Chapter 09 – Reporting and Analyzing Current Liabilities
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
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Solutions Manual, Chapter 9
51
1. McDonald’s 2011 current liabilities include the following:
• Accounts payable
2. The portion of long-term debt maturing in the next 12 months ($
$366.6 / ($366.6 + $12,133.8) = 2.93%
3. Times interest earned for McDonald’s as of 12/31/2011
($ millions)
12/31/2011
Net Income ……………………………………………………...
$ 5,503.1
Plus income taxes …………………………………………...
2,509.1
Plus interest expense ……………………………………….
492.8
Income before interest and taxes ……………………..
$ 8,505.0
Times interest earned ……………………………………...
17.26
times
Comment: The 17.26 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.
Cash …………………………………………………………….….
6,000
Notes Payable …………………………………………….
6,000
Borrowed cash by issuing an
interest-bearing note.
6,000
Interest Expense …………………………………………..….
Cash ……………………………………………………….
6,150
Repaid note plus interest.
6,000
Interest Expense …………………………………………..….
160
Cash ……………………………………………………….
6,160
Repaid note plus interest.
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.
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Solutions Manual, Chapter 9
53
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].
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.
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McGraw-Hill Education.
Financial Accounting, 7th Edition
54
1.
Annie’s, Inc.
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$10,000,000
$ 2,500,000
$12,500,000
Operating expenses (55%) ………
5,500,000
1,375,000
6,875,000
Income before interest ……………
4,500,000
1,125,000
5,625,000
Interest expense……………………..
0
210,000
210,000
Net income ……………………………..
$ 4,500,000
$ 915,000
$ 5,415,000
2. Times interest earned = $5,625,000 / $210,000 = 26.8 times
3.
Annie’s, Inc.
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$10,000,000
$ 4,000,000
$14,000,000
Operating expenses (55%) ………
5,500,000
2,200,000
7,700,000
Income before interest ……………
4,500,000
1,800,000
6,300,000
Interest expense……………………..
0
210,000
210,000
Net income ……………………………..
$ 4,500,000
$ 1,590,000
$ 6,090,000
Times interest earned = $6,300,000 / $210,000 = 30.0 times
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McGraw-Hill Education.
Solutions Manual, Chapter 9
55
4.
Annie’s, Inc.
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$10,000,000
$ 1,000,000
$11,000,000
Operating expenses (55%) ………
5,500,000
550,000
6,050,000
Income before interest ……………
4,500,000
450,000
4,950,000
Interest expense……………………..
0
210,000
210,000
Net income ……………………………..
$ 4,500,000
$ 240,000
$ 4,740,000
Times interest earned = $4,950,000 / $210,000 = 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
$1,000,000 in sales in Europe, then the company will have little trouble
paying its interest expense.
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McGraw-Hill Education.
Financial Accounting, 7th Edition
56
1. Samsung— Times interest earned
(KRW in millions)
Current Year
Prior Year
Net income …………………………………..……..
₩ 23,845,285
₩ 13,759,043
Add income taxes …………………………..
6,069,732
3,432,875
Income before income taxes ………………..
29,915,017
17,191,918
Add interest expense* …………………..……..
7,934,450
7,893,421
Income before taxes and interest ….……..
₩ 37,849,467
₩ 25,085,339
Times interest earned ratio …………………..
4.77a
3.18b
* Interest expense is labeled “Finance expense” on Samsung’s consolidated statements of income.
a 37,849,467/ 7,934,450
b 25,085,339/ 7,893,421
2. Of these three companies, Apple and Google both have superior
coverage of interest expense for the two years analyzed. Specifically,