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Comprehensive Problem (Continued)
Part 3
2015
(a)
Miscellaneous Expenses ............................................
15
Accounts Payable ........................................................
1,287
Interest Revenue ....................................................
52
Cash ........................................................................
1,250
Adjust cash account. (Separate entries are acceptable.)
(b1)
Allowance for Doubtful Accounts ...............................
679
Accounts Receivable .............................................
679
Wrote off uncollectible accounts.
(b2)
Bad Debts Expense ......................................................
551
Allowance for Doubtful Accounts .........................
551
Recognize bad debts expense.
(c)
Depreciation Expense—Trucks ...................................
6,000
Accumulated Depreciation—Trucks .....................
6,000
Depreciation on truck.
(d)
Depreciation Expense—Equipment ............................
6,100
Accumulated Depreciation—Equipment ..............
6,100
Depreciation on equipment.
(e)
Extermination Services Revenue ................................
2,240
Unearned Services Revenue ................................
2,240
Adjust for unearned revenues.
(f)
Warranty Expense ........................................................
1,444
Estimated Warranty Liability ................................
1,444
Estimate warranty expense.
(g)
No interest accrual required for 2015
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
Interest revenue .........................................
924
Total revenues............................................
$129,710
Expenses
Cost of goods sold ....................................
46,300
Depreciation expense—Trucks ................
6,000
Depreciation expense—Equipment .........
6,100
Wages expense ..........................................
35,000
Interest expense.........................................
0
Rent expense..............................................
9,000
Bad debts expense ....................................
551
Miscellaneous expenses ...........................
1,241
Repairs expense ........................................
8,000
Utilities expense.........................................
6,800
Warranty expense ......................................
1,444
Total expenses ...........................................
120,436
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
Less: Dividends .............................................................
(10,000)
Retained earnings, December 31, 2015 .......................
$ 48,974
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS
Balance Sheet
December 31, 2015
Assets
Current assets
Cash ................................................................
$15,750
Accounts receivable ......................................
$ 3,321
Allowance for doubtful accounts .................
(700)
2,621
Merchandise inventory ................................
11,700
Total current assets ......................................
30,071
Plant assets
Trucks .............................................................
32,000
Accumulated depreciation—Trucks ............
(6,000)
26,000
Equipment ......................................................
45,000
Accumulated depreciation—Equipment .....
(18,300)
26,700
Total plant assets ..........................................
52,700
Total assets ......................................................
$82,771
Liabilities
Current liabilities
Accounts payable ..........................................
$ 3,713
Estimated warranty liability ..........................
2,844
Unearned services revenue ..........................
2,240
Total current liabilities ................................
$ 8,797
Long-term liabilities
Long-term notes payable ..............................
15,000
Total liabilities ..................................................
23,797
Equity
Common stock .................................................
10,000
Retained earnings ............................................
48,974
Total liabilities and equity ...............................
$82,771
Reporting in Action — BTN 9-1
1. Times interest earned
($ millions)
2013
2012
2011
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
Income before taxes and interest .............
$50,291
$55,863
$34,305
Times interest earned ratio ...................
369.79a
558.63b
343.05c
a$50,291 / $136
b$55,863 / $100
c$34,305 / $100
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
2. Loyalty reward liabilities arise when a customer makes a purchase
under a frequent purchase program. It is an estimated liability as the
3. Total accrued expenses for 2013 equal $13,856. The six components
that make up accrued expenses are: Accrued warranty and related
4. The solution depends on the financial statement information accessed.
Comparative Analysis — BTN 9-2
1. Apple—Times interest earned
($ 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
Income before taxes and interest .............
$50,291
$55,863
$34,305
Times interest earned ratio ...................
369.79a
558.63b
343.05c
a$50,291 / $136
b$55,863 / $100
c$34,305 / $100
Google—Times interest earned
($ 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
Income before taxes and interest .............
$ 15,285
$ 13,419
$12,384
Times interest earned ratio ...................
