Chapter 13 solutions 11e

E13-2
(Accounts and Notes Payable)
The following are selected 2017 transactions of Darby Corporation.
Purchased inventory from Orion Ltd. on account for $50,000. Darby uses a periodic
Sept.
inventory system and records purchases using the gross method of accounting for purchase
1
discounts.
Oct. 1 Issued a $50,000, 12-month, 8% note to Orion in payment of Darby's account.
Borrowed $75,000 from the bank by signing a 12-month, non-interest-bearing $81,000
1
note.
Instructions
(a)  Prepare journal entries for the selected transactions above.
(b)  Prepare adjusting entries at December 31, 2017.
 
(c)  Calculate the net liability, in total, to be reported on the December 31, 2017 statement
of financial position for (1) the interest-bearing note, and (2) the non-interest-bearing note

EXERCISE 13-2 (10-15 minutes)

(a) Sept. 1 Purchases........................................................................................................

50,000
Accounts Payable...............................................................................
50,000

Oct. 1 Accounts Payable...........................................................................................

50,000
Notes Payable.....................................................................................
50,000

Oct. 1 Cash ............................................................................................................

75,000
Notes Payable.....................................................................................
75,000

(b) Dec. 31 Interest Expense.............................................................................................

1,000
Interest Payable..................................................................................
1,000
($50,000 X 8% X 3/12)

Dec. 31 Interest Expense.............................................................................................

1,500
Notes Payable.....................................................................................
1,500
[($81,000 – $75,000) X 3/12]

(c) (1) Note payable $50,000

Interest payable 1,000
$51,000

(2) Note payable at issuance $75,000

Interest accrued 1,500
Note payable balance $76,500

Page 1 of 19
EXERCISE 13-3 (15-20 minutes)
E13-3
(Notes Payable and Reversing Entry)
Refer to the information for Darby Corporation in E13-2.
Instructions
(a)  Prepare the journal entries for the payment of the notes at maturity.
(b)  Repeat part (a) assuming Darby uses reversing entries. (Show the reversing entries at
January 1, 2018.) Would the use of reversing entries be efficient for both types of notes?

(a) Oct. 1/18 Interest Expense *..........................................................................................

3,000
Interest Payable..............................................................................................
1,000
Notes Payable.................................................................................................
50,000
Cash.....................................................................................................
54,000
*($50,000 X 8% X 9/12)

Oct. 1/18 Interest Expense.............................................................................................

4,500
Notes Payable......................................................................................
4,500
[($81,000 – $75,000) X 9/12]

Notes Payable.................................................................................................
81,000
Cash.....................................................................................................
81,000

(b) Orion Note:

Jan. 1 Interest Payable..........................................................................................
1,000
Interest Expense.................................................................................
1,000

Oct. 1 Interest Expense.............................................................................................

4,000
Notes Payable.................................................................................................
50,000
Cash....................................................................................................
54,000

Bank note:
Jan. 1 Notes Payable.................................................................................................
1,500
Interest Expense.................................................................................
1,500

Oct. 1 Interest Expense.............................................................................................

6,000
Note Payable........................................................................................
6,000

Notes Payable.................................................................................................
81,000
Cash....................................................................................................
81,000

Page 2 of 19
EXERCISE 13-5 (25-35 minutes)
E13-5 (Entries for Sales Taxes)
Sararas Ltd. is a merchant and operates in the province of Ontario, where the HST rate is 13%.
Sararas uses a perpetual inventory system. Transactions for the business for the months of March
and April are as follows:
Mar. Paid March rent to the landlord for the rental of a warehouse. The lease calls for monthly
1 payments of $5,500 plus 13% HST.
Sold merchandise on account and shipped merchandise to Marcus Ltd. for $20,000, terms
3
n/30, f.o.b. shipping point. This merchandise cost Sararas $11,000.
Granted Marcus a sales allowance of $500 (exclusive of taxes) for defective merchandise
5
purchased on March 3. No merchandise was returned.
Purchased merchandise for resale on account from Tinney Ltd. at a list price of $4,000,
7
plus applicable tax.
Purchased a desk for the shipping clerk, and paid by cash. The price of the desk was $600
12
before applicable tax.
Apr.
Paid the monthly remittance of HST to the Receiver General.
15
30 Paid the monthly PST remittance to the Treasurer of the province (where applicable).
Instructions
(a)  Prepare the journal entries to record these transactions on the books of Sararas Ltd.
(b)  Assume instead that Sararas operates in the province of Alberta, where PST is not
applicable. GST is charged at the rate of 5%. Prepare the journal entries to record these
transactions on the books of Sararas.
(c)  Assume instead that Sararas operates in a province where 10% PST is also charged on the
5% GST. Prepare the journal entries to record these transactions on the books of Sararas. Rental
payments and inventory purchased for resale are PST-exempt.

