To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Current Liabilities QUESTIONS The three questions are: (1) Who must be paid? (2) When is payment due? (3) How much is to be paid? A current liability is expected to be paid within one year or the company’s operating cycle, whichever is longer Any liability that is not current is considered to be long term An estimated liability is an obligation to make a future payment, the exact amount of which is uncertain, but it is capable of being reasonably estimated The amount of the sale for the item only is $950 ($988/1.04) The combined Social Security tax rate (assuming the maximum wage amount is not yet reached) is 12.4% (6.2% + 6.2%) The maximum level of earnings [wage base on which taxes are due] for 2006 is $94,200 The Medicare tax rate is 1.45% This rate is applied to all wages earned by an employee—no maximum limit exists An employee’s gross earnings along with the number of withholding allowances that an employee claims, as well as whether they are married or single, determine the amount deducted for federal income taxes The employee is responsible for federal income taxes, state income taxes, local income taxes (if any), and the employee portion of the FICA taxes The employer is responsible for both federal and state unemployment taxes and the employer portion of the FICA taxes An unemployment merit rating is based on an evaluation of an employer’s experience in creating or avoiding unemployment with its employees The merit rating affects the state unemployment taxes that the employer must pay Merit ratings cause more of the cost of unemployment benefits to be paid by those who create more unemployment 10 The obligation to correct or replace defective products (or services) is created when the products are sold with the warranties Even though the seller does not know with certainty when the obligation will be paid, to whom it will be paid, or the amount to be paid, past experience shows that some amount will probably be paid If the seller can reasonably estimate that amount, the warranty liability must be reported on the balance sheet ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 463 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11 There are no conditions in which a probable loss tied to a future event can create a liability, regardless of its probability A liability is an obligation created by a past event, not by a future event If a disaster occurs, the company must report the loss in the period when it occurs 12.A A wage bracket withholding table shows for a pay period of a given length (weekly, biweekly, semimonthly, monthly), the amounts of federal income taxes to be withheld from the pay of an employee, at varying amounts of gross pay and varying numbers of withholding allowances 13.A Single employee earning $725 with two allowances has $76 taxes withheld Single employee earning $625 with no allowances has $81 taxes withheld 14 At February 26, 2005, Best Buy reports ―Accrued compensation and related expenses‖ in the amount of $234,000,000 15 Circuit City has two income-tax-related assets on its balance sheet, and two incometax-related liabilities One account is a current Deferred income taxes asset account and another is a noncurrent deferred income taxes asset account Deferred tax assets are accounts that represent income taxes that the company has paid before the taxes have been reported on the income statement as income tax expenses The current liabilities include Deferred income taxes as well These represent income taxes that the company has reported on its income statement as income tax expense before they have paid the taxes The final income-tax-related liability is Accrued income taxes This represents taxes that must be paid to the government in the short term 16 At September 25, 2004, Apple reports three current liabilities: Accounts payable, Accrued expenses, and Current debt ©McGraw-Hill Companies, 2008 464 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com QUICK STUDIES Quick Study 9-1 (5 minutes) Items 3, 4, and are current liabilities for