Chapter 9
Liabilities
Short Exercises
(10 min.) S 9-1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
July
31
Inventory …………………………………………………
22,500
Note Payable, Short-Term ……………………
22,500
Purchased inventory by issuing a
note payable.
2015
Apr.
30
Interest Expense ($22,500 × .06 × 9/12) ………
1,013
Interest Payable ………………………………….
1,013
Accrued interest expense.
July
31
Note Payable, Short-Term …………………………
22,500
Interest Payable ……………………………………….
1,013
Interest Expense ($22,500 × .06 × 3/12) ………
337
Cash …………………………………………………..
23,850
Paid note payable and interest at
maturity.
(5-10 min.) S 9-2
Req. 1
2014
2013
Accounts payable turnover:
Purchases*
Average accounts payable
$2,900,000 = 9.1
$317,600
$2,500,000 = 9.9
$252,600
Days payable outstanding:
365
Accounts payable turnover
365 = 40 days
9.1
365 = 37 days
9.9
*Purchases = COGS + Ending inventory – Beginning inventory
2014 = $2,600,000 + $1,000,000 – $700,000 = $2,900,000
2013 = $2,400,000 + $700,000 – $600,000 = $2,500,000
Req. 2
(10 min.) S 9-3
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ($674,000 × .35) ……………………………..
235,900
Notes Receivable ($674,000 − $235,900) ….
438,100
Sales Revenue ………………………………….
674,000
To record sales on account.
Warranty Expense ($674,000 × .05) ………….
33,700
Estimated Warranty Payable ………………
33,700
To accrue warranty expense.
Estimated Warranty Payable …………………..
19,400
Cash…………………………………………………
19,400
To pay warranty claims.
(5-10 min.) S 9-5
1. These are contingent liabilities, because, at the time of the note,
Wheels, Inc., was not liable for any of these product losses.
(5-10 min.) S 9-6
1. False – the cash received is equal to the present value of the future
cash flows.
2. False – the contract (stated) rate, not the market rate, is always used
to calculate the cash interest payment.
(5 min.) S 9-7
(5-10 min.) S 9-8
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
a.
July
1
Cash …………………………………………………..
150,000
Bonds Payable ……………………………….
150,000
To issue bonds at par.
b.
Dec.
31
Interest Expense ($150,000 × .04 × 6/12) …..
3,000
Interest Payable ……………………………..
3,000
To accrue interest expense.
2015
c.
Jan.
1
Interest Payable ………………………………….
3,000
Cash ………………………………………………
3,000
To pay semiannual interest on bonds.
2021
d.
July
1
Bonds Payable ……………………………………
150,000
Cash ………………………………………………
150,000
To pay bonds at maturity.
(10-15 min.) S 9-9
Req. 1 Using the PV function in EXCEL, the bond price is $535,964.
Req. 2 Amortization table
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(1.25% of
Maturity
Value)
Interest
Expense
(1.5% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($560,000
– D)
Mar. 31, 2014
24,036
535,964
Sept. 30, 2014
7,000
8,039
1,039
22,997
537,003
Mar. 31, 2015
7,000
8,055
1,055
21,942
538,058
Sept. 30, 2015
7,000
8,071
1,071
20,871
539,129
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Mar.
31
Cash (from Req. 1) ……………………….
535,964
Discount on Bonds Payable …………
24,036
Bonds Payable ……………………….
560,000
Sept.
30
Interest Expense ………………………….
8,039
Discount on Bonds Payable …….
1,039
Cash ………………………………………
7,000
(10 min.) S 9-10
Req. 1— Borrowed $535,964. Maturity value is $560,000.
Req. 2—Cash interest is $7,000.
Req. 3—Interest expense September 30, 2014 is $8,039.
(10-15 min.) S 9-11
Req. 1—Borrowed $1,950,000:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
July
1
Cash ($2,000,000 × .975) ……………….