Page 3 of 19
(a) Province of Ontario
March 1 Rent Expense....................................................... 5,500
HST Receivable ($5,500 X 13%)........................ 715
Cash............................................................... 6,215

3 Accounts Receivable—Marcus........................... 22,600

Sales Revenue................................................ 20,000
HST Payable ($20,000 X 13%)..................... 2,600
 
Cost of Goods Sold.............................................. 11,000
Inventory.......................................................   11,000

5 Sales Returns and Allowances............................ 500

HST Payable ($500 X 13%)................................ 65
Accounts Receivable—Marcus..................... 565

7 Inventory............................................................. 4,000
HST Receivable ($4,000 X 13%)........................ 520
Accounts Payable—Tinney............................ 4,520

12 Furniture and Fixtures ........................................ 600

HST Receivable ($600 X 13%)........................... 78
Cash...............................................................   678

Apr. 15 HST Payable ($2,600 – $65)............................... 2,535

Cash............................................................... 1,222
HST Receivable............................................. 1,313
($715 + $520 + $78)
(b) Province of Alberta

March 1 Rent Expense........................................................ 5,500  

GST Receivable ($5,500 X 5%)........................... 275
Cash............................................................... 5,775

3 Accounts Receivable—Marcus............................ 21,000  

Sales Revenue................................................ 20,000
GST Payable ($20,000 X 5%)....................... 1,000
     
Cost of Goods Sold............................................... 11,000
Inventory........................................................ 11,000

5 Sales Returns and Allowances.............................. 500

GST Payable ($500 X 5%)................................... 25
Accounts Receivable—Marcus..................... 525

7 Inventory............................................................... 4,000  

Page 4 of 19
 GST Receivable ($4,000 X 5%)........................... 200  
Accounts Payable—Tinney...........................   4,200

12 Furniture and Fixtures ......................................... 600

GST Receivable ($600 X 5%).............................. 30
Cash............................................................... 630

Apr. 15 GST Payable ($1,000 – $25)................................ 975  

Cash............................................................... 470
GST Receivable
($275 + $200 + $30)...................................... 505
(c)
March 1 Rent Expense.................................................................................................
5,500
GST Receivable ($5,500 X 5%)....................................................................
275
Cash....................................................................................................
5,775

3 Accounts Receivable—Marcus......................................................................
23,100  
Sales Revenue....................................................................................
20,000
GST Payable ($20,000 X 5%)........................................................... 1,000
PST Payable.......................................................................................
2,100
[($20,000 X 1.05) X 10%]

Cost of Goods Sold........................................................................................

11,000
Inventory............................................................................................
11,000

5 Sales Returns and Allowances.......................................................................

500
GST Payable ($500 X 5%)............................................................................
25
PST Payable [($500 X 1.05) X 10%].............................................................
53
Accounts Receivable—Marcus 578

7 Inventory........................................................................................................
4,000
GST Receivable ($4,000 X 5%)....................................................................
200
Accounts Payable—Tinney............................................................... 4,200

12 Furniture and Fixtures ($600 + $63*)............................................................

663
GST Receivable ($600 X 5%).......................................................................
30
Cash....................................................................................................693
* ($600 X 1.05) X 10% = $63

Apr. 15 GST Payable ($1,000 – $25)..........................................................................

