Hrudka Corp. has manufactured a broad range of quality products since 1988. The operating cycle of the


Hrudka Corp. has manufactured a broad range of quality products since 1988. The operating cycle of the business is less than one year. The following information is available for the company's fiscal year ended February 28, 2017. Hrudka follows ASPE.
1. Hrudka has $4 million of bonds payable outstanding at February 28, 2017, which were issued at par in 2006 and are due in 2026. The bonds carry an interest rate of 7%, payable semi-annually each June 1 and December 1.
2. Hrudka has several notes payable outstanding with its primary banking institution at February 28, 2017. In each case, the annual interest is due on the anniversary date of the note each year (same as the due dates listed). The notes are as follows:

3. Hrudka uses the expense approach to account for assurance-type warranties. The company has a two-year warranty on selected products, with an estimated cost of 1% of sales being returned in the 12 months following the sale, and a cost of 1.5% of sales being returned in months 13 to 24 following the sale. The warranty liability outstanding at February 28, 2016 was $5,700. Sales of warrantied products in the year ended February 28, 2017 were $154,000. Actual warranty costs incurred during the current fiscal year are as follows:

4. The accounts payable subsidiary ledger shows balances of regular trade payables for supplies and purchases of goods and services on open account. Included in the net balance of $394,000 are accounts with credit balances totalling $414,000 and accounts with debit balances totalling $20,000 at February 28, 2017. Included in trade payables is a loan of $23,000 owing to an affiliated company.
5. The following information relates to Hrudka's payroll for the month of February 2017. Hrudka's required contribution for EI is 1.4 times the employee contribution; for CPP, it is 1.0 times the employee contribution.

6. Hrudka regularly pays GST owing to the Receiver General of Canada on the 15th of the month. Hrudka's GST transactions include the GST that it charges to customers and the GST that it is charged by suppliers of goods and services. During February 2017, purchases attracted $28,000 of GST, while the GST charged on invoices to customers totalled $39,900. At January 31, 2017, the balances in the GST Receivable and GST Payable accounts were $34,000 and $60,000, respectively.
7. Other miscellaneous liabilities included $50,000 of dividends payable on March 15, 2017; $25,000 of bonuses payable to company executives (75% payable in September 2017 and 25% payable in March 2018); and $75,000 in accrued audit fees covering the year ended February 28, 2017.
8. Hrudka sells gift cards to its customers. The company does not set a redemption date and customers can use their cards at any time. At March 1, 2016, Hrudka had a balance outstanding of $95,000 in its Unearned Revenue account. Hrudka received $22,500 in cash for gift cards purchased during the current year and $37,500 in redemptions took place during the year. Based on past experience, 15% of customer gift card balances never get redeemed. At the end of each year, Hrudka recognizes 15% of the opening balance of Unearned Revenue as earned during the year.

(a) Prepare the current liability section of the February 28, 2017 balance sheet of Hrudka Corp. Identify any amounts
that require separate presentation or disclosure under ASPE.
(b) For each item included as a current liability, identify whether the item is a financial liability. Explain.
(c) If you have excluded any items from the category of current liabilities, explain why you left them out.
(d) Assume that Hrudka Corp. is not in compliance with the debt covenants in the note payable due October 30, 2019
in item 2 above. How would this affect the classification of the note on the balance sheet?
(e) For a manufacturer such as Hrudka, how should the revenue from unredeemed gift cards be shown on the income
statement, as opposed to revenue from redeemed gift cards?
(f) Comment on any differences that would apply in your accounting treatment for parts (a) though (e) if Hrudka had
followed IFRS.

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Intermediate Accounting

ISBN: 978-1119048541

11th Canadian edition Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy

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