CHAPTER 13 SOLUTIONS TO B EXERCISES E13-1B (10–15 minutes) (a) Current liability (b) Current liabilities or long-term liabilities as a deduction from face value of note (c) Current liability (d) Footnote disclosure (e) Separate presentation in either current or long-term liability section (f) Current liability (g) Footnote disclosure (assume not probable and/or not reasonably estimable) (h) Current liability (i) Current liability (j) Current liability or long-term liability depending on term of warranty (k) Current liability (l) Current or noncurrent liability depending upon the time involved (m) Current liability (n) Current liability (o) Current liability (unless right of offset exists) (p) Current liability Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-1 E13-2B (15–20 minutes) (a) (b) Sept Purchases 125,000 Accounts Payable 125,000 Oct Accounts Payable 125,000 Notes Payable 125,000 Oct Cash 125,000 Discount on Notes Payable 17,000 Notes Payable 142,000 Dec 31 Interest Expense 3,750 Interest Payable ($125,000 X 12% X 3/12) 3,750 Interest Expense 4,250 Discount on Notes Payable ($17,000 X 3/12) 4,250 Dec 31 (c) Note payable Interest payable $125,000 3,750 $128,750 Note payable Less: Discount ($17,000 – $4,250) $142,000 12,750 $129,250 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-2 E13-3B (10–12 minutes) HERNANDEZ COMPANY Balance Sheet (partial) December 31, 2014 Current liabilities: Notes payable (Note 1) $ 500,000 Long-term debt: Notes payable refinanced in February 2015 (Note 1) 2,500,000 Note Short-term debt refinanced As of December 31, 2014, the company had notes payable totaling $3,000,000 due on February 2, 2015 These notes were refinanced on their due date to the extent of $2,500,000 received from the issuance of common stock on January 21, 2015 The balance of $500,000 was liquidated using current assets OR Current liabilities: Notes payable (Note 1) $ 500,000 Long-term debt: Short-term debt expected to be refinanced (Note 1) 2,500,000 (Same Note as above.) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-3 E13-4B (20–25 minutes) GIBSON COMPANY Balance Sheet (partial) December 31, 2014 Current liabilities: Notes payable (Note 1) $8,840,000 Long-term debt: Notes payable expected to be refinanced in 2015 (Note 1) 9,360,000 Note Under a financing agreement with Blue Lagoon State Bank the Company may borrow up to 60% of the gross amount of its accounts receivable at an interest cost of 1% above the prime rate The Company intends to issue notes maturing in 2019 to replace $9,360,000 of short-term, 15%, notes due in 2015 Because the amount that can be borrowed may range from $9,360,000 to $12,480,000, only $9,360,000 of the $18,200,000 of currently maturing debt has been reclassified as long-term debt Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-4 E13-5B (25–30 minutes) (a) Year 2013 2014 (1) (2) (3) (4) (5) (6) (7) (8) To accrue the expense and liability for compensated absences: To record payment for compensated time when used by employees: Wages Expense Vacation Wages Payable Sick Pay Wages Payable 17,280 Sick Pay Wages Payable Cash Wages Expense Vacation Wages Payable Sick Pay Wages Payable 20,736 10,800(1) 4,320(3) 4,320 6,480(2) 12,960(4) 7,776(5) Wages Expense Vacation Wages Payable Sick Pay Wages Payable Cash employees X $15/hr X hrs./day X 10 days = employees X $15/hr X hrs./day X days = employees X $15/hr X hrs./day X days = employees X $18/hr X hrs./day X 10 days = employees X $18/hr X hrs./day X days = employees X $15/hr X hrs./day X days = employees X $15/hr X hrs./day X (6 – 4) days = employees X $18/hr X hrs./day X (5 – 2) days = employees X $18/hr X hrs./day X days = employees X $18/hr X hrs./day X days = 2,376 