975
Cash ...................................................................................................470
GST Receivable
($275 + $200 + $30)..........................................................................505

30 PST Payable............................................................... 2,047

Cash ($2,100 - $53)........................................ 2,047
EXERCISE 13-10 (15-20 minutes)
(Payroll Tax Entries)

Page 5 of 19
The payroll of Sumerlus Corp. for September 2017 is as follows. Total payroll was $485,000.
Pensionable (CPP) and insurable (EI) earnings were $365,000. Income taxes in the amount of
$85,000 were withheld, as were $8,000 in union dues. The EI tax rate was 1.88% for employees
and 2.632% for employers, and the CPP rate was 4.95% for employees and 4.95% for employers.
Instructions
(a)  Prepare the necessary journal entries to record the payroll if the salaries and wages paid and
the employer payroll taxes are recorded separately.
(b)  Prepare the entries to record the payment of all required amounts to the Receiver General
  and to the employees' union.
(c)  For every dollar of salaries and wages that Sumerlus commits to pay, what is the actual
payroll cost to the company?
(d)  Discuss any other costs, direct or indirect, that you think would add to the company's costs
of having employees.

(a) Salaries and Wages Expense..........................................................................

485,000
Employee Income Tax Deductions
Payable................................................................................... 85,000
EI Premiums Payable*................................................................ 6,862
CPP Contributions Payable**..................................................... 18,068
Union Dues Payable.................................................................... 8,000
Cash............................................................................................. 367,070
*$365,000 X 1.88% = $6,862
**$365,000 X 4.95% = $18,068

Payroll Tax Expense..........................................................................

27,675
EI Premiums Payable.................................................................. 9,607
$365,000 X 2.632%
CPP Contributions Payable......................................................... 18,068
(See previous calculation)

(b) Employee Income Tax Deductions

Payable......................................................................................................
85,000
EI Premiums Payable ($6,862 + $9,607)........................................... 16,469
CPP Contributions Payable........................................................... 36,136
($18,068 + $18,068)
Cash............................................................................................. 137,605

Union Dues Payable........................................................................... 8,000

Cash............................................................................................. 8,000

(c) Salaries and wages for September 2017 $485,000

Payroll tax expense 27,675
Total payroll cost for September 2017 $512,675
Cost per dollar of salaries and wages = ($512,675  $485,000) = $1.057

(d) The company may have additional employee-related costs such as Workplace Safety and
Insurance Board (WSIB) coverage, health taxes, life, health and disability insurance,

Page 6 of 19
pension benefits, compensated absences (paid vacation, maternity/paternity leave, sick
pay) and indirect costs such as a human resources department.

Page 7 of 19
EXERCISE 13-12 (25-30 minutes)
Refer to the data in E13-11 and assume instead that Mustafa Limited has chosen not to recognize
paid sick leave until it is used, and has chosen to accrue vacation time at expected future
rates of pay without discounting. Mustafa uses the following projected rates to accrue
vacation time:
Actual Hourly Wage Vacation Days Used by Each Sick Days Used by Each
Rate Employee Employee
2016 2017 2016 2017 2016 2017
$20 $21 0 9 4 5

Year in Which Vacation Time Was Projected Future Pay Rates Used to Accrue Vacation
Earned Pay
2016 $20.75 per hour
2017 $21.60 per hour

(a)
2016 To accrue the expense and liability for vacations:
Salaries and Wages Expense 14,940 (1)
Vacation Wages Payable 14,940

To record vacation time paid:

No entry.

2017 To accrue the expense and liability for vacations:

Salaries and Wages Expense 15,552 (2)
Vacation Wages Payable 15,552

To record vacation time paid:

Salaries and Wages Expense 162
Vacation Wages Payable 13,446 (3)
Cash 13,608 (4)

(1) 9 employees X $20.75/hr. X 8 hrs./day X 10 days = $19,940

(2) 9 employees X $21.60/hr. X 8 hrs./day X 10 days = $15,552
(3) 9 employees X $20.75/hr. X 8 hrs./day X 9 days = $13,446
(4) 9 employees X $21.00/hr. X 8 hrs./day X 9 days = $13,608

(b)
2016 To record sick time paid:
Salaries and Wages Expense 5,760 (1)
Cash 5,760

2017 To record sick time paid:

Salaries and Wages Expense 7,560 (2)
Cash 7,560

(1) 9 employees X $20.00/hr. X 8 hrs./day X 4 days = $5,760

(2) 9 employees X $21.00/hr. X 8 hrs./day X 5 days = $7,560
Page 8 of 19
EXERCISE 13-12 (CONTINUED)

(c) Accrued liability at year-end (vacation pay only):

2016 2017
Jan. 1 balance $ 0 $14,940
+ accrued 14,940 15,552
– paid ( 0) (13,446)
Dec. 31 balance $14,940(1) $17,046(2)