184.16a
159.75b
213.52c
a$15,285 / $83
b$13,419 / $84
c$12,384 / $58
2. Apple reports interest expense of $136 million for 2013. This problem
assumes that Apple reports interest expense of $100 million for 2012
and 2011. Apple and Google both are in strong positions in their ability
Ethics Challenge — BTN 9-3
1. It is in Bly’s self-interest to maximize the amount of revenues less
warranty expenses so as to maximize his personal bonus. Since Bly
2. Although Bly might be able to affect the amount of revenues less
warranty expenses via the warranty expense accrual in the short run,
over several years the amounts should even out. The dealership
Communicating in Practice — BTN 9-4
MEMORANDUM
To:
Tom Pretti, General Manager
From:
Dusty Johnson, Manager⎯Accounting and Finance
Date:
Subject:
Reporting warranties in financial statements
This memorandum is in response to your comment on my proposal for the
treatment of a contingency in our financial statements. You specifically
object to the proposed recognition of an expense and liability for
warranties. The purpose of this memorandum is to respond to your
objection.
Both the conservatism and matching principles apply to accounting for
warranties. Conservatism requires us to include an expense in this year’s
financial statements for costs that we may or may not pay in the future.
Another point in favor of reporting the expense and liability now is that we
offered the warranty in order to achieve the reported sales. Therefore, our
income measure would be incomplete if it did not match the cost of
Taking It to the Net — BTN 9-5
1. McDonald’s 2013 current liabilities include the following:
• Accounts payable
2. The portion of long-term debt maturing in the next 12 months ($
millions) is:
3. Times interest earned for McDonald’s as of 12/31/2013
($ millions)
12/31/2013
Net Income ...............................................................
$ 5,586.0
Plus income taxes ...................................................
2,618.6
Plus interest expense ..............................................
521.9
Income before interest and taxes ..........................
$ 8,726.5
Times interest earned .............................................
16.72 times
Comment: The 16.72 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 15.0.
Teamwork in Action — BTN 9-6
1. Option A: Interest Expense = $6,000 x 10% x 90/360 = $150
Option B: Interest Expense = $6,000 x 8% x 120/360 = $160
2. Entries:
2a. Issue date, Option A
June 1
Cash ..........................................................................
6,000
Notes Payable ....................................................
6,000
Borrowed cash by issuing an
interest-bearing note.
2b. Issue date, Option B
June 1
Cash ..........................................................................
6,000
Notes Payable ....................................................
6,000
Borrowed cash by issuing an
interest-bearing note.
2c. Maturity date, Option A
Aug. 30
Notes Payable ..........................................................
6,000
Interest Expense ......................................................
150
Cash ................................................................
6,150
Repaid note plus interest.
Teamwork in Action (Concluded)
4. Entries:
4a. Adjusting entry, Option A (Dec. 31)
Dec. 31
Interest Expense ......................................................
50
Interest Payable .................................................
50
Accrue interest on note
payable [$6,000 x 10% x 30/360].
Dec. 31
Interest Expense ......................................................
40
Interest Payable .................................................
40
Accrue interest on note payable
[$6,000 x 8% x 30/360].
4c. Maturity date entry, Option A
March 1
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.
Entrepreneurial Decision — BTN 9-7
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
Income before interest ...............
450,000
112,500
562,500
Interest expense..........................
0
21,000
21,000
Net income ...................................
$ 450,000
$ 91,500
$ 541,500
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
Income before interest ...............
450,000
180,000
630,000
Interest expense..........................
0
21,000
21,000
Net income ...................................
$ 450,000
$ 159,000
$ 609,000
Times interest earned = $630,000 / $21,000 = 30.0 times
Entrepreneurial Decision (concluded)
4.
Uncharted Play
Income Statement (Prospective)
Current
Operations
European
Total
Sales .............................................
$1,000,000
$ 100,000
$1,100,000
Operating expenses (55%) .........
550,000
55,000
605,000
Income before interest ...............
450,000
45,000
495,000
Interest expense..........................
0
21,000
21,000
Net income ...................................
$ 450,000
$ 24,000
$ 474,000
Times interest earned = $495,000 / $21,000 = 23.6 times
5. In each of these cases, the company’s times interest earned is at least
Hitting the Road — BTN 9-8
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.
Global Decision — BTN 9-9
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
Income before income taxes ....................
38,364,279
29,915,017
Add interest expense* ...............................
7,754,972
7,934,450
Income before taxes and interest ............
₩ 46,119,251
₩ 37,849,467
Times interest earned ratio .......................
5.95a
4.77b
* Interest expense is labeled “Finance expense” on Samsung’s consolidated statements of income.
a 46,119,251 / 7,754,972
b 37,849,467 / 7,934,450
2. Of these three companies, Apple and Google both have superior
coverage of interest expense for the two years analyzed. Specifically,
