Problem 9-6BA (Concluded)
July 15
FICA⎯Social Security Taxes Payable ……………….
992
FICA⎯Medicare Taxes Payable ………………………..
232
15
State Unemployment Taxes Payable …………………
440
31
Federal Unemployment Taxes Payable ……………..
66
31
Serial Problem — SP 9
Serial Problem — SP 9 (30 minutes)
1.
Gross pay (8 days x $125 per day) ……………………………..
FICA Social Security tax deduction (6.2%)* …………………
FICA Medicare tax deduction (1.45%) …………………………
Total deductions ……………………………………………………….
2. 2017
Feb. 26
Wages Expense ……………………………………………….
1,000.00
62.00
14.50
159.00
764.50
3. 2017
Feb. 26
Payroll Taxes Expense ……………………………………..
122.50
62.00
14.50
40.00
4. 2017
Mar. 25
Accounts Receivable – Wildcat Services …………..
2,912
2,800
Mar. 25
2,002
2,002
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 ……………………..
Reconciled balance …………………………
$15,750
Balance per books …………………………..
$17,000
Balance before omitted check ………….
(15,750)
$ 1,287
b. Allowance for doubtful accounts
Unadjusted balance …………………………
$ 828
credit
Anticipated write-off ………………………..
Revised unadjusted balance ……………
credit
Desired ending balance …………………..
credit
Necessary adjustment ……………………..
$ 551
credit
c. Depreciation expense on the truck
Cost ……………………………………………………….
$32,000
Less salvage value …………………………..
Depreciable cost …………………………..
$24,000
Useful life (years) …………………………..
Annual depreciation for 2016 ………………………
$ 6,000
d. Depreciation expense on the equipment
Sprayer
Injector
Cost ………………………………………………..
$27,000
$18,000
Less salvage value ………………………….
Useful life (years) …………………………..
Comprehensive Problem (Continued)
e. Adjusted revenue and unearned revenue balances
Total advance received ………………………………….
$ 3,840
Months in contract …………………………………………
12
Revenue per month ……………………………………….
Months of services provided ………………………….
Total earned ($320 x 5 months) ………………………
Overstatement of revenue ($3,840 – $1,600) ……
$ 2,240
Extermination Services Revenue account
$60,000
Overstatement ……………………………………………….
$57,760
Unearned Services Revenue account
Adjustment ……………………………………………………
$ 2,240
f. Warranty expense
Adjusted services revenue for the year (from e) ….
$57,760
Warranty percent ………………………………………….
Warranty expense (estimated) ……………………….
$ 1,444
$ 1,400
g. Note payable and interest accrual
The note originated on December 31, 2016. The first time interest
Comprehensive Problem (Continued)
Part 2
BUG-OFF EXTERMINATORS
December 31, 2016
Unadjusted
Trial Balance
Adjustments .
Adjusted
Trial Balance
Cash …………………………………….
$ 17,000
(a)
$1,250
$ 15,750
Accounts receivable ……………..
4,000
(b1)
679
3,321
Allowance for
doubtful accounts ………………
$ 828
(b1)
$ 679
(b2)
551
$ 700
Merchandise inventory …………
Trucks …………………………………..
Accum. deprec.–Trucks ………..
(c)
Equipment …………………………..
Accum. deprec.–Equip …………
18,300
Accounts payable …………………
5,000
1,287
Estim. warranty liability …………
1,400
Unearned services rev ………….
(e)
Interest payable ……………………
15,000
Common stock ……………………..
49,700
Extermination
Interest revenue ……………………
(a)
Sales ……………………………………..
71,026
Cost of goods sold ……………….
Deprec. expense–Trucks ………
6,000
6,000
Deprec. expense–Equip ………..
6,100
6,100
Wages expense …………………….
Interest expense ……………………
Rent expense ………………………..
9,000
9,000
Bad debts expense ……………….
Miscellaneous expense ………..
1,226
1,241
Repairs expense …………………..
8,000
8,000
Utilities expense ……………………
6,800
6,800
Warranty expense …………………
0
_______
1,444
Comprehensive Problem (Continued)
Part 3
2016
(a)
Miscellaneous Expenses ……………………………………..
15
Accounts Payable …………………………..……………………
(b1)
Allowance for Doubtful Accounts ………………………….
679
(b2)
Bad Debts Expense ………………………………………………
551
(c)
Depreciation Expense—Trucks ……………………………..
Depreciation Expense—Equipment ……………………….
(e)
Extermination Services Revenue …………………………..
Warranty Expense ………………………………………………..
Comprehensive Problem (Continued)
Part 4
BUG-OFF EXTERMINATORS
Income Statement
For Year Ended December 31, 2016
Revenues
Extermination services revenue ……………
$57,760
Sales ……………………………………………………
71,026
Interest revenue …………………………………..
Total revenues……………………………………..
Expenses
Cost of goods sold …………………………..….
46,300
Depreciation expense—Trucks …………….
Depreciation expense—Equipment ………
Wages expense ……………………………………
35,000
Interest expense…………………………………..
Rent expense……………………………………….
