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PROBLEMS: SET B
Problem 8-1B
List A
List B
_i__
1. Interest expense is recorded in the period
interest is incurred rather than in the period
interest is paid.
a. The riskiness of a
business’s obligations
Problem 8-2B
Requirement 1
(a). November 1, 2018
Cash
21,000,000
Requirement 2
(a). December 31, 2018
Interest Expense ($21 million x 7% x 2/12)
245,000
Requirement 3
(a). April 30, 2019
Notes Payable
21,000,000
Problem 8-3B
Requirement 1
January 31
Salaries Expense
500,000
Income Tax Payable
135,000
Requirement 2
January 31
Salaries Expense (fringe benefits)
73,000
Requirement 3
January 31
Payroll Tax Expense (total)
69,250
Problem 8-4B
Requirement 1
January 24
Salaries Expense
2,500,000
Requirement 2
January 24
201,250
Requirement 3
January 24
Payroll Tax Expense (total)
346,250
Problem 8-5B
Requirement 1
$9,128,000
=
$560 per season ticket
16,300
Requirement 2
Requirement 3
Deferred Revenue
570,500
Problem 8-6B
Requirement 1
Cash
2,300
Requirement 2
Deferred Revenue
742
Requirement 3
Deferred Revenue
2,300
Problem 8-7B
Requirement 1
Bad Debt Expense ($29 million x 3%) 870,000
Requirement 2
Compact Electronics has a contingent gain that is probable and reasonably estimable.
Requirement 3
Loss 600,000
Requirement 4
The likelihood of loss is reasonably possible rather than probable, so no journal entry
Problem 8-8B
Requirement 1
The contingent liability is reasonably possible and can be reasonably estimated within
a range. Because the loss is not probable, no journal entry for a loss and liability is
Requirement 2
The contingent liability is probable and reasonably estimable, so it must be reported.
Because the estimate of the loss is a range where no amount within the range is a
better estimate than any other amount, the minimum amount of the range will be
recorded as follows:
Requirement 3
Authors Academic Press has a contingent gain that is probable and can be reasonably
estimated at $3 million. Contingent gains are not recorded until the gain is certain.
Problem 8-9B
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Ferris Air
$4,227
÷
$4,650
=
0.91
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
Requirement 3
The purchase of additional inventory with cash would not affect the current ratio as
total current assets would remain unchanged. One current asset (inventory) would
ADDITIONAL PERSPECTIVES
Continuing Problem: Great Adventures
AP8-1
Requirement 1
The loss is probable and reasonably estimable, so it must be recorded as follows:
Requirement 2
Great Adventures would record a loss and a liability for the minimum amount
($100,000) and disclose the range between $100,000 and $150,000 in the notes to the
financial statements. The entry is as follows:
Requirement 3
If the likelihood of loss is reasonably possible rather than probable, we record no entry
Requirement 4
Financial Analysis: American Eagle
AP8-2
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
Requirement 3
If American Eagle used $100 million in cash to pay $100 million in accounts payable,
its current ratio and acid-test ratio would improve. The calculations are provided as
follows:
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
Financial Analysis: The Buckle
AP8-3
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
Requirement 3
If The Buckle purchased $50 million of inventory by debiting inventory and crediting
accounts payable, its current ratio and acid-test ratio would weaken. The calculations
are provided as follows:
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Comparative Analysis: American Eagle vs. The Buckle
AP8-4
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Requirement 2
($ in millions)
Quick
Assets
÷
Total
Current
Liabilities
=
Acid-Test
Ratio
Requirement 3
The purchase of additional inventory with accounts payable will decrease the current
ratio for American Eagle and The Buckle because their current ratio is above 1.0. In
AP8-5
Requirement 1
($ in millions)
Total
Current
Assets
÷
Total
Current
Liabilities
=
Current
Ratio
Requirement 2
Delaying the purchase of inventory on credit from December 26 to January 3, by
itself, is not unethical. The primary argument in favor of the decision is that it
provides a short-term solution and keeps the company from violating its debt covenant
Internet Research
AP8-6
This case provides an opportunity for students to research stock price and accounting
Written Communication
AP8-7
a. In order to record a contingent liability, the loss must be probable and the amount
must be reasonably estimable. A loss and liability will not be recorded for the
b. Western should record warranty expense of $40,000 (2% x $2 million in sales)
rather than just the $25,000 in warranty expense recorded for expenditures incurred
c. The likelihood of loss is reasonably possible rather than probable, so a contingent
Earnings Management
AP8-8
Requirement 1
Quattro can use the estimate for warranty expense to manage earnings. If earnings are
low, Quattro can boost earnings by recording less warranty expense this year. If
Requirement 2
($ in millions)
Income Before
Warranty Expense
−
Warranty
Expense
=
Net Income
2018
$210
−
$50
=
$160
Requirement 3
The executive meeting suggestion does not appear ethical. If the best estimate of
