(10-20 min.) E 9-26A
Req. 1
Accounts payable are amounts owed to suppliers for products or
services that have been purchased on account.
Employee compensation and benefits are amounts owed to employees
for salaries and other payroll-related expenses.
Current portion of long-term debt is next year’s payment on the
company’s long-term debt.
The other liabilities are a catch-all group of liabilities that do not fit one
of the more specific categories. The other liabilities are long-term, as
shown by the fact that they are not listed among the current liabilities.
(continued) E 9-26A
Req. 2
Total assets = $4,671 million, the sum of total liabilities and
stockholders’ equity.
Leverage
ratio
=
Total assets ($4,671)
Total stockholders’ equity ($2,418)
=
1.93
Debt ratio
=
Total liabilities ($4,671 − $2,418)*
=
0.48
Total assets ($4,671)
2015
Leverage
ratio
=
Total assets ($3,634)
Total stockholders’ equity ($1,785)
=
2.04
Total liabilities ($3,634 − $1,785)
Both the leverage ratio and debt ratio improved in 2016. Therefore, the
company improved.
____
*Or, $305 + $1,842 + $77 + $29 = $2,253
Req. 3
2016 2015
Accounts
payable
turnover
Cost of goods
sold
$1,580
= 10.0
$1,218
= 7.0
Average Accounts
payable
$158*
$174**
*($144 + $172) / 2
**($172 + $176) / 2
Days’
payable
365
365
= 36.5
365
= 52
Accts. payable
10.0
7.0
The company’s ability to cover accounts payable and current liabilities
over the year improved.
(5-10 min.) E 9-27A
Req. 1
Barclay Security Systems should report this situation in a note to the
financial statements. It is the company’s policy to disclose legal
Req. 2
Barclay would report:
INCOME STATEMENT
Estimated loss (or expense) due to lawsuit
contingency …………………………………..
$2,000,000
BALANCE SHEET
Estimated liability due to lawsuit contingency
$2,000,000
The note disclosure would be similar to Requirement 1.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Estimated Loss due to Lawsuit Contingency …..
2,000,000
(15-20 min.) E 9-28A
Banff Electronics
Balance Sheet (partial)
March 31, 2016
Current liabilities:
a. Estimated warranty payable
[$35,000 + ($2,100,000 × .02) − $58,000] …………….
$ 19,000
b. Current portion of long-term note payable …………….
9,000
Interest payable ($45,000 × .05 × 1/12) …………………..
c. Unearned sales revenue ($105,000 − $60,000) ………..
d. Employee withheld income tax payable ………………..
30,700
FICA tax payable ($220,000 × .0765 x 2) …………………
33,660*
Total current liabilities …………………………………….
$137,548
Long-term liabilities:
Note payable ($45,000 − $9,000) …………………………...
$ 36,000
(10-15 min.) E 9-29A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Jan.
31
Cash ($10,000,000 × 0.96) …………………
9,600,000
Discount on Bonds Payable …………….
400,000
Bonds Payable ………………………….
10,000,000
To issue bonds at a discount.
b.
July
31
Interest Expense ……………………………..
390,000
Cash ($10,000,000 × .07 × 6/12) …..
350,000
Discount on Bonds Payable
($400,000 / 10) ……………………….
c.
Dec.
31
Interest Expense ……………………………..
325,000
Interest Payable
($10,000,000 × .07 × 5/12) ……….
291,667
Discount on Bonds Payable
($400,000 / 10 × 5/6) ……………….
discount.
(10-15 min.) E 9-30A
1.
Cash received = $300,000 × 1.03 =
$309,000
2.
Principal ……………………………………………………………..
$300,000
Interest ($300,000 × .07 × 20) ………………………………..
Total cash paid ……………………………………………………
$720,000
3.
Total cash paid ……………………………………………………
$720,000
Less: Cash received …………………………………………..
(309,000)
Difference = Total interest expense ………………………
$411,000
4.