this company Quick Study 9-2 (10 minutes) Oct 31 Cash 5,000,000 Unearned Ticket Revenue 5,000,000 To record sales in advance of concerts Nov Unearned Ticket Revenue 1,250,000 Earned Ticket Revenue 1,250,000 To record concert revenues earned Quick Study 9-3 (10 minutes) Sept 30 Cash 6,300 Sales Sales Taxes Payable 6,000 300 To record cash sales and 5% sales tax Sept 30 Cost of Goods Sold 3,900 Merchandise Inventory 3,900 th To record cost of Sept 30 sales Oct 15 Sales Taxes Payable 300 Cash 300 To record remittance of sales taxes to govt ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 465 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 9-4 (15 minutes) Computation of interest payable at December 31, 2008: Days from November to December 31 54 days Accrued interest (8% x $160,000 x 54/360) $1,920 2008 Dec.31 Interest Expense 1,920 Interest Payable 1,920 To record accrued interest (8% x $160,000 x 54/360) 2009 Feb Interest Expense 1,280 Interest Payable 1,920 Notes Payable 160,000 Cash 163,200 To record payment of note plus interest (8% x $160,000 x 90/360) Quick Study 9-5 (15 minutes) [Note: Two months (January and February) of earnings have already been recorded for each of the employees.] Mar 31 Payroll Taxes Expense 1,316.25 FICA—Social Security Taxes Payable1 FICA—Medicare Taxes Payable2 State Unemployment Taxes Payable3 Federal Unemployment Taxes Payable4 775.00 181.25 280.00 80.00 To record employer payroll taxes $12,500 x 6.2% = $775.00 $12,500 x 1.45% = $181.25 [5 x ($7,000 - ($2,500 x 2))] x 2.8% = $280.00 [5 x ($7,000 - ($2,500 x 2))] x 0.8% = $80.00 Quick Study 9-6 (5 minutes) Vacation Benefits Expense Vacation Benefits Payable 500 500 To record vacation benefits accrued ©McGraw-Hill Companies, 2008 466 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 9-7 (5 minutes) Dec 31 Employee Bonus Expense 15,000 Bonus Payable 15,000 To record expected bonus costs Quick Study 9-8 (10 minutes) 2008 July 24 Estimated Warranty Liability Repair Parts Inventory 55 55 To record cost of warranty repairs Quick Study 9-9 (10 minutes) (b); reason—is reasonably estimated but not a probable loss (b); reason—probable loss but cannot be reasonably estimated (a); reason—can be reasonably estimated and loss is probable Quick Study 9-10 (10 minutes) Times interest earned = $1,885,000 $145,000 = 13 times Interpretation: This company’s times interest earned ratio of 13 exceeds (is superior to) its competitors’ average ratio of 4.0 Moreover, a times interest earned of 13 suggests sufficient income to cover interest obligations Quick Study 9-11B (10 minutes) Dec 31 Income Taxes Expense 40,000 Income Taxes Payable Deferred Income Tax Liability 34,000 6,000 To record tax expense and deferred tax liability ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 467 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 9-1 (10 minutes) C C L N C L C C C 10 C Warranty Expense Estimated Warranty Liability 5,440 Exercise 9-2 (15 minutes) [Note: All entries dated December 31, 2008.] 5,440 To record warranty expense [4,000 units x 8% x $17] No adjusting entry can be made since the loss cannot be reasonably estimated Disclosure of the suit as a contingent liability should be made in the notes to the financial statements Vacation Benefits Expense Vacation Benefits Payable 3,000 3,000 To record vacation benefits expense [20 employees x day x $150] No adjusting entry is required since it is not probable that the supplier will default on the debt The guarantor, Casco Company, should describe the guarantee in its financial statement notes as a contingent liability Cash 787,500 Sales Sales Taxes Payable 750,000 37,500 To record sales and sales taxes Cost of Goods Sold 500,000 Merchandise Inventory 500,000 To record cost of sales Unearned Services Revenue 75,000 Earned Services Revenue 75,000 To record product revenue earned ©McGraw-Hill Companies, 2008 468 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 9-3 (15 minutes) B = 0.03 ($500,000 – B) B = $15,000 – 0.03B 1.03B = $15,000 B = $14,563 (rounded to nearest dollar) 2008 Dec 31 Employee Bonus Expense