9,720(6) 6,048(7) 18,144(8) $10,800 $6,480 $4,320 $12,960 $7,776 $9,720 $2,160 + 3,888 = $6,048 $11,664 + 6,480 = $18,144 Note: Vacation days and sick days are paid at the employee’s current wage Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-5 E13-5B (Continued) (b) Accrued liability at year-end: 2013 Jan balance + accrued – paid Dec 31 balance Vacation Wages Payable $ 10,800 (0) $10,800 (1) 2014 Sick Pay Wages Payable $ 6,480 (4,320) $2,160 (2) Vacation Wages Payable $10,800 12,960 (9,720) $14,040 (3) (1) employees X $15/hr X hrs./day X 10 days = (2) employees X $15/hr X hrs./day X (6 – 4) days = (3) employees X $15/hr X hrs./day X (10 – 9) days = employees X $18/hr X hrs./day X 10 days = (4) employees X $18/hr X hrs./day X (6 + – – 5) days Sick Pay Wages Payable $2,160 7,776 (6,048) $3,888 (4) $10,800 $2,160 $ 1,080 +12,960 $14,040 $3,888 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-6 E13-6B (25–30 minutes) (a) 2014 To accrue the expense and liability for vacations Wages Expense 11,520 (1) Vacation Wages Payable 11,520 To record sick leave paid Wages Expense Cash 4,320 (2) 4,320 To record vacation time paid No entry, since no vacation days were used 2015 To accrue the expense and liability for vacations Wages Expense 13,320 (3) Vacation Wages Payable 13,320 To record sick leave paid Wages Expense Cash 6,480 (4) 6,480 To record vacation time paid Wages Expense 1,296 Vacation Wages Payable 10,368 (5) Cash 11,664 (6) (1) employees X $16.00/hr X hrs./day X 10 days = $11,520 (2) employees X $15.00/hr X hrs./day X days = $4,320 (3) employees X $18.50/hr X hrs./day X 10 days = $13,320 (4) employees X $18.00/hr X hrs./day X days = $6,480 (5) employees X $16.00/hr X hrs./day X days = $10,368 (6) employees X $18.00/hr X hrs./day X days = $11,664 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-7 E13-6B (Continued) (b) Accrued liability at year-end: 2014 Jan balance + accrued – paid Dec 31 balance $ 11,520 (0) $11,520(1) 2015 $ 11,520 13,320 (10,368) $14,472(2) (1) employees X $16.00/hr X hrs./day X 10 days = $11,520 (2) employees X $16.00/hr X hrs./day X day = employees X $18.50/hr X hrs./day X 10 days = $ 1,152 13,320 $14,472 E13-7B (5–7 minutes) June 30 Revenue from Sales Sales Tax Payable Computation: Sales plus sales tax ($300,000 + $180,000) Sales exclusive of tax ($480,000 ÷ 1.08) Sales tax 35,556 35,556 $480,000 444,444 $ 35,556 E13-8B (10–15 minutes) Wages and Salaries Expense 960,000 Withholding Taxes Payable FICA Taxes Payable* Union Dues Payable Cash *($960,000 – $220,000) X 7.65% = $56,610 $220,000 X 1.45% = $3,190; $56,610 + $3,190 = $59,800 180,000 59,800 18,000 702,200 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-8 E13-8B (Continued) Payroll Tax Expense FICA Taxes Payable (See previous computation) Federal Unemployment Tax Payable ($960,000 – $800,000) X 8% State Unemployment Tax Payable $160,000 X (3.5% – 2.3%) 63,000 59,800 1,280 1,920 E13-9B (15–20 minutes) (a) Computation of taxes Wages Social security taxes (FICA) Federal unemployment taxes State unemployment taxes Total Cost Warehouse $206,000 15,759 (7.65% X $206,000) 480 (0.8% X $60,000) 1,500 (2.5% X $60,000) $223,739 Wages Social security taxes (FICA) Federal unemployment taxes State unemployment taxes Total Cost Sales $184,000 12,216* 40 (0.8% X $5,000) 125 (2.5% X $5,000) $196,381 *$154,000 X 7.65% = $11,781; $30,000 X 1.45% = $435; $11,781 + $435 = $12,216 Wages Social security taxes (FICA) Federal unemployment taxes State unemployment taxes Total Cost Administrative $51,000 2,352* –0– –0– $53,352 *$26,000 X 7.65% = $1,989; $25,000 X 1.45% = $363; $1,989 + $363 = $2,352 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-9 E13-9B (Continued) Schedule Wages