Like all other businesses, Canadian Tire adjusts accounts prior to year-end to measure assets, liabilities, revenues, and expenses for the financial statements. Examine Canadian Tire's balance sheet in Appendix A, and pay particular attention to (a) Prepaid Expenses and Deposits and (b) Trade and Other Payables.

Requirements

1. Why aren't Prepaid Expenses "true" expenses?

2. Open T-accounts for the Prepaid Expenses and Deposits account and the Trade Payables account. Insert Canadian Tire's balances (in millions) at December 28, 2013.

3. Journalize the following for the year ended January 3, 2015. Key entries by letter, and show accounts in millions. Explanations are not required.

a. Paid the beginning balance of Trade and Other Payables.

b. Allocated Prepaid Expenses of $68.2 to Selling, General and Administrative Expenses.

c. Recorded Trade and Other Payables in the amount of $1,961.2. Assume this relates to Selling, General and Administrative Expenses.

d. Recorded a prepayment of $104.5 in services to Prepaid Expenses.

4. Post these entries and show that the balances in Prepaid Expenses and in Trade and Other Payables agree with the corresponding amounts reported in the January 3, 2015, balance sheet.

5. Compute the current ratios and debt ratios for Canadian Tire at December 28, 2013, and at January 3, 2015. Did the ratio values improve, deteriorate, or hold steady during the year ended January 3, 2015? Do the ratio values indicate financial strength or weakness?