Chapter 09 – Reporting and Analyzing Current Liabilities
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) …………
Omitted check …………………………………
$ 1,287
Unadjusted balance …………………………
$ 828
credit
Anticipated write-off ……………………..…
(679)
debit
Revised unadjusted balance ……………
149
credit
Desired ending balance ………………..…
700
credit
Necessary adjustment …………………..…
$ 551
credit
Cost ……………………………………………..………..
Less salvage value ……………………….….
Depreciable cost …………………………..…………….
Useful life (years) …………………………..
Annual depreciation for 2013 ………..…………….
Cost ……………………………………………..…
Less salvage value ……………………….…
Useful life (years) …………………………..
Chapter 09 – Reporting and Analyzing Current Liabilities
Comprehensive Problem (Continued)
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
Warranty percent ………………………………………….
2.5%
Warranty expense (estimated) ……………………….
$ 1,444
Unadjusted balance ………………………………………
$ 1,400
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Financial Accounting, 7th Edition
44
(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 2013
Chapter 09 – Reporting and Analyzing Current Liabilities
Comprehensive Problem (Continued)
Part 4
BUG-OFF EXTERMINATORS
Income Statement
For Year Ended December 31, 2013
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, 2013
Retained earnings, December 31, 2012 ……………..……
$ 49,700
Add: Net income ……………………………………………..……
9,274
58,974
Less: Dividends …………………………..…………………..……
(10,000)
Retained earnings, December 31, 2013 ……………..……
$ 48,974
Chapter 09 – Reporting and Analyzing Current Liabilities
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS
Balance Sheet
December 31, 2013
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 ………………………....
$82,771
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McGraw-Hill Education.
Solutions Manual, Chapter 9
47
1. Times interest earned (for fiscal periods)
($ millions)
2012
2011
2010
Net income …………………………………..………
$41,733
$25,922
$14,013
Add income taxes ………………………..…
14,030
8,283
4,527
Add interest expense (ASSUMED) ..………
1,000
1,000
1,000
Income before taxes and interest ….………
$56,763
$35,205
$19,540
Times interest earned ratio …………..…..
56.76a
35.21b
19.54c
a$56,763/$1,000
b$35,205/$1,000
c$19,540/$1,000
Analysis comment: Assuming Apple had interest expense of $1,000
million each fiscal year, Apple’s risk of not being able to cover its
interest expense became progressively lower over the three-year
period as evidenced by its higher times interest earned. Further,
Apple’s times interest earned ratio is higher than the industry average
of 10 for each of its fiscal years.
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 2012 equal $11,414. The six components
that make up accrued expenses are: Accrued warranty and related
4. The solution depends on the financial statement information accessed.
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McGraw-Hill Education.
Financial Accounting, 7th Edition
48
1. Apple—Times interest earned
($ millions)
Current
Year
One Year
Prior
Two Years
Prior
Net income …………………………………..………
$41,733
$25,922
$14,013
Add income taxes ………………………..…
14,030
8,283
4,527
Add interest expense (ASSUMED) ..………
1,000
1,000
1,000
Income before taxes and interest ….………
$56,763
$35,205
$19,540
Times interest earned ratio …………..…..
56.76a
35.21b
19.54c
a$56,763/$1,000
b$35,205/$1,000
c$19,540/$1,000
Google—Times interest earned
($ millions)
Current
Year
One Year
Prior
Two Years
Prior
Net income (loss) …………………………..
$ 10,737
$ 9,737
$ 8,505
Add income taxes (benefit) …………..………
2,598
2,589
2,291
Add interest expense (from Note 10) ….………
84
58
5
Income before taxes and interest ….………
$ 13,419
$12,384
$10,801
Times interest earned ratio …………..…..
159.75a
213.52b
2,160.20c
a$13,419/ $84
b$12,384/ $58
c$10,801/ $ 5
2. This problem assumes that Apple reports interest expense of $1,000
million each fiscal year (it reports zero in reality). Apple and Google
both are in strong positions in their ability to make interest payments