Bonus Payable 14,563 14,563 To record expected bonus costs 2009 Jan 19 Bonus Payable Cash 14,563 14,563 To record payment of bonus Exercise 9-4 (30 minutes) Maturity date = May 15 + 60 days = July 14, 2008 2a May 15 Cash 104,000 Notes Payable 104,000 Borrowed cash by issuing an interest-bearing note 2b July 14 Interest Expense* 2,080 Notes Payable 104,000 Cash 106,080 Repaid note plus interest * Principal $104,000 x Interest rate 12% x Fraction of year 60/360 Total interest $ 2,080 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 469 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 9-5 (30 minutes) Maturity date = November + 90 days = January 30, 2009 Principal $200,000 x Interest rate 9% x Fraction of year (Nov – Dec 31) 60/360 Total interest in 2008 $ 3,000 Principal $200,000 x Interest rate 9% x Fraction of year (Jan – Jan 30) 30/360 Total interest in 2009 $ 1,500 4a 2008 Nov Cash 200,000 Notes Payable 200,000 Borrowed cash by issuing an interest-bearing note 4b 2008 Dec 31 Interest Expense 3,000 Interest Payable 3,000 Accrued interest on note payable 4c 2009 Jan 30 Interest Expense 1,500 Interest Payable 3,000 Notes Payable 200,000 Cash 204,500 Repaid note plus interest ©McGraw-Hill Companies, 2008 470 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 9-6 (20 minutes) Subject to Tax Rate Tax Explanation a FICA Social Security $ 900 6.20% FICA—Medicare 900 1.45 13.05 Full amount is subject to tax FUTA 200 0.80 1.60 $700 is over the maximum SUTA 200 2.90 5.80 $700 is over the maximum $ 55.80 Full amount is subject to tax b FICA Social Security $2,200 6.20% $136.40 Full amount is subject to tax FICA—Medicare 2,200 1.45 FUTA 0.80 0.00 Full amount is over maximum SUTA 2.90 0.00 Full amount is over maximum 31.90 Full amount is subject to tax c FICA Social Security $5,000 6.20% FICA—Medicare 8,000 1.45 FUTA 0.80 0.00 Full amount is over maximum SUTA 2.90 0.00 Full amount is over maximum $310.00 $3,000 is over the maximum 116.00 Full amount is subject to tax Exercise 9-7 (20 minutes) (1) Sept 30 Salaries Expense 900.00 FICA—Social Security Taxes Payable FICA—Medicare Taxes Payable Employee Federal Income Taxes Payable Accrued Payroll Payable 55.80 13.05 150.00 681.15 To record payroll for pay period ended September 30 (2) Sept 30 Payroll Taxes Expense 76.25 FICA—Social Security Taxes Payable FICA—Medicare Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable 55.80 13.05 1.60 5.80 To record employer payroll taxes ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 471 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 9-8 (25 minutes) Warranty Expense = 4% of dollar sales = 4% x $6,000 = $240 The December 31, 2008, balance of the liability equals the expense because no repairs are provided in 2008 Therefore, the ending balance of the Estimated Warranty Liability account is $240 The company should report no additional warranty expense in 2009 for this copier The December 31, 2009, balance of the Estimated Warranty Liability account equals the 2009 beginning balance minus the costs incurred in 2009 to repair the copier: Ending 2008 balance $240 Less parts cost (209) Ending 2009 balance $ 31 Journal entries 2008 (a) Aug 16 Cash Sales 6,000 6,000 To record cash sale of copier Aug 16 Cost of Goods Sold Merchandise Inventory 4,800 4,800 To record cost of August 16 sale (b) Dec 31 Warranty Expense Estimated Warranty Liability 240 240 To record warranty expense for copier sold in 2008 2009 (c) Nov 22 Estimated Warranty Liability Repair Parts Inventory 209 209 To record cost of warranty repairs ©McGraw-Hill Companies, 2008 472 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comprehensive Problem (Continued) Part BUG-OFF EXTERMINATORS December 31, 2008 Unadjusted Trial Balance Cash $ 18,000 (a) $2,250 (b1) 779 Accounts receivable 5,000 Allowance for doubtful accounts Merchandise inventory 12,700 Adjusted Trial Balance Adjustments $ 928 (b1) $ 779 (b2) 651 (c) 7,000 Equipment 55,000 Accum deprec.