FICA Federal U.C State U.C Total Cost Total $441,000 30,327 520 1,625 $473,472 Warehouse $206,000 15,759 480 1,500 $223,739 Sales $184,000 12,216 40 125 $196,381 (b) Warehouse Payroll: Wages and Salaries Expense Withholding Taxes Payable FICA Taxes Payable Cash Payroll Tax Expense FICA Taxes Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Payroll: Wages and Salaries Expense Withholding Taxes Payable FICA Taxes Payable Cash Payroll Tax Expense FICA Taxes Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Administrative Payroll: Wages and Salaries Expense Withholding Taxes Payable FICA Taxes Payable Cash Payroll Tax Expense FICA Taxes Payable Administrative $51,000 2,352 –0– –0– $53,352 206,000 28,000 15,759 162,241 17,739 15,759 480 1,500 184,000 31,000 12,216 140,784 12,381 12,216 40 125 51,000 9,000 2,352 39,648 2,352 2,352 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-10 E13-10B (10–15 minutes) (a) (b) Cash (400 X $3,000) 1,200,000 Sales 1,200,000 Warranty Expense 24,000 Cash 24,000 Warranty Expense ($132,000 – $24,000) 108,000 Estimated Liability Under Warranties 108,000 Cash 1,200,000 Sales 1,200,000 Warranty Expense 24,000 Cash 24,000 E13-11B (15–20 minutes) (a) (b) Cash 2,400,000 Sales (600 X $4,000) 2,400,000 Warranty Expense 30,000 Cash 30,000 Warranty Expense 120,000 Estimated Liability Under Warranties ($150,000 – $30,000) 120,000 Cash 2,400,000 Sales Unearned Warranty Revenue 2,200,000 200,000 Warranty Expense 30,000 Cash 30,000 Unearned Warranty Revenue 40,000 Warranty Revenue [$200,000 X ($30,000/$150,000)] 40,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-11 E13-12B (15–20 minutes) Inventory of Premiums (10,000 X $0.50) Cash 5,000 Cash (55,000 X $3.75) Sales 206,250 Premium Expense Inventory of Premiums [(28,000 ÷ 5) X $0.50] Premium Expense Estimated Liability for Premiums 5,000 206,250 2,800 2,800 500* 500 *[(55,000 X 60%) – 28,000] ÷ X $0.50 = $500 E13-13B (20–30 minutes) The FASB pronouncements require that, when some amount within the range appears at the time to be a better estimate than any other amount within the range, that amount is accrued When no amount within the range is a better estimate than any other amount, the dollar amount at the low end of the range is accrued, and the dollar amount of the high end of the range is disclosed In this case, therefore, Santiago Inc would report a liability of $225,000 at December 31, 2014 The loss should be accrued Given that the loss is covered by insurance, except for the $125,000 deductible, only the $125,000 should be accrued This is a gain contingency because the amount to be received will be in excess of the book value of the plant Gain contingencies are not recorded and are disclosed only when the probabilities are high that a gain contingency will become reality Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-12 E13-14B (25–30 minutes) (a) (b) Depot 2,400,000 Cash 2,400,000 Depot 167,516 Asset Retirement Obligation 167,516 Depreciation Expense 240,000 Accumulated Depreciation 240,000 Depreciation Expense 16,752 Accumulated Depreciation 16,752* Interest Expense 10,051 Asset Retirement Obligation 10,051** *$167,516/10 **$167,516 X 06 (c) Asset Retirement Obligation 300,000 Loss on ARO Settlement 20,000 Cash 320,000 E13-15B (20–30 minutes) Liability for stamp redemptions, 12/31/13 Cost of redemptions redeemed in 2014 $6,000,000 (3,000,000) 3,000,000 Cost of redemptions to be redeemed in 2015 (9,800,000 X 60%) Liability for stamp redemptions, 12/31/14 5,880,000 $8,880,000 Total coupons issued Redemption rate To be redeemed Handling charges ($150,000 X 10%) Total cost $500,000 X 30% 150,000 15,000 $165,000 Total cost Total payments to retailers Liability for