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Comprehensive Problem (Continued)
Part 4
BUG-OFF EXTERMINATORS
Income Statement
For Year Ended December 31, 2015
Revenues
Extermination services revenue............... $57,760
Sales............................................................ 71,026
Wages expense........................................... 35,000
Interest expense......................................... 0
Rent expense.............................................. 9,000
Bad debts expense..................................... 551
Net income.................................................... $ 9,274
BUG-OFF EXTERMINATORS
Statement of Retained Earnings
For Year Ended December 31, 2015
Retained earnings, December 31, 2014....................... $ 49,700
Add: Net income........................................................... 9,274
58,974
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS
Balance Sheet
December 31, 2015
Merchandise inventory.................................. 11,700
Total current assets....................................... 30,071
Plant assets
Trucks.............................................................. 32,000
Accumulated depreciation—Trucks............. (6,000) 26,000
Total assets....................................................... $82,771
Liabilities
Current liabilities
Accounts payable..........................................$ 3,713
Estimated warranty liability........................... 2,844
Unearned services revenue.......................... 2,240
Equity
Common stock................................................. 10,000
Reporting in Action — BTN 9-1
1. Times interest earned
($ millions) 2013 2012 2011
Net income..................................................$37,037 $41,733 $25,922
2013; assumed for 2012 and 2011)............ 136 100 100
Income before taxes and interest.............$50,291 $55,863 $34,305
Times interest earned ratio................... 369.79a558.63b343.05c
Analysis comment : Apple reports interest expense of $136 million for
2013. Assuming Apple had interest expense of $100 million for 2012
and 2011, Apple’s risk of not being able to cover its interest expense
each of its fiscal years shown here.
2. Loyalty reward liabilities arise when a customer makes a purchase
under a frequent purchase program. It is an estimated liability as the
earned and could also expire depending on the terms of the program.
3. Total accrued expenses for 2013 equal $13,856. The six components
that make up accrued expenses are: Accrued warranty and related
benefits; and Other current liabilities.
4. The solution depends on the financial statement information accessed.
Comparative Analysis — BTN 9-2
1. Apple—Times interest earned
($ millions)
Current
Year
One Year
Prior
Two Years
Prior
Net income..................................................$37,037 $41,733 $25,922
Add income taxes...................................... 13,118 14,030 8,283
Add interest expense (actual for
2013; assumed for 2012 and 2011)............. 136 100 100
Google—Times interest earned
($ millions)
Current
Year
One Year
Prior
Two Years
Prior
Net income (loss).......................................$ 12,920 $ 10,737 $ 9,737
Add income taxes (benefit).......................2,282 2,598 2,589
Add interest expense (from Note 10)............. 83 84 58
2. Apple reports interest expense of $136 million for 2013. This problem
assumes that Apple reports interest expense of $100 million for 2012
and 2011. Apple and Google both are in strong positions in their ability
not paying interest payments based on times interest earned.
Ethics Challenge — BTN 9-3
1. 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
2. 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
recent experience.
Communicating in Practice — BTN 9-4
MEMORANDUM
To: Tom Pretti, General Manager
From: Dusty Johnson, ManagerAccounting and Finance
Date:
Subject: Reporting warranties in financial statements
This memorandum is in response to your comment on my proposal for the
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.
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