Annual interest expense by the straight-line amortization method:
$300,000 × .07
$300,000 × (1.03 − 1.00)
20
$21,000
−
$450
=
$ 20,550
Cash interest payment
Premium amortization
× 20 years
Total interest expense over the life of the bonds
$411,000
same
(15-20 min.) E 9-31A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$1,145,203.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(1.5% of
Maturity
Value)
Interest
Expense
(3.5% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($1,600,000
– D)
Dec. 31, 2016
454,797
1,145,203
June 30, 2017
24,000
40,082
16,082
438,715
1,161,285
Dec. 31, 2017
24,000
40,645
16,645
422,070
1,177,930
June 30, 2018
24,000
41,228
17,228
404,842
1,195,158
Dec. 31, 2018
24,000
41,831
17,831
387,012
1,212,988
June 30, 2019
24,000
42,455
18,455
368,557
1,231,443
Dec. 31, 2019
24,000
43,100
19,100
349,457
1,250,543
June 30, 2020
24,000
43,769
19,769
329,688
1,270,312
Dec. 31, 2020
24,000
44,461
20,461
309,227
1,290,773
24,000
45,177
21,177
288,050
1,311,950
Dec. 31, 2021
24,000
45,918
21,918
1,333,869
June 30, 2022
24,000
46,685
243,446
1,356,554
Dec. 31, 2022
24,000
47,479
23,479
219,967
1,380,033
24,000
48,301
24,301
195,665
1,404,335
Dec. 31, 2023
24,000
49,152
25,152
170,514
1,429,486
June 30, 2024
24,000
50,032
26,032
144,482
1,455,518
Dec. 31, 2024
24,000
50,943
26,943
117,539
1,482,461
June 30, 2025
24,000
51,886
27,886
1,510,348
Dec. 31, 2025
24,000
52,862
28,862
1,539,210
June 30, 2026
24,000
53,872
29,872
1,569,082
Dec. 31, 2026
24,000
54,918
30,918
Note: numbers may differ slightly due to rounding differences
(continued) E 9-31A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
31
Cash ……………………………………………..
1,145,203
Discount on Bonds Payable ……………
Bonds Payable ………………………….
To issue bonds at a discount.
2017
June
30
Interest Expense …………………………...
40,082
Cash …………………………………………
24,000
Discount on Bonds Payable ……….
16,082
To pay semiannual interest and
amortize bond discount.
2017
Dec.
31
Interest Expense …………………………...
40,645
Cash …………………………………………
24,000
Discount on Bonds Payable ……….
16,645
To pay semiannual interest and
amortize bond discount.
(15-20 min.) E 9-32A
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$908,723.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(5% of
Maturity
Value)
Interest
Expense
(4% of
Preceding
Bond
Carrying
Amount)
Premium
Amortization
(A – B)
Premium
Account
Balance
(Preceding
D–C)
Bond
Carrying
Amount
($800,000
+ D)
June 30, 2016
108,723
908,723
Dec. 31, 2016
40,000
36,349
3,651
105,072
905,072
June 30, 2017
40,000
36,203
3,797
101,275
901,275
40,000
36,051
3,949
97,326
897,326
June 30, 2018
40,000
35,893
4,107
93,219
893,219
Dec. 31, 2018
40,000
35,729
4,271
88,948
888,948
June 30, 2019
40,000
35,558
4,442
84,505
884,505
Dec. 31, 2019
40,000
35,380
4,620
79,886
879,886
June 30, 2020
40,000
35,195
4,805
75,081
875,081
Dec. 31, 2020
40,000
35,003
4,997
70,084
870,084
June 30, 2021
40,000
34,803
5,197
64,888
864,888
Dec. 31, 2021
40,000
34,596
5,404
59,483
859,483
June 30, 2022
40,000
34,379
53,863
853,863
Dec. 31, 2022
40,000
34,155
5,845
48,017
848,017
June 30, 2023
40,000
33,921
6,079
41,938
841,938
Dec. 31, 2023
40,000
33,678
6,322
35,615
835,615
June 30, 2024
40,000
33,425
6,575
29,040
829,040
Dec. 31, 2024
40,000
33,162
6,838
22,201
822,201
June 30, 2025
40,000
32,888
7,112
15,090
815,090
Dec. 31, 2025
40,000
32,604
807,693
June 30, 2026
40,000
32,308
800,000
(continued) E 9-32A
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
June
30
Cash …………………………………………………..
908,723
Bonds Payable ……………………………….
800,000
Premium on Bonds Payable …………….
Dec.
31
Interest Expense …………………………………
36,349
Premium on Bonds Payable …………………
3,651
Cash ………………………………………………
40,000
To pay semiannual interest and amortize
bond premium.
2017
June
30
Interest Expense …………………………………
36,203
Premium on Bonds Payable …………………
Cash ………………………………………………
40,000
To pay semiannual interest and amortize
bond premium.