unredeemed coupons $165,000 (115,000) $ 50,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-13 E13-15B (Continued) Boxes Redemption rate Total redeemable 1,000,000 X 40% 400,000 Coupons to be redeemed (400,000 – 100,000) Cost ($5.20 – $2.00) Liability for unredeemed coupons 300,000 X $3.20 $960,000 E13-16B (20–25 minutes) # Assets NE Liabilities I Owners’ Equity D Net Income D I I I I NE I D D I NE I I NE D NE D NE I D D NE NE NE NE NE I D D D D NE NE 10 NE I D D 11 NE D I I 12 I I NE NE 13 D NE D D 14 NE I D D 15 I I NE NE 16 D I D D 17 NE I D D 18 I I I I Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-14 E13-17B (15–20 minutes) (a) Current ratio = Current assets Current liabilities = $105,000 $40,000 = 2.63 The current ratio measures the short-term ability of the company to meet its currently maturing obligations (b) Acid-test ratio = Cash + Marketable securities + Receivables Current liabilities = $57,500 $40,000 = 1.44 The acid-test ratio also measures the short-term ability of the company to meet its current maturing obligations However, it eliminates assets that might be slow-moving, such as inventories and prepaid expenses (c) Debt to total assets = Total liabilities Total assets = $110,000 $215,000 = 51.16% This ratio provides the creditors with some idea of the company’s ability to withstand losses without impairing the interest of creditors (d) Rate of return on assets = Net income Average total assets = $12,500 $215,000 = 5.81% This ratio measures the return the company is earning on its average total assets and provides one indication related to the profitability of the company Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-15 E13-18B (20–25 minutes) (a) Current ratio = $521,000 $277,000 Acid-test ratio = $8,000 + $151,000 + $50,000 $277,000 = 0.75 Accounts receivable turnover = $112,000 + $151,000 = 19.8 times (or approximately $2,608,000 ÷ every 18 days) Inventory turnover = $268,000 + $300,000 = 5.9 times (or approximately $1,673,000 ÷ every 62 days) Rate of return on assets = $865,000 + $981,000 $328,000 ÷ (b) = 1.88 = 35.54% Profit margin on sales = $328,000 ÷ $2,608,000 = 12.58% Financial ratios should be evaluated in terms of industry peculiarities and prevailing business conditions Although industry and general business conditions are unknown in this case, the company appears to have a relatively strong current position The main concern from a shortterm perspective is the apparently low inventory turnover The rate of return on assets and profit margin on sales are extremely good and indicate that the company is employing its assets advantageously Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-16 E13-19B (15–25 minutes) (a) (b) $440,000 ÷ $273,000 = 1.61 times $1,960,000 ÷ $2,800,000 ÷ $155,000 = 18.06 times (or approximately 20 days) $200,000 + $271,000 = 8.32 times (or approximately 44 days) $334,000 ÷ 72,000 = $4.64 $334,000 ÷ $2,800,000 = 11.9% $334,000 ÷ $643,000 = 51.9% No effect on current ratio, if already included in the allowance for doubtful accounts Weaken current ratio by reducing current assets Improve current ratio by reducing current assets and current liabilities by a like amount No effect on current ratio Weaken current ratio by increasing current liabilities No effect on current ratio Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-17 ... $142,000 12,750 $129,250 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-2 E13-3B (10–12 minutes) HERNANDEZ... 2,500,000 (Same Note as above.) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-3 E13-4B (20–25 minutes) GIBSON COMPANY... reclassified as long-term debt Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 13-4 E13-5B (25–30 minutes) (a) Year