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Comprehensive Problem
Bug-Off Exterminators (100 minutes)
Part 1
a. Correct ending balance of cash and the amount of the omitted check
Balance per bank ................................
$15,100
Plus deposit in transit ..........................
2,450
Less outstanding checks .....................
(1,800)
Reconciled balance ..............................
$15,750
Balance per books ................................
$17,000
Plus interest earned..............................
52
Less service charges............................
(15)
Balance before omitted check .............
17,037
Reconciled balance (from above) ............
(15,750)
Omitted check .......................................
$ 1,287
b. Allowance for doubtful accounts
Unadjusted balance ..............................
$ 828
credit
Anticipated write-off .............................
(679)
debit
Revised unadjusted balance................
149
credit
Desired ending balance........................
700
credit
Necessary adjustment ..........................
$ 551
credit
c. Depreciation expense on the truck
Cost ................................................................
$32,000
Less salvage value ................................
(8,000)
Depreciable cost ................................
$24,000
Useful life (years) ................................
4
Annual depreciation for 2015............................
$ 6,000
d. Depreciation expense on the equipment
Sprayer
Injector
Cost ........................................................
$27,000
$18,000
Less salvage value ...............................
(3,000)
(2,500)
Depreciable cost ................................
$24,000
$15,500
Useful life (years) ................................
8
5
Depreciation for 2015 ...........................
$ 3,000
$ 3,100
Comprehensive Problem (Continued)
e. Adjusted revenue and unearned revenue balances
Total advance received ........................................
$ 3,840
Months in contract ................................................
12
Revenue per month ..............................................
$ 320
Months of services provided ...............................
5
Total earned ($320 x 5 months) ...........................
(1,600)
Overstatement of revenue ($3,840 – $1,600) ......
$ 2,240
Extermination Services Revenue account
Unadjusted balance ..............................................
$60,000
Overstatement .......................................................
(2,240)
Adjusted balance ..................................................
$57,760
Unearned Services Revenue account
Unadjusted balance ..............................................
$ 0
Adjustment ............................................................
2,240
Adjusted balance ..................................................
$ 2,240
f. Warranty expense
Adjusted services revenue for the year (from e) ....
$57,760
Warranty percent .................................................
2.5%
Warranty expense (estimated) ............................
$ 1,444
Estimated warranty liability
Unadjusted balance .............................................
$ 1,400
credit
Warranty expense ................................................
1,444
credit
Ending adjusted balance ....................................
$ 2,844
credit
g. Note payable and interest accrual
The note originated on December 31, 2015. The first time interest
will be payable is December 31, 2016. The annual interest expense
on the note is $1,200 ($15,000 x .08).
Thus, the adjusted balance for both Interest Payable and Interest
Expense at December 31, 2015, is zero.
Comprehensive Problem (Continued)
Part 2
BUG-OFF EXTERMINATORS
December 31, 2015
Unadjusted
Trial Balance
Adjustments .
Adjusted
Trial Balance
Cash ...........................................
$ 17,000
(a)
$1,250
$ 15,750
Accounts receivable .................
4,000
(b1)
679
3,321
Allowance for
doubtful accounts ..................
$ 828
(b1)
$ 679
(b2)
551
$ 700
Merchandise inventory ............
11,700
11,700
Trucks .........................................
32,000
32,000
Accum. deprec.–Trucks ...........
0
(c)
6,000
6,000
Equipment ................................
45,000
45,000
Accum. deprec.–Equip.............
12,200
(d)
6,100
18,300
Accounts payable .....................
5,000
(a)
1,287
3,713
Estim. warranty liability ............
1,400
(f)
1,444
2,844
Unearned services rev .............
0
(e)
2,240
2,240
Interest payable ........................
0
0
Long-term notes payable ........
15,000
15,000
Common stock ..........................
10,000
10,000
Retained earnings .....................
49,700
49,700
Dividends ................................
10,000
10,000
Extermination
services revenue ....................
60,000
(e)
2,240
57,760
Interest revenue ........................
872
(a)
52
924
Sales ............................................
71,026
71,026
Cost of goods sold ...................
46,300
46,300
Deprec. expense–Trucks .........
0
(c)
6,000
6,000
Deprec. expense–Equip ...........
0
(d)
6,100
6,100
Wages expense .........................
35,000
35,000
Interest expense ........................
0
0
Rent expense .............................
9,000
9,000
Bad debts expense ...................
0
(b2)
551
551
Miscellaneous expense ...........
1,226
(a)
15
1,241
Repairs expense .......................
8,000
8,000
Utilities expense ........................
6,800
6,800
Warranty expense .....................
0
_______
(f)
1,444
______
1,444
_______
Totals...........................................
$226,026
$226,026
$18,316
$18,316
$238,207
$238,207
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial and Managerial Accounting, 6th Edition
546
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
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial and Managerial Accounting, 6th Edition
548
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 ...............................
$82,771
1. Times interest earned
($ 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 $13,856. The six components
that make up accrued expenses are: Accrued warranty and related
4. The solution depends on the financial statement information accessed.
1. Apple—Times interest earned
($ 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
and 2011. Apple and Google both are in strong positions in their ability
to make interest payments should their income decline as implied by