1,950,000
Discount on Bonds Payable ………….
50,000
Bonds Payable ………………………..
2,000,000
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Dec.
31
Interest Expense …………………………….
42,500
Discount on Bonds Payable ……….
2,500
Interest Payable ………………………..
40,000
2015
Jan.
1
Interest Payable ……………………………..
40,000
Cash …………………………………………
40,000
(10-15 min.) S 9-12
Req. 1
Best Buy
Co.
Wal-Mart
Stores
5
Leverage
ratio
$16,787 / $3,061
5.48
$203,105 / $76,343
2.66
6
Total
debt
$16,787 − $3,061
$13,726
$203,105 − $76,343
$126,762
7
Debt
ratio
$13,726 / $16,787
.82
$126,762 / $203,105
.62
8
Times
interest
earned
$1,085 / $134
8.1 times
$27,801 / $2,064
13.5 times
Req. 2
Best Buy has a higher leverage ratio and debt ratio, and a lower times–
(10-15 min.) S 9-13
Plan A
Issue $1,500,000 of
6% Bonds Payable
Plan B
Issue $1,500,000
of Common Stock
Net income before expansion ………………
$400,000
$400,000
Project income before interest
and income tax ……………………………….
$ 200,000
$200,000
Less: interest expense ($1,500,000 × .06)
(90,000)
-0-
Project income before income tax ……….
110,000
200,000
Less income tax expense (30%). ………….
(33,000)
(60,000)
Project net income ………………………………
77,000
140,000
Total company net income …………………..
$477,000
$540,000
Earnings per share including expansion:
Plan A ($477,000 / 100,000 shares) …..
$4.77
Plan B ($540,000 / 250,000 shares) …..
$2.16
(5-10 min.) S 9-14
Req. 1
Leverage
ratio
$100.0 / $40.0
=
2.5
This means that Ferguson has $2.50 of assets for every
dollar of stockholders’ equity.
Debt ratio
$60.0 / $100.0
=
.60
This means that Ferguson has $.60 in liabilities (debt) for
every dollar of assets.
Times interest
earned
$4.1 / $1.1
=
3.73 times
This means that for every dollar of interest expense
Ferguson has earned $3.73 of operating income.
Ferguson’s debt ratio is about average and can cover its
existing interest expense. I would be willing to lend
Ferguson $1 million.
(10 min.) S 9-15
LIABILITIES
Current:
Accounts payable ………………………………….
$ 28,500
Current portion of bonds payable …………..
56,000
Interest payable …………………………………….
1,600
Total current liabilities ……………………….
86,100
Long term:
Notes payable, long-term ……………………….
125,000
Bonds payable ………………………………………
$350,000
Less: Discount on bonds payable …………..
(11,250)
338,750
Total liabilities …………………………..………………
$549,850
Exercises
(5-15 min.) E 9-16A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Warranty Expense ($108,000 × .08) ……….
8,640
Estimated Warranty Payable …………….
8,640
Estimated Warranty Payable …………………
7,100
Cash ……………………………………………….
7,100
Req. 2
INCOME STATEMENT
Sales revenue ………………………………………………….
$108,000
Warranty expense ……………………………………………
8,640
BALANCE SHEET
Current liabilities
Estimated warranty payable
($4,500 + $8,640 − $7,100) …………………………
$ 6,040
Req. 3
(10-15 min.) E 9-17A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Oct.
1
Cash ………………………………………………………..
1,962
Unearned Subscription Revenue……………
1,800
Sales Tax Payable ($1,800 × .09) ……………
162
Nov.
15
Sales Tax Payable …………………………………….
162
Cash…………………………………………………….
162
Dec.
31
Unearned Subscription Revenue ……………….
450
Subscription Revenue ($1,800 × 3/12) …….
450
BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($1,800 − $450) …………….