(1) 9 employees X $20.75/hr. X 8 hrs./day X 10 days = $14,940

(2) 9 employees X $20.75/hr. X 8 hrs./day X 1 day = $ 1,494

9 employees X $21.60/hr. X 8 hrs./day X 10 days = 15,552
$17,046

Page 9 of 19
EXERCISE 13-15 (30-35 minutes)
(Asset Retirement Obligation)
On January 1, 2017, Offshore Corporation erected a drilling platform at a cost of $5,460,000.
Offshore is legally required to dismantle and remove the platform at the end of its six-year useful
life, at an estimated cost of $950,000. Offshore estimates that 70% of the cost of dismantling and
removing the platform is caused by acquiring the asset itself, and that the remaining 30% of the
cost is caused by using the platform in production. The present value of the increase in asset
retirement obligation related to the production of oil in 2017 and 2018 was $32,328 and $34,914,
respectively. The estimated residual value of the drilling platform is zero, and Offshore uses
straight-line depreciation. Offshore prepares financial statements in accordance with IFRS.
Instructions
(a)  Prepare the journal entries to record the acquisition of the drilling platform, and the asset
retirement obligation for the platform, on January 1, 2017. An appropriate interest or discount
rate is 8%.
(Hint: For a review of present value concepts, see Appendix 3B of Volume 1.)
(b)  Prepare any journal entries required for the platform and the asset retirement obligation at
December 31, 2017.
(c)  Prepare any journal entries required for the platform and the asset retirement obligation at
December 31, 2018.
(d)  Assume that on December 31, 2022, Offshore dismantles and removes the platform for a
cost of $922,000. Prepare the journal entry to record the settlement of the asset retirement
obligation. Also assume its carrying amount at that time is $950,000.
(e)  Repeat parts a through d assuming that Offshore prepares financial statements in accordance
with ASPE.

(a) January 1, 2017

Drilling Platform 5,460,000
Cash 5,460,000

Drilling Platform 419,063

Asset Retirement Obligation 419,063
(PV of $950,000 using i=8% and n=6) X 70%
$950,000 X .63017 X 70%

(b) December 31, 2017

Depreciation Expense 979,844
Accumulated Depreciation –
Drilling Platform 979,844
($5,460,000 + $419,063) ÷ 6

Interest Expense 33,525

Asset Retirement Obligation 33,525
$419,063 X 8%

Page 10 of 19
Inventory 32,328
Asset Retirement Obligation 32,328

(c) December 31, 2018

Depreciation Expense 979,844
Accumulated Depreciation –
Drilling Platform 979,844
($5,460,000 + $419,063) ÷ 6

Interest Expense 38,793

Asset Retirement Obligation 38,793
($419,063 + $33,525 + $32,328) X 8%

Inventory 34,914
Asset Retirement Obligation 34,914

(d) December 31, 2022

Asset Retirement Obligation 950,000
Gain on Settlement of ARO 28,000
Cash 922,000

(e) January 1, 2017

Drilling Platform 5,460,000
Cash 5,460,000

Drilling Platform 419,063

Asset Retirement Obligation 419,063
(PV of $950,000 using i=8% and n=6) X 70%
$950,000 X .63017 X 70%

December 31, 2017

Depreciation Expense 979,844
Accumulated Depreciation –
Drilling Platform 979,844
($5,460,000 + $419,063) ÷ 6

Accretion Expense 33,525

Asset Retirement Obligation 33,525
$419,063 X 8%

Drilling Platform 32,328

Asset Retirement Obligation 32,328

December 31, 2018

Depreciation Expense 986,310
Accumulated Depreciation –
Drilling Platform 986,310
($5,460,000 + $419,063) ÷ 6 + $32,328 ÷ 5

Page 11 of 19
 38,793

Accretion Expense
Asset Retirement Obligation 38,793
($419,063 + $33,525 + $32,328) X 8%

Drilling Platform 34,914

Asset Retirement Obligation 34,914

December 31, 2022

Asset Retirement Obligation 950,000
Gain on Settlement of ARO 28,000
Cash 922,000