Bad debts expense ………………………………
Miscellaneous expenses ………………………
Repairs expense ………………………………….
Utilities expense…………………………………..
Warranty expense ………………………………..
Total expenses …………………………………….
BUG-OFF EXTERMINATORS
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2015 …………………..
$ 49,700
Retained earnings, December 31, 2016 …………………..
$ 48,974
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS
Balance Sheet
December 31, 2016
Assets
Current assets
Cash ……………………………………………………….
$15,750
Accounts receivable ………………………………..
$ 3,321
Allowance for doubtful accounts ……………..
Total current assets ………………………………..
Trucks …………………………………………………….
Accumulated depreciation—Trucks …………
Equipment ………………………………………………
Accumulated depreciation—Equipment …..
(18,300)
Total plant assets ……………………………………
Total assets ………………………………………………
Liabilities
Current liabilities
Accounts payable ……………………………………
$ 3,713
Estimated warranty liability ……………………..
Unearned services revenue ……………………..
Total current liabilities …………………………..
15,000
Total liabilities …………………………………………..
Equity
Common stock ………………………………………….
10,000
Retained earnings ……………………………………..
48,974
Total liabilities and equity ………………………….
Reporting in Action — BTN 9-1
1. Times interest earned
$ millions
2014
2013
2012
Net income …………………………………………..
$39,510
$37,037
$41,733
Add income taxes …………………………..
13,973
13,118
14,030
Analysis comment: Apple reports interest expense of $384 million for
2014. Assuming Apple had interest expense of $136 million for 2013
2. Loyalty reward liabilities arise when a customer makes a purchase
under a frequent purchase program. It is an estimated liability as the
Comparative Analysis — BTN 9-2
1. Apple—Times interest earned
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income …………………………………………..
$39,510
$37,037
$41,733
Google—Times interest earned
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income (loss) …………………………..
$ 14,444
$ 12,920
$ 10,737
Add interest expense (from Note 10) ………….
2. Apple reports interest expense of $384 million for 2014 and $136 million
for 2013. And, this problem assumes that Apple reports interest
Ethics Challenge — BTN 9-3
1. It is in Bly’s self-interest to maximize the amount of revenues less
warranty expenses so as to maximize his personal bonus. Since Bly
2. Although Bly might be able to affect the amount of revenues less
warranty expenses via the warranty expense accrual in the short run,
Communicating in Practice — BTN 9-4
MEMORANDUM
To:
Tom Pretti, General Manager
From:
Dusty Johnson, Manager⎯Accounting and Finance
Date:
Subject:
Reporting warranties in financial statements
This memorandum is in response to your comment on my proposal for the
treatment of a contingency in our financial statements. You specifically
object to the proposed recognition of an expense and liability for
warranties. The purpose of this memorandum is to respond to your
objection.
Both the conservatism and matching principles apply to accounting for
Taking It to the Net — BTN 9-5
1. McDonald’s 2014 current liabilities include the following:
• Accounts payable
2. The portion of long-term debt maturing in the next 12 months ($
millions) is:
3. Times interest earned for McDonald’s as of 12/31/2014
$ millions
12/31/2014
Net income ………………………………………………………
$ 4,758
Plus income taxes ……………………………………………
2,614
Plus interest expense ……………………………………….
$ 7,942
Teamwork in Action — BTN 9-6
1. Option A: Interest Expense = $6,000 x 10% x 90/360 = $150
2. Entries:
2a. Issue date, Option A
June 1
Cash ………………………………………………………………..
6,000
Notes Payable …………………………………………….
6,000
Borrowed cash by issuing an
interest-bearing note.
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.
Teamwork in Action (Concluded)
4. Entries:
4a. Adjusting entry, Option A (Dec. 31)
Dec. 31
Interest Expense ………………………………………………
50
Interest Payable ………………………………………….
50
Dec. 31
Interest Expense ………………………………………………
Interest Payable ………………………………………….
4c. Maturity date entry, Option A
Interest Expense ………………………………………………
Interest Payable ……………………………………………….
Notes Payable ………………………………………………….
4d. Maturity date entry, Option B
Interest Expense ………………………………………………
Interest Payable ……………………………………………….
Notes Payable ………………………………………………….
Cash ……………………………………………………….
Entrepreneurial Decision — BTN 9-7
1.
Noodles & Company
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$1,000,000
$ 250,000
$1,250,000
2. Times interest earned = $562,500 / $21,000 = 26.8 times
3.
Noodles & Company
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$1,000,000
$ 400,000
$1,400,000
4.
Noodles & Company
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$1,000,000
$ 100,000
$1,100,000
5. In each of these cases, the company’s times interest earned is at least
Hitting the Road — BTN 9-8
Global Decision — BTN 9-9
1. Samsung— Times interest earned
KRW in millions
Current Year
Prior Year
Net income ………………………………………….
₩ 23,394,358
₩ 30,474,764
Add income taxes …………………………..
4,480,676
7,889,515
Add interest expense* ………………………….
7,294,002
7,754,972
2. Of these three companies, Apple and Google both have superior
coverage of interest expense for the two years analyzed. Specifically,