Chapter 4
Current Liabilities
208
Case Study
CS-1 (
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Fulton Electronics sells televisions and other electronics. All the electronics come with a
default one-year warranty against defects. Warranty estimates are recorded every month.
Fulton estimates that warranty repairs or replacements are 2% of the sales price. Customers
are also able to purchase a two-year extended warranty. The warranty revenue is spread
evenly over the two-year period. During September 2016, the following transactions occurred.
The company uses the perpetual inventory system and operates in a province that has an HST
rate of 13%.
Sep 1 Purchased store fixtures for $300,000 plus HST. Since Fulton does not have the
cash, it signed a three-year note payable with a rate of 5%. Payment of $50,000
plus interest is due each March 1 and September 1 until the note matures.
Sep 1 Sold extended two-year warranties on products sold last month. Received $4,800
cash.
Sep 10 Incurred warranty costs of $500 to replace defective products sold last month. The
warranty costs were taken from inventory.
Sep 14 Prepared the payroll for employees for first half of the month. The actual payment
will be made at a later date. The employer also pays 100% of the CPP and 140% of
EI. Details of the payroll are shown below.
Gross Pay
$5,000
Canada Pension Plan
$247
Employment Insurance
$94
Income Tax
$1,000
Sep 15 Cash sales for the first half of the month amount to $400,000 plus HST. Cost of
goods sold is $240,000. Estimated warranty costs must also be recorded. There is
no sales tax recorded on warranty estimates.
Sep 15 Paid the amount of payroll owing to employees from September 14.
Sep 20 Purchased inventory on account for $150,000 plus HST.
Sep 29 Prepared the payroll for employees for the second half of the month. The actual
payment will be made at a later date. The employer also pays 100% of the CPP and
140% of EI. Details of the payroll are shown below.
Gross Pay
$6,000
Canada Pension Plan
$297
Employment Insurance
$113
Income Tax
$1,200
