Current Liabilities Paper 2

(b) To compute the amount of the contribution, the requirements described in the problem must be translated into an equation. The contribution must equal 10% of income after deduction of the contribution, but before income tax. Therefore, the tax rate (30%) does not enter into the computation. The equation is solved below. C = .10 × ($75,000 −C) C = $7,500 −.10C 1.1C = $7,500 C = $7,500 ÷ 1.1 C = $6,818 The amount to be accrued as an expense and liability is $6,818.

(b) When the warehouse was purchased on 9/1/Y2, it would be recorded at its total cost before any credit for accrued realty taxes. The offsetting credits would be to cash for the net amount paid, and to real estate taxes payable for two months’ taxes ($12,000 × 2/6 = $4,000). At the end of September and of October, Day would record property tax expense each month as follows: Real estate tax expense 2,000 Real estate taxes payable 2,000 Therefore, at October 31, Day has a balance of $8,000 in the payable account ($4,000 + $2,000 + $2,000). On 11/1/Y2, Day would record the semiannual payment as follows: Real estate taxes payable 8,000 Prepaid real estate taxes 4,000 Cash 12,000 The prepaid real estate taxes would then be expensed $2,000 per month at the end of November and December

(d) An accrued liability is an expense which has been incurred, but has not been paid. Of the $500 advertising bill, $375 had been incurred as an expense as of 12/31/Y2 and should be reported as an accrued liability at that time. For the store lease, the fixed portion ($1,200 per month) is payable on the 16th of each month for the preceding month. Therefore, on 12/16/Y2, rent was paid for the period 11/16/Y2 to 12/15/Y2. An additional one-half month’s rent expense (1/2 × $1200 = $600) has been incurred but not paid as of 12/31/Y2. The variable portion of the rent [5% × ($550,000 – $300,000), or $12,500] was incurred during year 2, but will not be paid until 1/31/Y3. It, too, is an accrued liability at 12/31/Y2. Total 12/31/Y2 accrued liabilities are $13,475. Advertising $ 375 Fixed rent (1/2 × $1,200) 600 Variable rent [5% × ($550,000 −$300,000)] 12,500 Total $13,475

(b) At June 30, year 2, Northan Retailers should report the coupon transactions as unearned revenues because the sale of the coupons is not the culmination of the earnings process (i.e., Northan must allow customers to exchange the coupons for merchandise or refund the cost of the coupons at some later date). The unearned revenues should be recorded at the amount of the cash received by debiting cash and crediting an unearned revenue account. The retail price of the merchandise for which coupons may be redeemed does not impact the monetary amount of Northan’s liability to its customers, and each coupon redeemed will ultimately result in the recognition of sales of $10, the amount of cash previously received.

(b) The requirement is to determine the situation that might account for the reduction in the deferred revenue balance. When a service contract is purchased by a customer and the fee prepaid, deferred revenue is recognized at the date of payment. Revenue cannot be recorded because revenue has not yet been earned. Revenue is only recorded when services are performed under the contract. The deferred revenue balance is reduced by the actual amount of revenue earned when services are performed under the services contract. If more contracts were signed earlier in one year than another year, there is a greater period of time in which to perform actual services. As previously stated, when actual services are performed, the deferred revenue balance is decreased. Therefore, the more actual services that are performed, the greater the reduction in the deferred revenue balance. If more year 2 contracts were signed later in year 2 than year 1, the deferred revenue balance in year 2 would be larger than year 1. There would be less time to perform actual services, therefore less actual revenue would be recognized, creating a larger deferred revenue balance at year-end. There is no contribution margin recognized on service contracts.

(c) The aggregate amount of payments for unconditional purchase obligations that have been recognized on the purchaser’s balance sheet shall be disclosed for each of the five years following the date of the latest balance sheet presented.

(b) The requirement is to identify the response to a violation of a loan covenant on a long-term debt under IFRS. Answer (b) is correct because the debt must be reclassified as current.

(d) The requirement is to identify the account that would not be considered a “provision.” Answer (d) is correct because provisions are accounts that are uncertain as to amount or timing. They involve estimated amounts, such as warranty liabilities, bad debts, and taxes. A note payable is not uncertain as to amount or timing.

Correct answer: (A)
Product warranty

Correct answer: (B)
$5,910