Page 12 of 19
EXERCISE 13-21 (20-25 minutes)
(Warranties—Assurance-Type and Service-Type)
Selzer Equipment Limited sold 500 Rollomatics on account during 2017 for $6,000 each. During
2017, Selzer spent $30,000 servicing the two-year warranties that are included in each sale of the
Rollomatic. All servicing transactions were paid in cash.
Instructions
(a)  Prepare the 2017 entries for Selzer using the assurance-type (expense-based)
approach for warranties. Assume that Selzer estimates that the total cost of servicing the
warranties will be $120,000 for two years.
(b)  Prepare the 2017 entries for Selzer assuming that the warranties are not an integral
part of the sale, but rather a separate service that is considered to be bundled with the
selling price. Use the service-type (revenue-based) approach for warranties. Assume
that of the sales total, $160,000 is identified as relating specifically to sales of warranty
contracts. Selzer estimates the total cost of servicing the warranties will be $120,000 for
two years. Because the repair costs are not incurred evenly, warranty revenues are
recognized based on the proportion of costs incurred out of the total estimated costs.
 (c)  What amounts would be shown on Selzer's income statement under parts (a) and (b)
? Explain the resulting difference in the Selzer's net income.
(d)  Are assurance-type and service-type warranties recorded differently in IFRS and
ASPE?
(e)  Assume that the equipment sold by Selzer undergoes technological improvements
and management now has no past experience on which to estimate the extent of the
warranty costs. The chief engineer believes that product warranty costs are likely to be
incurred, but they cannot be reasonably estimated. What advice would you give on how
to account for and report the warranties?

(a) Accounts Receivable......................................................................................

3,000,000
Sales Revenue....................................................................................
3,000,000
(500 X $6,000)

Warranty Expense..........................................................................................
30,000
Cash.................................................................................................... 30,000

Warranty Expense..........................................................................................
90,000
Warranty Liability.............................................................................. 90,000
($120,000 – $30,000)

(b) Accounts Receivable......................................................................................

3,000,000
Sales Revenue....................................................................................
2,840,000
Unearned Warranty Revenue.............................................................160,000

Warranty Expense..........................................................................................
30,000
Cash.................................................................................................... 30,000

Page 13 of 19
 Unearned Warranty Revenue.........................................................................
40,000
Warranty Revenue............................................................................. 40,000
[$160,000 X ($30,000/$120,000)]

(c)

Sales Revenue $3,000,000 $2,840,000

Warranty Revenue 0 40,000
Warranty Expense (120,000) (30,000)
Net Income $2,880,000 $2,850,000

Treating the warranty as an integral part of the sale under the assurance-type (expense
based approach) for warranties will trigger a larger expense. This is because the full cost of
servicing the product over the course of the warranty period must be estimated and
disclosed in the period of sale. The warranty expense under a service-type (revenue based
approach) for warranties consists of only expenses incurred in the current period.

The presentation of sales revenue will also differ under the two approaches. Under the
assurance-type warranty, the sales proceeds from selling the product generate only one
revenue source. Under the service-type warranty approach, the sale of the product
generates two different revenue streams (the sale of the product and the sale of the
warranty contract as service revenue) as well as two gross profit sources (sales revenue less
cost of goods sold and warranty revenue net of warranty expense).

The service-type warranty approach generates a lower income in the current year because a
portion of the profit is deferred to future periods when it is earned as the service is
provided.

(d) The recording of assurance-type and service-type warranties is the same under IFRS and
ASPE. However, under ASPE, it is based on the principle that when revenue covers a
variety of deliverables (bundled sales) it should be unbundled and the revenue allocated to
the various goods or services that are required to be performed.

(e) If the warranty costs are considered to be immaterial, the cash basis method could be used
and warranty costs recognized in the year they are incurred. However, if the warranty costs
are considered material to the company’s financial statements, the company may have to
defer recognizing the revenue from the sale of the product until all costs can be measured
and matched against the related revenues.

