,590 Total Current Liabilities Solution:C Particulars Date Amount Amount $9,072 Dec 10th Furniture & Fixture A/C Dr $9,072 -($ 8,000+ ($ 8,000 X 8%) + ($ 8, 000+ ($ 8,000 x 8%)) X 5%) To Cash A/C |(To Record purchase of furniture and fixture) Dec 31st Cash A/C Dr $89,586 $79,000 $6,320 $79,000 X 8% $4,266 ($ 79,000+ $ 6320) X 5% To Sales Revenue A/C To Sales Tax A/c To GST A/C (To Record Sales Revenue)

Solution: D The bankers look in the the liability section of the Business before giving any loan approvals for the Business. If there are loan liabilities appearing in the finacial statement of the business, the bank will be willing to give loan for the business. The loans or notes payable appearing on the liability side of the financial statement shows whether the business is sucessfully running and is in a position to pay off the existing debt or not. Bank always looks into the Company's loan paying history before loan approval. Therefore, the liability section of the financial statement is of a primary significant to the bankers. Solution: E The working capital is derived from the current assets and current liabilities of the bussines. Current Assets less the current liabilities gives the working capital of the business. The operation activities of the business are not only depended on the availability cash liquidity but also on the availability of the short term debts. Operation activites helps in generating revenue for the bussiness and it can be carried out sucessfully because of the availability of the current assets and short term debts (or current liabilities). Solution: F Under IFRS the expenses and income are shown or recovered in financial statement when they are actually paid or earned. Under GAAP accounting is done on accrual basis, but under IFRS the expenses incurred and revenue earned are shown for the period in which they are actually paid and earned. Even the prepaid rent will be considered as expense for the period in which they are paid.