–Equip Accounts payable Estim warranty liability Unearned services rev Interest payable Long-term notes payable Common stock Retained earnings Sales 14,400 4,800 1,400 0 15,000 10,000 52,600 (a) 7,000 (d) 7,200 (f) 1,638 4,480 21,600 2,513 3,038 4,480 15,000 10,000 52,600 2,287 (e) 10,000 70,000 872 80,000 (e) 4,480 Cost of goods sold 57,991 Deprec expense–Trucks 800 55,000 Dividends 10,000 Extermination services revenue Interest revenue $ 12,700 40,000 Trucks 40,000 Accum deprec.–Trucks $ 15,750 4,221 (c) 7,000 Deprec expense–Equip (d) 7,200 Wages expense .32,500 Interest expense Rent expense 10,000 Bad debts expense (b2) 651 Miscellaneous expense 1,338 (a) 15 Repairs expense 671 Utilities expense 6,800 Warranty expense _ (f) 1,638 Totals $250,000 $250,000 $24,050 (a) 52 57,991 7,000 7,200 32,500 10,000 651 1,353 671 6,800 1,638 $24,050 $263,475 65,520 924 80,000 _ $263,475 ©McGraw-Hill Companies, 2008 500 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comprehensive Problem (Continued) Part 2008 (a) Miscellaneous Expenses 15 Accounts Payable 2,287 Interest Revenue Cash 52 2,250 Adjust cash account (Separate entries are acceptable.) (b1) Allowance for Doubtful Accounts Accounts Receivable 779 779 Wrote off uncollectible accounts (b2) Bad Debts Expense Allowance for Doubtful Accounts 651 651 Recognize bad debts expense (c) Depreciation Expense—Trucks 7,000 Accumulated Depreciation—Trucks 7,000 Depreciation on truck (d) Depreciation Expense—Equipment 7,200 Accumulated Depreciation—Equipment 7,200 Depreciation on equipment (e) Extermination Services Revenue 4,480 Unearned Services Revenue 4,480 Adjust for unearned revenues (f) Warranty Expense 1,638 Estimated Warranty Liability 1,638 Estimate warranty expense (g) No interest accrual required for 2008 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 501 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comprehensive Problem (Continued) Part BUG-OFF EXTERMINATORS Income Statement For Year Ended December 31, 2008 Revenues Extermination services revenue Sales Interest revenue Total revenues Expenses Cost of goods sold Depreciation expense—Trucks Depreciation expense—Equipment Wages expense Interest expense Rent expense Bad debts expense Miscellaneous expenses Repairs expense Utilities expense Warranty expense Total expenses Net income $65,520 80,000 924 $146,444 57,991 7,000 7,200 32,500 10,000 651 1,353 671 6,800 1,638 125,804 $ 20,640 BUG-OFF EXTERMINATORS Statement of Retained Earnings For Year Ended December 31, 2008 Retained Earnings, Beginning balance $ 52,600 Add: Net income 20,640 73,240 Less: Dividends (10,000) Retained Earnings, Ending balance $ 63,240 ©McGraw-Hill Companies, 2008 502 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comprehensive Problem Part (concluded) BUG-OFF EXTERMINATORS Balance Sheet December 31, 2008 Assets Current assets Cash Accounts receivable $ 4,221 Allowance for doubtful accounts (800) Merchandise inventory Total current assets Plant assets Trucks 40,000 Accumulated depreciation—Trucks (7,000) Equipment 55,000 Accumulated depreciation—Equipment (21,600) Total plant assets Total assets $15,750 3,421 12,700 31,871 33,000 33,400 66,400 $98,271 Liabilities Current liabilities Accounts payable $ 2,513 Estimated warranty liability 3,038 Unearned services revenue 4,480 Total current liabilities Long-term liabilities Long-term notes payable Total liabilities Equity Common stock Retained earnings Total liabilities and equity $10,031 15,000 25,031 10,000 63,240 $98,271 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 503 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 9-1 Times interest earned ($ millions) 2005 Fiscal Year Net income $ 984 Add income taxes 509 Income before taxes 1,493 Add interest expense (from note 6) 44 Income before interest and taxes $1,537 Times interest earned ratio 34.93 2004 Fiscal Year 2003 Fiscal Year $ 705 496 1,201 32 $1,233 $ 99 392 491 30 $ 521 38.53 17.37 Analysis comment: For each of these fiscal years, it appears that Best Buy’s risk of not being able to cover its interest expense is low In addition, Best Buy’s times interest earned ratio is higher than the industry average of 19.9 for the most recent two out of the three years