$1,350
(10 min.) E 9-18A
INCOME STATEMENT
Expenses:
Payroll expense ………………………………………………………
$125,000
Payroll tax expense ($125,000 × .08) …………………………
10,000
BALANCE SHEET
Current liabilities:
Salary payable ………………………………………………………..
$9,500
Payroll tax payable …………………………..……………………..
920
(5-10 min.) E 9-19A
Req. 1
Accrued interest,
Dec. 31, 2014
=
$58,000 × .04 × 9/12
=
$1,740
Req. 2
Final payment
=
$58,000 + ($58,000 × .04)
=
$60,320
on April 1, 2015
Req. 3
Interest expense for:
2014
=
$58,000 × .04 × 9/12
=
$1,740
2015
=
$58,000 × .04 × 3/12
=
$ 580
(10-15 min.) E 9-20A
Bracken’s balance sheet at Dec. 31, 2015, reported:
Income tax payable ………………………………………..
$ 94,600*
Bracken’s 2015 income statement reported:
Income tax expense ($680,000 × .29) ……………….
$197,200
_____
* Beginning income tax payable ….. ……………………..
$ 75,000
+ Income tax expense (and payable) for the year
($680,000 × .29) …………………………………………………..
197,200
− Income tax payments during the year ……………………
(177,600)
= Ending income tax payable ……………………………………
$ 94,600
(10-20 min.) E 9-21A
Req. 1
Accounts payable are amounts owed to suppliers for products or
services that have been purchased on account.
Accrued expenses are expenses that the company has incurred but not
(continued) E 9-21A
Req. 2
Total assets = $3,701 million, the sum of total liabilities and
stockholders’ equity.
(in millions) 2014
Leverage
ratio
=
Total assets ($3,701)
Total stockholders’ equity ($1,951)
=
1.90
Debt ratio
=
Total liabilities ($3,701 − $1,951)*
=
0.47
Total assets ($3,701)
For 2013, the leverage ratio was 2.25 and the debt ratio was .56.
Both the leverage ratio and debt ratio improved in 2014. Therefore, the
company improved.
____
*Or, $256 + $1,384 + $102 + $8 = $1,750
Req. 3
2014 2013
Accounts
payable
turnover
Cost of goods sold
$1,546
= 10.8
$1,650
= 8.9
Average Accounts
payable
$143*
$185**
*($107 + $179) / 2
**($179 + $190) / 2
Days
payable
outstanding
365
365
= 33.8
365
= 41.0
Accts. payable
turnover
10.8
8.9
Current
ratio
Current assets
$658
= 2.57
$603
= 1.54
Current liabilities
$256
$391
The company’s ability to cover accounts payable and current liabilities
over the year improved.
(5-10 min.) E 9-22A
Req. 1
Strong Security Systems should report this situation in a note to the
financial statements. It is the company’s policy to disclose legal
Req. 2
Strong would report:
INCOME STATEMENT
Estimated loss (or expense) due to lawsuit
contingency …………………………………..
$2,100,000
BALANCE SHEET
Estimated liability due to lawsuit contingency
$2,100,000
The note disclosure would be similar to Requirement 1.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Estimated Loss due to Lawsuit Contingency …..
2,100,000
Estimated Liability due to Lawsuit
Contingency ……………………………………………
2,100,000
(15-20 min.) E 9-23A
Best Electronics
Balance Sheet (partial)
March 31, 2014
Current liabilities:
a. Estimated warranty payable
[$41,000 + ($1,800,000 × .04) − $67,000] …………….
$ 46,000
b. Current portion of long-term note payable …………….
15,000
Interest payable ($75,000 × .03 × 1/12) …………………..
188
c. Unearned sales revenue ($110,000 − $80,000) ………..
30,000
d. Employee withheld income tax payable ………………..
27,900
FICA tax payable ($260,000 × .0765)… …………………..
19,890
Total current liabilities …………………………………….
$138,978
Long-term liabilities:
Note payable ($75,000 − $15,000) ………………………….
$ 60,000