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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
should probably adjust the warranty expense accrual to match the
usual (average) experience over time. Given the variable nature of
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.
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.
©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.
Solutions Manual, Chapter 9
555
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].
4b. Adjusting entry, Option B (Dec. 31)
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.
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
2. Times interest earned = $562,500 / $21,000 = 26.8 times
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
©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.
Solutions Manual, Chapter 9
557
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
23.6, so it appears that if it takes out the loan and can generate at least
$100,000 in sales in Europe, then the company will have little trouble
paying its interest expense.
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,