Gift card liabilities arise when a customer purchases a gift card It is unearned revenue until the gift card recipient buys merchandise with the card Yes Best Buy has both commitments and contingencies (see its Note No.11) Its contingencies arise from several lawsuits filed by purchasers of Best Buy’s stock, as well as other various legal proceedings Their commitments include: a contractual obligation with Accenture LLP to assist in improving their information systems; letters of credit for purchase obligations; a commitment to purchase, construct, and lease facilities; and a liability for extended service contracts The solution depends on the financial statement information accessed ©McGraw-Hill Companies, 2008 504 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 9-2 Best Buy—Times interest earned (also, see the alternate solution on next page) Current Year One Year Prior Two Years Prior Net income $ 984 Add income taxes 509 Add interest expense 44 Income before taxes and interest $1,537 $ 705 496 32 $1,233 $ 99 392 30 $ 521 34.93a 38.53b 17.37c ($ millions) Times interest earned ratio a $1,537/$44 = 34.93 $1,233/$32 = 38.53 c $521 / $30 = 17.37 b Circuit City—Times interest earned ($ millions) Current Year Net income $ 62 Add income taxes 36 Add interest expense Income before taxes and interest $ 100 Times interest earned ratio 50.00a One Year Prior Two Years Prior $ (89) $ (87) $ 82 $ 83 (43.50)b 83.00c a $100/$2 = 50.00 $(87)/$2= (43.50) c $83/ $1 = 83.00 b ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 505 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis (concluded) Note to instructor: Some more advanced students might note that Best Buy has discontinued operations and cumulative effects of changes in accounting principles, both of which are presented net of tax effects Thus, income taxes can be adjusted for these separate treatments of taxes as shown below This would create an alternative times interest earned table Best Buy—Times interest earned (ALTERNATIVE SOLUTION) Current One Year ($ millions) Year Prior Net income $ 984 Add income taxes 509 Add interest expense 44 Income before taxes and interest $1,537 Times interest earned ratio 34.93a Two Years Prior $ 705 479* 32 $1,216 $ 99 223** 30 $ 352 38.00 11.73c * $496 - $17 = $479 ** $392 - $119 - $24 - $26 = $223 a $1,537/ $44 = 34.93 b $1,216/ $32 = 38.00 c $352/ $30 = 11.73 Except for the one year prior, Circuit City appears considerably stronger in its ability to make interest payments should income decline Circuit City’s times interest earned ratio is negative because they had a net loss during the prior year For two out of the three years, each company’s times interest earned ratio exceeded the industry average of 19.9 ©McGraw-Hill Companies, 2008 506 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 9-3 It is in Bly’s self-interest to maximize the amount of revenues less warranty expenses so as to maximize his personal bonus Since Bly has some input into setting the warranty expense accrual percent, he potentially faces an ethical dilemma Specifically, the lower the expense accrual, the lower the warranty expense, and the higher his bonus (The evidence indicates that Bly has tended to overestimate warranty expense in prior years.) Although Bly might be able to affect the amount of revenues less warranty expenses via the warranty expense accrual in the short run, over several years the amounts should even out The dealership should probably adjust the warranty expense accrual to match the usual (average) experience over time Given the variable nature of warranty expenses, at times it might warrant being adjusted upward (lowering Bly’s bonus) or downward (increasing Bly’s bonus) The accountant and others should offer input into this decision Since the experience with warranties has varied, a percent should perhaps be based on a long-run average, with some additional weight given to recent experience ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 507 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 9-4 MEMORANDUM To: From: Date: Subject: Tom Pretti, General Manager Dustin Clemens, ManagerAccounting and Finance Reporting warranties in financial statements This memorandum is in response to your comment on my proposal for the treatment of a contingency in our financial statements You specifically object to the proposed recognition of an expense and liability for warranties The purpose of this memorandum is to respond to your objection Both the conservatism and matching principles apply to accounting for warranties Conservatism requires us to include an expense in this year’s financial statements for costs that we may or may not pay in the future Another point in favor of reporting the expense and liability now is that we offered the warranty in order to achieve the reported sales Therefore, our income measure would be incomplete if it did not match the cost of fulfilling the warranty against revenues generated by offering the warranty This treatment would be in compliance with the matching principle Your comment also raised the objection that we don’t know what costs will be If they are not reasonably estimable, generally accepted accounting principles will allow us to leave them out of the financial statements But we must describe the contingency in the notes I will be checking with the product design engineers to get their opinion on the estimableness of repair costs If the product is different from others, we may have a basis for going with only a note disclosure However, financial statement recognition is a more effective way to get the information into users’ hands As a result, it is usually preferred, even if we are uncertain about the amount ©McGraw-Hill Companies, 2008 508 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 9-5 McDonald’s current liabilities include the following Accounts payable Income taxes Other taxes Accrued interest Accrued restructuring and restaurant closing costs Accrued payroll and other liabilities Current maturities of long-term debt The portion of long-term debt maturing in the next 12 months ($ millions) is $862.2 / ($862.2 + $8,357.3) = 9.35% Times interest earned for McDonald’s as of 12/31/2004 ($ millions) 12/31/2004 Net Income $2,278.5 Plus income taxes 923.9 Plus interest expense Income before interest and taxes Times interest earned 358.4 $3,560.8 9.94 times Comment: The 9.94 times interest earned ratio seems more than sufficient for McDonald’s to cover its interest obligations, and it is higher than the industry average of 7.9 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 509 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 9-6 Option A: Interest Expense = $6,000 x 10% x 90/360 = $150 Option B: Interest Expense = $6,000 x 8% x 120/360 = $160 The interest expense in option B does exceed option A If interest cost is the only consideration, then Option A is the preferred loan However, if a mere $10 more is paid in interest expense the business can use the loan money for an additional 30 days The decision on which loan is preferred will ultimately depend on whether interest cost savings is valued more than the additional time to use the loaned money Entries: 2a Issue date, Option A June Cash Notes Payable 6,000 6,000 Borrowed cash by issuing an interest-bearing note 2b Issue date, Option B June Cash 6,000 Notes Payable 6,000 Borrowed cash by issuing an interest-bearing note 2c Maturity date, Option A Aug 30 Notes Payable Interest Expense Cash 6,000 150 6,150 Repaid note plus interest 2d Maturity date, Option B Sep 29 Notes Payable 6,000 Interest Expense 160 Cash 6,160 Repaid note plus interest ©McGraw-Hill Companies, 2008 510 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Concluded) Entries: 4a Adjusting entry, Option A (Dec 31) Dec 31 Interest Expense Interest Payable 50 50 Accrue interest on note payable [$6,000 x 10% x 30/360] 4b Adjusting entry, Option B (Dec 31) Dec 31 Interest Expense Interest Payable 40 40 Accrue interest on note payable [$6,000 x 8% x 30/360] 4c Maturity date entry, Option A March Interest Expense 100 Interest Payable 50 Notes Payable 6,000 Cash 6,150 Repaid note plus interest 4d Maturity