Page 14 of 19
 PROBLEM 13-5
Sultanaly Limited, a private company following ASPE, pays its office employees each week. A
partial list follows of employees and their payroll data for August. Because August is the
vacation period, vacation pay is also listed.
Weekly
Employee Vacation Pay to Be Received in August
Pay
Mark Olly $  450 $  900
Bill Ganton    610  1,220
Laurie Evans    550  
Louise
 1,250  2,500
Bérubé
Jeff Huziak    780  
Assume that the income tax withheld is 10% of salaries and that union dues withheld are 1% of
gross salary. Vacations are taken in the second and third weeks of August by Olly, Ganton, and
Bérubé. The Employment Insurance rate is 1.88% for employees and 1.4 times that for
employers. The CPP rate is 4.95% each for employee and employer.
Instructions
(a)  Prepare the journal entries that are necessary for each of the four August payrolls. The
entries for the payroll and for Sultanaly's payroll tax are made separately.
(b)  Prepare the entry to record the monthly payment of accrued payroll liabilities.
(c)  Prepare the entry to accrue the 4% vacation entitlement that was earned by employees in
August. (No entitlement is earned on vacation pay.)
  (d)  When Sultanaly prepares its income statement, it groups salaries and wages expense with
payroll tax expense and labels the amount “Salaries and related expenses.” Therefore, the bank
cannot figure out exactly how much is being paid to employees. Any outstanding vacation
wages payable is grouped with other accruals of expenses and shown as accrued liabilities in the
current liability section of Sultanaly's balance sheet. You are Sultanaly's banker. Do you feel
that you require more detail concerning the combined expense on the income statement or
combined accrued liabilities on the balance sheet?

(a) Entries for Payroll 1 and 4 (individually)

Salaries and Wages Expense..........................................................................
3,640.00*
Employee Income Tax Deductions
Payable (10% X $3,640)............................................................... 364.00
EI Premiums Payable **.................................................................... 68.43
CPP Contributions Payable ***......................................................... 180.18
Union Dues Payable (1% X $3,640).................................................. 36.40
Cash.................................................................................................... 2,990.99

*$450 + $610 + $550 + $1,250 + $780 = $3,640

Payroll Tax Expense......................................................................................

275.98
EI Premiums Payable (1.4 X $68.43)................................................ 95.80
Page 15 of 19
 CPP Contributions Payable................................................................ 180.18

** EI Premiums = $3,640 X 1.88% = $68.43

***CPP Contributions = $3,640 X 4.95% = $180.18

Entries for Payroll 2 and 3 (individually)

Vacation Wages Payable
($450 + $610 + $1,250)..............................................................................
2,310.00
Salaries and Wages Expense ($550 + $780).................................................. 1,330.00
Employee Income Tax Deductions
Payable (10% X $3,640)............................................................... 364.00
EI Premiums Payable ........................................................................ 68.43
CPP Contributions Payable................................................................ 180.18
Union Dues Payable (1% X $3,640).................................................. 36.40
Cash.................................................................................................... 2,990.99

Payroll Tax Expense......................................................................................

275.98
EI Premiums Payable (1.4 X $68.43)................................................ 95.80
CPP Contributions Payable................................................................ 180.18

(b) Monthly Payment of Payroll Liabilities

Employee Income Tax Deductions Payable
($364.00 X 4)............................................................................................
1,456.00
EI Premiums Payable
[($68.43 X 4) + ($95.80 X 4)].................................................................. 656.92
CPP Contributions Payable ($180.18 X 8).................................................... 1,441.44
Union Dues Payable ($36.40 X 4)................................................................. 145.60
Cash.................................................................................................... 3,699.96

(c) Vacation Entitlement for August

Salaries and Wages Expense..........................................................................
397.60
Vacation Wages Payable ................................................................... 397.60

$3,640 X 2 weeks X 4% = $291.20

$1,330 X 2 weeks X 4% = 106.40
$397.60

(d) As Sultanaly’s banker I do not object to the presentation adopted for salaries, wages and
related expenses, nor for the accrued liabilities. A certain level of grouping to reduce
details is perfectly acceptable and likely useful. It is fairly standard to accrue vacation
entitlement at the rate of 4% and the statutory deductions are well known and could easily
be estimated to arrive at a gross pay amount. Should details in either groupings of accounts
become necessary, I would not hesitate to request the detail from the bank’s client.

