COMPLETE SOLUTIONS MANUAL
HORNGREN’S ACCOUNTING VOLUME 2
13TH CANADIAN EDITION
CHAPTER NO. 11: CURRENT LIABILITIES AND PAYROLL
QUESTIONS
1. A current liability is one that is payable within the coming year or within the company’s
normal operating cycle if longer than a year. All other liabilities are long term.
2. Retailers act as collecting agents for the federal government. Stores charge their customers
GST, but the GST belongs to the federal government. The store has a liability to pay the
federal government (Receiver General) the amount of tax collected less applicable input tax
credits.
3. GST Recoverable or Input Tax Credit
4. The company reports current liabilities for the short-term note payable of$50,000 and for
interest payable of $1,000 ($50,000 × 0.04 × 6/12).
5. The balance sheet would show a current liability of $1,000 in an account called Current
Portion of Long-Term Note Payable. The long-term liabilities section would report $4,000 as
the balance of the Note Payable.
6. If current were not separated from long-term debt, two ratios would be distorted—the
current ratio and the acid-test ratio. The understated current liability would make both of the
results more positive than they are in reality, and users of the financial information would be
misled.
7. An accrued expense is an expense that has been incurred but has not been paid. Because the
expense has been incurred but not paid, it must be accrued, thus it is a liability.
8. Accounts payable and short-term notes payable are both current liabilities—that is, both are
due and payable within one year or within the company’s operating cycle.
Differences:
• Accounts payable are amounts owed for products or services that are purchased on
open account.
• Accounts payable have no interest obligation (however, if paid late, interest or late
payment charges could be incurred); short-term notes payable have a defined rate of
interest due over the term of the note.
,9. At the beginning of the school term, tuition collected in advance is recorded as a liability of the
school because it is an unearned revenue. At the end of the term, the tuition is moved to a revenue
account because the tuition has been earned.
10. A customer deposit is a liability because the company has not provided service for the deposit
and must refund that cash to its customers under certain conditions. The security deposit collected
by telephone and other utility companies is an example.
11. The company’s warranty expense for the year is $50,000, the estimate based on the current year’s
sales. The matching objective demands that this expense be matched against the period’s revenues.
12. A contingent liability is a potential liability that depends on a future event arising out of past
events. The future event will determine the amount and existence of the liability. A contingent
liability may or may not become an actual obligation.
13. Accounting conservatism (and the CPA Canada Handbook) tell us that contingent losses must
be accrued or disclosed but that gains are not reported until realized.
14. Service businesses sell their employees’ services, so employment compensation is their
major expense of doing business, just as cost of goods sold is the largest expense in merchandising.
15. The amount of income tax withheld from employee paycheques depends on the employee’s gross
pay, the amount of non-refundable tax credits claimed on the Personal Tax Credit Form (TD1), and
the tax rate set by CRA.
16. Required deductions: income tax, Canada (or Quebec) Pension Plan, and Employment Insurance.
17. Employers pay: Canada (or Quebec) Pension, Employment Insurance, Workers’
Compensation, and, where applicable, provincial payroll taxes regarding health and education.
18. Employment insurance premiums are determined annually by the federal government. This
answer is appropriate for 2024. Assuming a rate of 1.66 percent on earnings up to $63,200, the
maximum employment insurance premium this employee can pay is $1,049.12. The employer will
contribute 1.4 times this amount, or $1,468.77.
19. Some companies use a special payroll bank account to keep the payroll cheques separate from
the day-to-day business cheques. It may be easier to complete two bank reconciliations that are
less complicated than one large bank reconciliation. Any payroll issues may also be highlighted in a
separate payroll bank-account reconciliation.
20. A contingent liability is reported when it is probable that it will occur. The IFRS standard is lower
than for ASPE.
,Starters
(10 min.) S11-1
General Journal
Date Post.
20X2 Account Titles and Explanations Ref. Debit Credit
a. Dec. 31 Interest Expense 800
Interest Payable 800
Accrued interest expense at year end.
($32,000 × 0.06 × 5/12)
20X3
b. Jul. 31 Note Payable, Short-Term 32,000
Interest Payable 800
Interest Expense 1,120
Cash 33,920
Paid note and interest at maturity.
($32,000 × 0.06 × 7/12)
(5-10 min.) S11-2
MISSION CO.
Balance Sheet (partial)
December 31, 20X2
Assets Liabilities
Current liabilities
Note payable, short-term $32,000
Interest payable 800
MISSION CO.
Income Sheet (partial)
For the Year Ended December 31, 20X2
Revenues
Expenses
Interest expense $800
, (5-10 min.) S11-3
General Journal
Post.
Date Account Titles and Explanations Ref. Debit Credit
Jul. 10 Inventory 15,000
GST Recoverable (GST = $15,000 × 0.05) 750
Accounts Payable 15,750
Purchased goods for resale on account
Jul. 25 Accounts Receivable 21,000
GST Payable (GST = $20,000 x 0.05) 1,000
Sales Revenue 20,000
Cost of Goods Sold 15,000
Inventory 15,000
To record sale of goods on account
Aug. 10 GST Payable 1,000
GST Recoverable 750
Cash 250
Paid July GST to Receiver General.
(5 min.) S11-4
Kraft-Kwon will report $56,000 as the current portion of notes payable in the current liability
section. The remaining $224,000 will show as notes payable in the long-term liability section.
(5-10 min.) S11-5
General Journal
Post.
Date Account Titles and Explanations Ref. Debit Credit
Jul. 1 Cash 5,000
Unearned Subscription Revenue 5,000
To record subscription revenue received in
advance for one-year subscriptions.