date entry, Option B March 31 Interest Expense 120 Interest Payable 40 Notes Payable 6,000 Cash 6,160 Repaid note plus interest BusinessWeek Activity — BTN 9-7 Merck & Co would not report anything in its financial statements until any lawsuits are filed Once the lawsuits are filed, if Merck believes the potential for a liability is reasonably possible, they should be disclosed in notes to the financial statements The lawsuits should be recorded in the accounts only if payments for damages are probable and the amount can be reasonably estimated Potential lawsuits to bring the product back to market would most likely not involve any money damages to be paid, but instead would require Merck & Co to begin selling the product again ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 511 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 9-8 Wildflower Linens Income Statement (Prospective) California Hawaii Total Sales Cost of goods sold (30%) $1,000,000 300,000 $250,000 $1,250,000 75,000 375,000 Gross profit Operating expenses (25%) Income before interest Interest expense Net income 700,000 250,000 450,000 $ 450,000 175,000 62,500 112,500 21,000 $ 91,500 875,000 312,500 562,500 21,000 $ 541,500 Times interest earned = $562,500 / $21,000 = 26.8 times Wildflower Linens Income Statement (Prospective) California Hawaii Total Sales Cost of goods sold (30%) $1,000,000 300,000 $400,000 $1,400,000 120,000 420,000 Gross profit Operating expenses (25%) 700,000 250,000 280,000 100,000 980,000 350,000 Income before interest Interest expense Net income 450,000 $ 450,000 180,000 21,000 $159,000 630,000 21,000 $ 609,000 Times interest earned = $630,000 / $21,000 = 30.0 times ©McGraw-Hill Companies, 2008 512 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision (concluded) Wildflower Linens Income Statement (Prospective) California Hawaii Total Sales $1,000,000 $100,000 $1,100,000 Cost of goods sold (30%) 300,000 30,000 330,000 Gross profit 700,000 70,000 770,000 Operating expenses (25%) Income before interest 250,000 450,000 25,000 45,000 275,000 495,000 Interest expense 21,000 21,000 Net income $ 450,000 $ 24,000 $ 474,000 Times interest earned = $495,000 / $21,000 = 23.6 times In each of these cases, Martin’s times interest earned is at least 23.6, so it appears that if she takes out the loan and can generate at least $100,000 in sales in Hawaii, she will have little trouble paying her interest expense Hitting the Road — BTN 9-9 There is no formal solution to this problem A discussion of the importance of safeguarding social security information would be appropriate especially with respect to the Administration’s decision to no longer transfer benefit information online ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 513 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Global Decision — BTN 9-10 Dixons — Times interest earned (₤ millions) Current Year One Year Prior Net income Add income taxes Income before income taxes Add interest expense Income before taxes and interest ₤243.1 88.1 331.2 23.6 ₤354.8 ₤280.4 82.9 363.3 34.0 ₤397.3 Times interest earned ratio 15.0a 11.7b a ₤354.8/ ₤23.6 = 15.0 ₤397.3/ ₤34.0 = 11.7 b Of these three companies, Circuit City has the best coverage of interest expense for the current year Specifically, Circuit City’s times interest earned of 50.0 for the current year is superior to Best Buy’s value of 34.9 and Dixons’ 15.0 In the prior year, Dixons’ ratio was again lower than that for Best Buy, but better than that for Circuit City ©McGraw-Hill Companies, 2008 514 Financial Accounting, 4th Edition ... 200,000 Net income increases by* $ 260,000 43% 86% * Computed as the increase in net income divided by prior net income Sales increase by 50% (multiply prior sales by 1.5) Miller Co Weaver Co... $ 300,000 $ 460,000 Net income increases by 114% 229% ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 479 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... 114,000 30,000 $ 84,000 Net income increases by 360% 180% ©McGraw-Hill Companies, 2008 490 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com