(15-20 min.) E 9-33A
Req. 1
The company has the right to occupy space and operate out of leased
Req. 2
The rights and obligations discussed in Req. 1 are classified as
operating leases and are not reported on the balance sheet. Omitting
them from the balance sheet improves (lowers) the company’s debt and
leverage ratios.
Req. 3
In the future, the FASB and IASB are proposing to eliminate the current
accounting treatment of most operating leases. If this rule change
(20-25 min.) E 9-34A
Amounts in millions or billions
Company
Company
Company
Ratio
F
K
R
Total current assets
Total current liabilities
F
K
R
Debt
=
Total liabilities
=
$207 + $116
¥2,197 + ¥2,318
€72,600 + €110,107
ratio
Total assets
$434 + $114
¥5,383 + ¥405
€148,526 + €49,525
= 0.59
= 0.78
= 0.92
F
K
R
Leverage
ratio
=
Total assets
=
$548
¥5,788
€198,051
Tot. stockholders’
equity
$225
¥1,273
€15,344
= 2.44
= 4.55
= 12.91
F
K
R
Times-
Operating income
Interest expense
(15-20 min.) E 9-35A
Req. 1
PLAN A
BORROW
$600,000
AT 5%
PLAN B
ISSUE
$600,000
OF COMMON
STOCK
Net income before expansion ……………………
$400,000
$400,000
Project income before interest and income tax
$550,000
$550,000
Less interest expense ($600,000 × .05) ………
30,000
-0-
Project income before income tax……………..
520,000
550,000
Project net income …………………………………..
330,000
Total company net income ……………………
$730,000
Earnings per share including new project:
Plan B ($730,000 / 200,000 shares) ………..
(continued) E 9-35A
Req. 2
MEMORANDUM
TO: Board of Directors, Green Nation Financial Services
FROM: Student Name
SUBJECT: Financing plan to expand operations
Plan A (borrowing) results in much higher earnings per share. Plan A
also allows the existing stockholders to retain control of the company
because the company issues no new stock. But Plan A also creates
more financial risk because borrowing obligates the company to pay the
(10-15 min.) E 9-36B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
31
Inventory …………………………………………………
22,500
Note Payable, Short-Term ……………………
22,500
Purchased inventory by issuing a
note payable.
Apr.
30
Interest Expense ($22,500 × .06 × 9/12) ………
Interest Payable ………………………………….
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.
Balance Sheet on April 30, 2017:
Current liabilities:
Note payable, short-term $22,500
Interest payable 1,013
(5-15 min.) E 9-37B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Warranty Expense ($120,000 × .08) ………….
9,600
Estimated Warranty Payable ………………
9,600
Cash …………………………………………………
Req. 2
INCOME STATEMENT
Sales revenue …………………………………………………..
$120,000
Warranty expense ……………………………………………..
9,600
BALANCE SHEET
Current liabilities
Estimated warranty payable
Req. 3
Estimated warranty payable, a current liability, will cause a company’s
current ratio to decrease.
(10-15 min.) E 9-38B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Oct.
1
Cash ………………………………………………………..
1,512
Unearned Subscription Revenue …………..
1,400
Sales Tax Payable ($1,400 × .08) ……………
112
Nov.
Sales Tax Payable …………………………………….
Cash ……………………………………………………
Dec.
Unearned Subscription Revenue ……………….
Subscription Revenue ($1,400 × 3/12) ……
350
BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($1,400 − $350) ……………..
$1,050
(10 min.) E 9-39B
INCOME STATEMENT
Expenses:
Salary & wage expense ……………………………………………
$215,000
Payroll tax expense ($215,000 × .12) …………………………
25,800
BALANCE SHEET
Current liabilities:
Salary payable ………………………………………………………..
Payroll tax payable ………………………………………………….
(5-10 min.) E 9-40B
Req. 1
Interest to
accrue at
=
$64,000 × .05 × 9/12
=
$2,400
Dec. 31, 2016
Req. 2
Final payment
=
$64,000 + ($64,000 × .05)
=
$67,200
on April 1, 2017
Req. 3
$2,400
(10-15 min.) E 9-41B
Saglio’s balance sheet at Dec. 31, 2017 reported:
Income tax payable ………………………………………………..
$114,500*
Saglio’s 2017 income statement reported:
Income tax expense ($650,000 × .33) ……………………….
$214,500
(10-20 min.) E 9-42B
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
yet paid. They are liabilities for expenses such as interest and income
taxes.
Employee compensation and benefits are amounts owed to employees
for salaries and other payroll-related expenses.
Current portion of long-term debt is next year’s payment on the
company’s long-term debt.