Chapter 11 – Current Liabilities and Payroll Accounting
Ethics Challenge — BTN 11-3
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
should probably adjust the warranty expense accrual to match the
Communicating in Practice — BTN 11-4
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
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.
11-625
Education.
Chapter 11 – Current Liabilities and Payroll Accounting
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.
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
11-626
Chapter 11 – Current Liabilities and Payroll Accounting
Taking It to the Net — BTN 11-5
1. McDonald’s 2013 current liabilities include the following:
Accounts payable
2. The portion of long-term debt maturing in the next 12 months ($
millions) is:
3. Times interest earned for McDonald’s as of 12/31/2013
($ millions) 12/31/2013
Net Income…………………………………………..………….. $ 5,586.0
higher than the industry average of 15.0.
Teamwork in Action — BTN 11-6
1. Option A: Interest Expense = $6,000 x 10% x 90/360 = $150
11-627
Education.
Chapter 11 – Current Liabilities and Payroll Accounting
valued more than the additional time to use the loaned money.
2. Entries:
2a. Issue date, Option A
June 1 Cash………………………………………………………………… 6,000
Notes Payable……………………………………..……… 6,000
Borrowed cash by issuing an
interest-bearing note.
2d. Maturity date, Option B
Sep. 29 Notes Payable……………………………………………..…… 6,000
Interest Expense………………………………………………. 160
Cash…………………………………………………………… 6,160
Repaid note plus interest.
Teamwork in Action (Concluded)
4. Entries:
4a. Adjusting entry, Option A (Dec. 31)
11-628
Chapter 11 – Current Liabilities and Payroll Accounting
4b. Adjusting entry, Option B (Dec. 31)
Dec. 31 Interest Expense………………………………………………. 40
4c. Maturity date entry, Option A
March 1 Interest Expense………………………………………………. 100
4d. Maturity date entry, Option B
March 31 Interest Expense…………………………………………….... 120
Interest Payable…………………………………………..…… 40
Entrepreneurial Decision — BTN 11-7
1.
Uncharted Play
Income Statement (Prospective)
Current
Operations European Total
Sales……………………………….…..… $1,000,000 $ 250,000 $1,250,000
Operating expenses (55%)......... 550,000 137,500 687,500
11-629
3.
Uncharted Play
Income Statement (Prospective)
Current
Operations European Total
Sales……………………………….…..… $1,000,000 $ 400,000 $1,400,000
Operating expenses (55%)......... 550,000 220,000 770,000
Entrepreneurial Decision (concluded)
4.
Uncharted Play
Income Statement (Prospective)
Current
Operations European Total
Sales……………………………….…..… $1,000,000 $ 100,000 $1,100,000
5. In each of these cases, the company’s times interest earned is at least
23.6, so it appears that if it takes out the loan and can generate at least
11-630
Chapter 11 – Current Liabilities and Payroll Accounting
Hitting the Road — BTN 11-8
There is no formal solution to this problem. A discussion of the importance
Global Decision — BTN 11-9
1. Samsung— Times interest earned
(KRW in millions) Current Year Prior Year
Net income…………………………………………..₩ 30,474,764 ₩ 23,845,285
Add income taxes……….……..……………….. 7,889,515 6,069,732
2. Of these three companies, Apple and Google both have superior
coverage of interest expense for the two years analyzed. Specifically,
11-631