The following are selected transactions of Pendlebury Department Store

The following are selected transactions of Pendlebury Department Store Ltd. for the current year ending December 31.

1. On February 2, the company purchased goods having cash discount terms of 2/10, n/30 from Hashmani Limited for $46,000. Purchases and accounts payable are recorded using the periodic system at net amounts after cash discounts.

The invoice was paid on February 26.

2. On April 1, Pendlebury 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, the company 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, Pendlebury remitted cheques for $19,000 each as instalments on its current year tax liability.

5. On August 14, the board of directors declared a $13,000 cash dividend that was payable on September 10 to share holders of record on August 31.

6. On December 5, the store received $750 from Jefferson Players as a deposit on furniture that Jefferson Players is using in its stage production. The deposit is to be returned to the theatre company after it returns the furniture on January 15.

7. On December 10, the store purchased new display cases for $8,000 on account. 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% 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. Pendlebury's lease for its store premises calls for a $2,500 monthly rental payment plus 3% of all sales. The payment is due one week after month end.

10. Pendlebury is legally required to restore the area surrounding one of its store parking lots, at an estimated cost of

$100,000, when the store is closed in two years. Pendlebury estimates that the fair value of this obligation at December 31 is $86,000.

11. The corporate tax return indicated taxable income of $205,000. Pendlebury'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 adjust ing journal entries relative to the transactions that would be required to present fair financial statements at December 31. Date each entry.

(b) Identify the current liabilities that will be reported on the December 31 balance sheet, and indicate the amount of each one.

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

(d) Why is the liabilities section of the balance sheet of primary significance to bankers? (e) How are current liabilities related by definition to current assets?

(a)                                                          February 2
Purchases ($46,000 X 98%).........................................................	45,080
Accounts Payable..............................................................		45,080
February 26
Accounts Payable..........................................................................	45,080
Purchase Discounts Lost..............................................................	920
Cash.....................................................................................		46,000
April 1
Trucks...............................................................................................	50,000
Cash.....................................................................................		5,000
Notes Payable.....................................................................		45,000
May 1
Cash  ...............................................................................................	83,000
Notes Payable.....................................................................		83,000
June 30
Income Tax Expense.....................................................................	19,000
Cash.....................................................................................		19,000
August 14
Retained Earnings (Dividends Declared)..................................	13,000
Dividends Payable.............................................................		13,000
September 10
Dividends Payable.........................................................................	13,000
Cash.....................................................................................		13,000
December 5
Cash  ...............................................................................................	750
Returnable Deposit Liability.............................................		750
December 10
Display Cases ($8,000 X 1.08).....................................................	8,640
GST Receivable ($8,000 X .05)....................................................	400
Accounts Payable..............................................................		9,040
December 31
Cash  ...............................................................................................	89,270
Sales ....................................................................................		79,000
Sales Taxes Payable ($79,000 X .08).............................		6,320
GST Payable ($79,000 X .05)...........................................		3,950
December 31
Rental Expense..............................................................................	4,870
Rental Payable...................................................................		4,870
($2,500 + [3% X $79,000])
December 31
Parking Lot......................................................................................	86,000
Asset Retirement Obligation.............................................		86,000
December 31
Income Tax Expense.....................................................................	19,000
Cash.....................................................................................		19,000
December 31
Income Tax Expense ....................................................................	3,000
Income Taxes Payable......................................................		3,000
($205,000 X 20%) – ($19,000 X 2)
December 31
Interest Expense ($45,000 X 8% X ¾)........................................	2,700
Interest Payable..................................................................		2,700
December 31
Interest Expense ($9,000 X 8/12)................................................	6,000
Notes Payable.....................................................................		6,000

(b)      Current Liabilities:
Accounts Payable..............................................................			$9,040
Note Payable.......................................................................	$45,000
Interest Payable..................................................................	2,700		47,700
Note Payable.......................................................................			89,000
Sales Taxes Payable.........................................................			6,320
GST Payable ($3,950 – $400)..........................................			3,550
Rental Payable...................................................................			4,870
Income Taxes Payable......................................................			3,000
Returnable Deposit Liability.............................................			750
Total Current Liabilities..............................................		$164,230
(c)                                                       December 10
Display Cases ($8,000 + [$8,000 X 1.05 X .08])........................	8,672
GST Receivable ($8,000 X .05)....................................................	400
Accounts Payable..............................................................			9,072
December 31
Cash  ...............................................................................................	89,586
Sales ....................................................................................			79,000
Sales Taxes Payable                  ($79,000 X 1.05 X .08)...................................................			6,636
GST Payable ($79,000 X .05)...........................................			3,950

(d)       As a lender of money, the banker is interested in the priority his/her claim has on the company’s assets relative to other claims. Close examination of the liability section and the related notes discloses amounts, maturity dates, collateral, subordination, and restrictions of existing contractual obligations, all of which are important to potential and existing creditors. The assets and earning power are likewise important to a banker considering a loan.

(e)       Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities.