Exam 1: Current Liabilities and Contingencies

Consider the following independent situations.The underlined entity is the reporting entity. 1.The Supreme Court of Canada ordered a supplier to pay Towna Haring Inc.$500,000 for breach of contract. 2.Iwas Pharmaceuticals Inc.sued Game Day Agencies Ltd.for $8 million alleging patent infringement.While there may be some substance to Iwas's assertion,Game Day's legal counsel estimates that Iwas's likelihood of success is about 30%. 3.Environment Canada sued Foil Fan Isotopes Ltd.for $18 million seeking to recover the costs of cleaning up Foil Fan's accidental discharge of radioactive materials.Foil Fan acknowledges liability but is disputing the amount,claiming that the actual costs are in the range of$9 million to $12 million.Foil Fan's $18 million environmental insurance policy includes a $6 million deductible clause. Required: a.For each of the situations,indicate whether the appropriate accounting treatment is to: A.Recognize an asset or liability. B.Disclose the details of the contingency in the notes to the financial statements. C.Neither provides for the item nor discloses the circumstances in the notes to the financial statements. b.For each situation that requires the recognition of an asset or liability,record the journal entry.

Simplicity Inc.had the following shareholders' equity account balances on December 31,2017: On October 31,2018 Simplicity declared the stipulated dividends on the preferred shares payable on December 1. On November 30,2018 Simplicity declared cash dividends of $2 per common share payable on January 2,2019. Required: Prepare the journal entries for 2018 and 2019.

St.John Laurulry (SJL)recently hired Huck as its payable clerk,a position that has been vacant for two months.While the other accounting staff have taken care of the "must do's," there are a number of transactions that have not yet been recorded. • Nov.15,2017-SJL purchases $8,000 supplies inventory on account.The terms offered are 2/10,net 30. • Nov.22,2017-SJL purchases 10 washing machines.SJL issues a $3,000 non-interest bearing note payable due on 01/15/18. • Nov.28,2017-SJL borrows $131,400 from the bank.SJL signs a demand note for this amount and authorizes the bank to take the interest payments from its bank account.Interest is payable monthly at 10% per annum. • Dec.18,2017-SJL purchases $1,000 supplies inventory on account.The terms offered are 2/10,net 30. • Dec.21,2017-SJL purchases 15 dryers.SJL issues a $25,000 non-interest bearing note payable due on Dec.21,2018. • Dec.22,2017-Huck pays the Nov.15,2017 and Dec.18,2017 invoices. • Dec.31,2017-Huck processes the payroll for the month.The gross payroll is $80,000; $2,700 is withheld for the employees' Canada Pension Plan and Employment Insurance premiums. Other Info • SJL uses the net method to record accounts payable. • SJL's year-end is Dec.31 and interim statements are normally prepared on a monthly basis. • Due to the vacancy in the accounting department,SJL's latest interim statements are for the period ended Oct.31,2017.The necessary accruals were made at that time. • The market rate of interest for SJL's short-term borrowing is 10%. Required: a.Prepare journal entries to record the documented events and the necessary accruals for the months of November and December.Compute interest accruals based on the number of days,rather than months. b.Contrast the gross and net methods of accounting for trade payables.

A company purchases inventory on credit for $80,000.Inventory costing $30,000 is sold on credit for $40,000.The applicable HST rate is 10%.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

A company purchases inventory on credit for $40,000.Inventory costing $30,000 is sold on credit for $50,000.The applicable HST rate is 10%.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Why is it important to distinguish current liabilities from long-term liabilities?

Which statement is correct under the IFRS definition for a "liability"?

Consider the following independent situations.The underlined entity is the reporting entity. 1.Call Cattle Inc.sued Nutrient Feed Ltd.for $10 million alleging breach of contract.Nutrient's legal counsel estimates that Call's likelihood of success is about 80%.Based on its experience with cases of this nature,the law firm estimates that,if successful,the litigants will be awarded $8,800,000 to $9,000,000,with all payouts in this range being equally likely. 2.Deana Finnamore broke her leg when she tripped on an uneven floor surface in Groton Co.'s office.On the advice of legal counsel,Groton has offered Finnamore $140,000 to settle her $275,000 lawsuit.It is unknown whether Finnamore will accept the settlement offer.Groton's legal counsel estimates that Finnamore has a 90% probability of success,and that if successful,she will be awarded $230,000. 3.The courts ordered a competitor to pay $1,000,000 to Ferbert and Finn Corp.for patent infringement.The competitor's legal counsel indicated that the company will probably appeal the amount of the award. Required: a.For each of the situations,indicate whether the appropriate accounting treatment is to: A.Recognize an asset or liability. B.Disclose the details of the contingency in the notes to the financial statements. C.Neither provides for the item nor discloses the circumstances in the notes to the financial statements. b.For each situation that requires the recognition of an asset or liability,record the journal entry.

Explain the difference between "probable," "possible," and "remote" under IFRS.

For a $200,000 trade payable with terms of 2/15,net 50,how much would be reported as "purchase discount lost" under the net method if a payment was made after 60 days?

Explain what contingent assets and liabilities are and how these items are accounted for financial reporting purposes.

On March 1,2017 Daisy Miller signed a five-year franchise agreement for the exclusive rights to sell Delightful Shakes products in Montreal,Quebec.The agreement stipulates that Daisy will pay the franchisor $30,000 upon signing the agreement and an ongoing royalty of 6% of monthly sales payable on the 20th of each following month.Daisy started operating the new franchise immediately after signing the agreement.Her sales for the first two months were $20,000,and $30,000.Daisy amortizes the franchise agreement monthly on a straight-line basis. Required: Prepare journal entries related to franchise fees during the first two months of operation.

Which statement about contingencies is correct?

Which statement is correct about provisions,contingent assets and contingent liabilities?

Select transactions and other information pertaining to the Best Place in the World Inc.(BPW)are detailed below. Facts: a.BPW is domiciled in Vancouver,British Columbia and all purchases and sales are made in BC. b.The HST rate in British Columbia is 12%. c.The balances in BPWs HST recoverable account and HST payable account as at March 31,2017,were $7,000 and $18,000,respectively. d.BPW uses a perpetual inventory system. e.Inventory is sold at a 100% mark-up on cost.(Cost of goods sold is 50% of the sales price.) Select transactions in April 2017: 1.BPW purchased inventory on account at a cost of $17,000 plus HST. 2.BPW purchased equipment on account at a cost of $18,000 plus HST.It paid an additional $600 plus HST for shipping. 3.Cash sales-BPW sold inventory for $45,000 plus HST. 4.Sales on account-BPW sold inventory for $35,000 plus HST. 5.BPW paid the supplier in full for the equipment previously purchased on account. 6.At the end of the month,BPW remitted the net amount of HST owing to the Canada Revenue Agency. Required: Prepare summary journal entries to record the transactions detailed above.

A company,using a perpetual inventory system,sells goods on credit for $10,000.The applicable PST rate is 5% and the GST rate is 10%.The cost of goods sold was $6,000.Sales taxes are remitted on a monthly basis.Prepare the necessary journal entries for this transaction.

Which of the following characteristic is required for a liability under IFRS Framework?

Why is it important to distinguish financial from non-financial liabilities?

Which is not an example of a non-financial liability?

Which statement about contingencies is correct?