Dec. 31 Unearned Subscription Revenue 2,083
Sales Revenue 2,083
To record five months of magazines sent and
revenue earned ($5,000 × 5/12)
HORNGREN’S ACCOUNTING VOLUME 2
13TH CANADIAN EDITION
CHAPTER NO. 11: CURRENT LIABILITIES AND PAYROLL
QUESTIONS
1. A current liability is one that is payable within the coming year or within the company’s
normal operating cycle if longer than a year. All other liabilities are long term.
2. Retailers act as collecting agents for the federal government. Stores charge their customers
GST, but the GST belongs to the federal government. The store has a liability to pay the
federal government (Receiver General) the amount of tax collected less applicable input tax
credits.
3. GST Recoverable or Input Tax Credit
4. The company reports current liabilities for the short-term note payable of$50,000 and for
interest payable of $1,000 ($50,000 × 0.04 × 6/12).
5. The balance sheet would show a current liability of $1,000 in an account called Current
Portion of Long-Term Note Payable. The long-term liabilities section would report $4,000 as
the balance of the Note Payable.
6. If current were not separated from long-term debt, two ratios would be distorted—the
current ratio and the acid-test ratio. The understated current liability would make both of the
results more positive than they are in reality, and users of the financial information would be
misled.
7. An accrued expense is an expense that has been incurred but has not been paid. Because the
expense has been incurred but not paid, it must be accrued, thus it is a liability.
8. Accounts payable and short-term notes payable are both current liabilities—that is, both are
due and payable within one year or within the company’s operating cycle.
Differences:
• Accounts payable are amounts owed for products or services that are purchased on
open account.
• Accounts payable have no interest obligation (however, if paid late, interest or late
payment charges could be incurred); short-term notes payable have a defined rate of
interest due over the term of the note.
,9. At the beginning of the school term, tuition collected in advance is recorded as a liability of the
school because it is an unearned revenue. At the end of the term, the tuition is moved to a revenue
account because the tuition has been earned.
10. A customer deposit is a liability because the company has not provided service for the deposit
and must refund that cash to its customers under certain conditions. The security deposit collected
by telephone and other utility companies is an example.
11. The company’s warranty expense for the year is $50,000, the estimate based on the current year’s
sales. The matching objective demands that this expense be matched against the period’s revenues.
12. A contingent liability is a potential liability that depends on a future event arising out of past
events. The future event will determine the amount and existence of the liability. A contingent
liability may or may not become an actual obligation.
13. Accounting conservatism (and the CPA Canada Handbook) tell us that contingent losses must
be accrued or disclosed but that gains are not reported until realized.
14. Service businesses sell their employees’ services, so employment compensation is their
major expense of doing business, just as cost of goods sold is the largest expense in merchandising.
15. The amount of income tax withheld from employee paycheques depends on the employee’s gross
pay, the amount of non-refundable tax credits claimed on the Personal Tax Credit Form (TD1), and
the tax rate set by CRA.
16. Required deductions: income tax, Canada (or Quebec) Pension Plan, and Employment Insurance.
17. Employers pay: Canada (or Quebec) Pension, Employment Insurance, Workers’
Compensation, and, where applicable, provincial payroll taxes regarding health and education.
18. Employment insurance premiums are determined annually by the federal government. This
answer is appropriate for 2024. Assuming a rate of 1.66 percent on earnings up to $63,200, the
maximum employment insurance premium this employee can pay is $1,049.12. The employer will
contribute 1.4 times this amount, or $1,468.77.
19. Some companies use a special payroll bank account to keep the payroll cheques separate from
the day-to-day business cheques. It may be easier to complete two bank reconciliations that are
less complicated than one large bank reconciliation. Any payroll issues may also be highlighted in a
separate payroll bank-account reconciliation.
20. A contingent liability is reported when it is probable that it will occur. The IFRS standard is lower
than for ASPE.
,Starters
(10 min.) S11-1
General Journal
Date Post.
20X2 Account Titles and Explanations Ref. Debit Credit
a. Dec. 31 Interest Expense 800
Interest Payable 800
Accrued interest expense at year end.
($32,000 × 0.06 × 5/12)
20X3
b. Jul. 31 Note Payable, Short-Term 32,000
Interest Payable 800
Interest Expense 1,120
Cash 33,920
Paid note and interest at maturity.
($32,000 × 0.06 × 7/12)
(5-10 min.) S11-2
MISSION CO.
Balance Sheet (partial)
December 31, 20X2
Assets Liabilities
Current liabilities
Note payable, short-term $32,000
Interest payable 800
MISSION CO.
Income Sheet (partial)
For the Year Ended December 31, 20X2
Revenues
Expenses
Interest expense $800
, (5-10 min.) S11-3
General Journal
Post.
Date Account Titles and Explanations Ref. Debit Credit
Jul. 10 Inventory 15,000
GST Recoverable (GST = $15,000 × 0.05) 750
Accounts Payable 15,750
Purchased goods for resale on account
Jul. 25 Accounts Receivable 21,000
GST Payable (GST = $20,000 x 0.05) 1,000
Sales Revenue 20,000
Cost of Goods Sold 15,000
Inventory 15,000
To record sale of goods on account
Aug. 10 GST Payable 1,000
GST Recoverable 750
Cash 250
Paid July GST to Receiver General.
(5 min.) S11-4
Kraft-Kwon will report $56,000 as the current portion of notes payable in the current liability
section. The remaining $224,000 will show as notes payable in the long-term liability section.
(5-10 min.) S11-5
General Journal
Post.
Date Account Titles and Explanations Ref. Debit Credit
Jul. 1 Cash 5,000
Unearned Subscription Revenue 5,000
To record subscription revenue received in
advance for one-year subscriptions.
Dec. 31 Unearned Subscription Revenue 2,083
Sales Revenue 2,083
To record five months of magazines sent and
revenue earned ($5,000 × 5/12)