Page 16 of 19
 PROBLEM 13-6
The following is a payroll sheet for Bayview Golf Corporation for the first week of November
2017. The Employment Insurance rate is 1.88% and the maximum annual deduction per
employee is $930.60. The employer's obligation for Employment Insurance is 1.4 times the
amount of the employee deduction. Assume a 15% income tax rate for all employees, and a
4.95% CPP premium charged to both the employee and employer, up to an annual maximum of
$2,479.95 per employee. Union dues are 1% of earnings. Bayview is a private corporation
following ASPE.
Earnings to Oct. 1st Week Nov. Income Tax
Name CPP EI Union Dues
31 Earnings Deducted
L.
$36,120 $  840        
Meloche
P. Groot  33,540    780        
D.
 54,180  1,260        
Beaux
C.
  6,000  1,000        
Regier
Instructions
(a)  Complete the payroll sheet and prepare the necessary entry to record the payment
of the payroll.
(b)  Prepare the entry to record the employer's payroll tax expense.
(c)  Prepare the entries to record the payments of the payroll liabilities (1) to the
Receiver General and (2) to the employees' union. Assume that Bayview pays all
payroll liabilities at the end of each month.
(d)  What is the total expense that Bayview will report for the first week of November
2017 relative to employee compensation? (Ignore any vacation pay accrual.) What
percentage of gross pay is the payroll tax expense? Will this percentage be a constant
  
for all pay periods?
(e)  Bayview's management is considering laying off all of its employees and
immediately thereafter entering into contracts with each employee, creating a
contractor relationship with the business. Bayview reasons that severance packages do
not need to be paid because immediate reinstatement with the company will be made
available to all employees. This way all payroll tax expenses are avoided and the total
labour expense would not only be reduced but be characterized as contract service
expense on the income statement. Assume the plan is put into place for the current year.
As a potential investor who is looking at the current year's comparative income
statement, how will your decisions be affected by the reclassification of labour costs?

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 (a)
1st week Income
Earnings to of Nov. Tax Union
Name Oct. 31 Earnings Deducted CPP EI Dues
L. Meloche $36,120 $ 840 $ 126 $ 41.58 $15.79 $8.40
P. Groot 33,540 780 117 38.61 14.66 7.80
D. Beaux 54,180 1,260 189 * * 12.60
C. Regier 6,000 1,000 150 49.50 18.88 10.00
Total $129,840 $3,880 $582 $129.69 $49.25 $38.80
* Annual maximum was previously reached

Salaries and Wages Expense..........................................................................

3,880.00
Employee Income Tax
Deductions Payable ...................................................................... 582.00
EI Premiums Payable ........................................................................ 49.25
CPP Contributions Payable................................................................ 129.69
Union Dues Payable........................................................................... 38.80
Cash....................................................................................................3,080.26

(b) Payroll Tax Expense......................................................................................

198.64
EI Premiums Payable (1.4 X $49.25)................................................ 68.95
CPP Contributions Payable................................................................ 129.69

(c) Employee Income Tax Deductions

582.00
Payable......................................................................................................
EI Premiums Payable
($49.25 + $68.95)......................................................................................
118.20
CPP Contributions Payable
($129.69 + $129.69)..................................................................................
259.38
Cash.................................................................................................... 959.58

Union Dues Payable ......................................................................................

38.80
Cash.................................................................................................... 38.80

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PROBLEM 13-6 (CONTINUED)

(d) Salaries and Wages Expense $3,880.00

Payroll tax expense 198.64
Total cost for first week of November, 2017 $4,078.64
Percentage of payroll tax expense to gross pay 5.1%

Later in the calendar year, some employees will have reached the maximum amount of
contributions to the CPP and EI programs, as was the case for D. Beaux above.
Consequently, the payroll tax expense will be higher at the beginning of the calendar year,
or at the beginning of the employment of a new employee and lower at the end of the
calendar year, assuming employees earn more than $49,500 per year for EI and $53,600 for
CPP calculation purposes.

(e) As a potential investor, I would likely not be fooled by the reclassification of labour costs.
I would be concerned with the shift from salaried employees to contract services provided
by the same employees. My first concern would be with the Canada Revenue Agency
(CRA) which keeps a close eye on employers who are mischaracterizing their relationships
with employees in order to save costs on payroll expenses including CPP and EI, or for
vacation pay or parental leave entitlements and possibly also additional benefit costs for
such plans for medical and dental coverage. Bayview would be responsible for any
penalties and unpaid payroll tax CRA would deem should have been remitted. My second
concern would be with employee loyalty. Since Bayview would not be perceived as a long-
term employer and could lay off employees on short notice with few consequences,
employees would be more likely to look elsewhere for employment, causing high turnover
of staff at Bayview.

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