=
Chapter 8, SE 1.
8.0 =
TimesPayables Turnover
= Days
365
Current Assets – Current Liabilities
Financial Ratios:
Working Capital
CHAPTER 8—Solutions
CURRENT LIABILITIES AND
FAIR VALUE ACCOUNTING
Chapter 8, SE 2.
Days’ Payable
Days
365 Days =
45.6
393
=
365
7.3
Days = 50.0 Days
Times
$56,000 $31,000
Chapter 8, SE 3.
Financial Ratios:
Current Assets – Current Liablities
$87,000
Chapter 8, SE 4.
=
=
=
Day’s Payable 365 Days
Payables Turnover =
Working Capital
–
1. 31 480,000.00
480,000.00
2. 30 480,000.00
9,468.49
1. $446,000.00
$ 62,880.00
2.
$ 27,652.00
6,468.00
52,640.00
2,505.60
Federal unemployment tax payable
Cash
Notes Payable
Oct.
Total payroll for April equals salaries:
Medical insurance premiums payable
Social security tax payable
Components of the payroll:
Employees’ federal income taxes payable
Medicare tax payable
Payroll expenses:
Notes Payable
Interest Expense
Chapter 8, SE 5.
Aug.
Chapter 8, SE 6.
32,500
32,500
35,000
35,000
1. 31 360,000.00
2. 30 360,000.00
5,917.81
365,917.81
Payment of note plus interest
Estimated Product Warranty Liability
Merchandise Inventory
Product Warranty Expense31Oct.
Chapter 8, SE 7.
To record estimated product warranty
31
Estimated Product Warranty Liability
May
Notes Payable
Interest Expense
Cash
Cash
Mar.
Chapter 8, SE 8.
86,580
86,580
90,650
90,650
1.
× 0.625 =
$36,000
Merchandise Inventory
Estimated Product Warranty Liability31
Chapter 8, SE 9.
Estimated Product Warranty Liability
To record estimated product warranty
Product Warranty ExpenseJuly 31
$22,500
Chapter 8, SE 10.
Single payment of $36,000 at 4% for 12 years (see Table 1 in Appendix B)
$ 7,200
At a required rate of return of 10 percent, the present value of the cash flows is
greater than the cost of the machine. Purchasing the machine appears to be a
To find the present value of the purchase transaction:
Chapter 8, SE 11.
annual net cash flow
To find the present value of the purchase transaction:
Chapter 8, SE 12.
smart business decision.
398
1.
2.
3.
4.
2.
3.
4.
1. c 4. e 7.
a
Chapter 8, E 3.
They never affect cash flows at the time of the entry, but they may require pay-
No, the contract should not be considered a liability on the books for the team
Three different methods of computing fair value are needed because there is
Chapter 8, E 1.
ment of a liability in the future.
An increasing payables turnover is good for the company in the sense that it is
able to pay its creditors in fewer days. It must have the cash flow to do this.
The present value concept allows the decision maker to compare various alter-
The payer is better off because the receiver has to wait a year for the payment,
Chapter 8, E 2.
A commitment would be recognized in the accounting records when a transac-
399
=
=
Times
Current Assets – Current Liabilities
2011:
Current Assets – Current Liabilities
Working Capital
Ronaldo’s working capital has declined from $220,000 to $200,000 because cur-
rent liabilities have increased more than current assets. Also, the payables turn-
over has declined from 7.8 times to 6.6 times, resulting in a longer days’ payable
Chapter 8, E 4.
2010:
Financial Ratios:
Working Capital
400
1. Oct. 31 240,000.00
240,000.00
2. Nov. 30 2,169.86
2,169.86
=
3. Dec. 30 240,000.00
2,169.86
31 490,200
2. Journal entry prepared
Aug.
Accounts Receivable
Service revenue for the month:
Chapter 8, E 6.
Interest Payable
1. Amount of service revenue determined
Chapter 8, E 5.
Cash
Interest Expense
Notes Payable
Interest Payable
Notes Payable
401
1. $371,000.00
$ 94,884.00
2.
$23,002.00
3,090.96
$83,410.88
Total payroll for October equals wages:
Employees’ federal income taxes payable
Chapter 8, E 7.
State unemployment tax payable
Social security tax payable
Payroll expenses:
Total payroll expenses
Components of the payroll:
31 91,000
91,000
31 140,000
31 11,102
11,102
July Estimated Product Warranty Liability
Chapter 8, E 9.
1. Employee benefit for July vacation estimated
1. Estimated liability recorded
Chapter 8, E 8.
Product Warranty Expense
2. Games’ replacement recorded
July
Estimated Product Warranty Liability
Vacation Pay Expense
Estimated Liability for Vacation Pay
July
2. and 3. Journal entries prepared
1.
$24,000 0.497 =
Chapter 8, E 11.
$11,928
Single payment of $24,000 at 6% for 12 years (see Table 1 in Appendix B)
×
annual rent
Chapter 8, E 10.
$12,600.00
Rate
Factor from
Table 1*
Present Value
of $30,000
Payments Rate
Factor from
Table 2*
Present Value
of $600
Payments
Years
Chapter 8, E 12.
Chapter 8, E 13.
*In Appendix B
To find the present value of the purchase transaction:
Chapter 8, E 14.
machine does not appear to be a smart business decision.
At a required rate of return of 14 percent, the cost of the machine is greater than
the present value of the cash flows the machine will generate. Purchasing the
Chapter 8, E 15.
Since the 16 percent annual interest is compounded quarterly, the applicable inter-
406
Betley’s offer to buy:
From Table 2 in Appendix B:
Chapter 8, E 16.
Otis’s offer to sell:
From Table 2 in Appendix B:
407
1. 8.
The items that would not be expected to be listed on a balance sheet include con-
tingent liabilities and commitments. The items that would be listed on the balance
a
2. User Insight: Nature of current liabilities
Chapter 8, P 1.
1. Current liabilities, contingencies, and commitments identified
l
21 9,000.00
9,000.00
20 9,000.00
69.04
When a company has notes payable, the user would also expect to see a current
July
May
Chapter 8, P 2.
2. User Insight: Other current liability discussed
2011
1. Transactions recorded
60-day, 14% note given to supplier in
Accounts Payable
Notes Payable
settlement of trade account payable
Notes Payable
Interest Expense
a. 2011
July 31 69,623.00
17,791.00
2,923.00
b. July 31 17,583.66
4,313.00
÷=
Wages Expense
0.20
To record the payroll
Payroll Taxes and Benefits Expense
Social Security Tax Payable
$2,400
Employees’ Federal Income Taxes Payable
Computations:
$12,000
Employees’ State Income Taxes Payable
1. Journal entries prepared
Lazur Corporation incurred $17,583.66 in payroll taxes and benefits on payroll
2. Cost of new employee estimated
a. Jan. 31 18,884
17,530
b. Jan. 31 10,800
10,800
$28,600
Estimated Product Warranty Liability
1. Journal entries prepared
Cash
Chapter 8, P 4.
Product Warranty Expense
Estimated Product Warranty Liability
Beginning balance
2. Balance of Estimated Product Warranty Liability account computed
3. User Insight: Product warranty liability estimation discussed