$18,000.00
952.00
$39,436.20
Employees’ federal income taxes payable
User Insight: Additional information identified
other loan outstanding, missing invoices, or accrued liabilities. Gundy should be
The current liabilities of Gundy Cycle Repair as of December 31, 2011, are as
follows:
Chapter 8, P 5.
1. Current liabilities determined
Accounts payable
Total current liabilities
which the documents are missing. For instance, there may be a bank loan or an-
2.
Current liabilities may exist for which there is no documentary evidence or for
=
= $32,600 – =
Working Capital
($6,836)
Chapter 8, P 5. (Continued)
3. User Insight: Working capital, payables turnover, and days’ payable computed
Gundy has a negative working capital of $6,836, and the payables turnover is only
4.8 times. This position means that it takes, on average, 76.0 days for the company
to pay its accounts payable. Although the company is said to be profitable, its
and evaluated (cents omitted)
$39,436
Current Assets – Current Liabilities
a.
=
Chapter 8, P 6.
Factor: 8%, 4 periods
1. Present value applied
Present value of a single payment (Table 1 in Appendix B)
2. User insight: Usefulness of present value discussed
The fundamental reason present value is a useful tool in making business deci-
25 86,400.00
86,400.00
24 86,400.00
568.11
852.16
2. User Insight: Other current liability discussed
Equipment
Chapter 8, P 7.
Nov.
Purchase of loading cart with a 60-day,
1. Transactions recorded
10% note
2011
Notes Payable
Interest Expense
Interest Payable
Notes Payable
When a company has notes payable, the user would also expect to see a current
Jan.
2012
a. 2011
Oct. 31 185,500.00
b. Oct. 31 46,888.76
11,501.00
2,690.00
÷ 0.20 =
Chapter 8, P 8.
$6,400
Wages Expense
$32,000
Computations:
Social Security Tax Payable
Medicare Tax Payable
2. Cost of new employee estimated
1. Transactions recorded
Payroll Taxes and Benefits Expense
Hammer Company incurred $46,888.76 in payroll taxes and benefits on payroll
a. 30 4,930
30,000
4,930
× 0.03 × = $10,080
$104,000
Estimated Product Warranty Liability
Service Fees Revenue
2,800
2. Balance of Estimated Product Warranty Liability account computed
CashSept.
Chapter 8, P 9.
1. Journal entries prepared
$120
If the product warranty liability is underestimated, the current year’s income is
Beginning balance
3. User Insight: Product warranty liability estimation discussed
$ 7,500.00
3,000.00
516.00
$18,541.25
Employees’ federal income taxes payable
The current liabilities of Linda’s Salon as of December 31, 2011, are as follows:
Notes payable
Current liabilities may exist for which there is no documentary evidence or for
other loan outstanding, missing invoices, or accrued liabilities. Lopez should be
User Insight: Additional information identified
Accounts payable
Total current liabilities
which the documents are missing. For instance, there may be a bank loan or an-
2.
Chapter 8, P 10.
1. Current liabilities determined
=
= $15,800 – =
Days
Times
365 Days
Payables Turnover 5.0
Days’ Payable =
Lopez has a negative working capital of $2,741, and the payables turnover is only
5.0 times. This position means that it takes, on average, 73.0 days for the company
to pay its accounts payable. Although the company is said to be profitable, its
Days73.0==
Chapter 8, P 10. (Continued)
3. User Insight: Working capital, payables turnover, and days’ payable computed
and evaluated (cents omitted)
Working Capital
($2,741)$18,541
Current Assets – Current Liabilities
365
a.
=
The fundamental reason present value is a useful tool in making business decisions
Factor: 10%, 3 periods
2. User Insight: Usefulness of present value discussed
Chapter 8, P 11.
Present value of a future payment (Table 1 in Appendix B)
1. Present value applied
a.
=
Factor: 10%, 6 periods
Chapter 8, P 12.
Present value of a future payment (Table 1 in Appendix B)
1. Present value applied
2. User Insight: Usefulness of present value discussed
The fundamental reason present value is a useful tool in making business deci-
421
Finally, some students may argue that only the marginal costs of serving passen-
would otherwise be empty. The implication is that the expense and liability would
gers who are flying free should be expensed because these people fill seats that
revenue because of free passengers as an expense and represents the value of
Another estimate of the cost would be a percentage of variable operating costs.
(This calculation assumes that idle capacity is used for these passengers, with
additional aircraft or other fixed charges not needed.) However, to accommodate
Students will have different views about the best way to estimate this expense.
One estimate of the cost for 2011 would be 2.5 percent of 2011 passenger trans-
portation revenues of $966.3 million, or $24.2 million. This amount treats the lost
If the expense and corresponding liability of frequent flyer programs are recog-
nized, operating income would be reduced and current liabilities would be in-
be much lower than 2.5 percent of revenues or 2.5 percent of variable operating
Chapter 8, C 1.
The above computations illustrate why airlines are reluctant to recognize frequent
flyer programs in their financial statements. Recognition may have a significantly
incurred.
the relevant rate is Cadillac’s. If the customer is willing and able to pay for the car
Present value is relevant because the price of the auto must take into account
the interest cost to Cadillac. Cadillac will have to pay interest while it waits for its
money in monthly payments over five years. Since it will have to pay interest of
Chapter 8, C 3.
8 percent on the funds it borrows during that time, the present value of the car is
the present value of an annuity equal to the monthly payments times the 8 percent
factor. Since the customer does not have to borrow money for the transaction,
liabilities. Liabilities refer to probable future sacrifices of economic benefits aris-
When Citibank “set up a reserve,” it recorded a loss (debit) and established a lia-
bility (credit). This would indicate that the company and its auditors believed that
Chapter 8, C 2.
Chapter 8, C 1. (Continued)
services to other entities as a result of past transactions. In this case, FlyJet in-
curs a present obligation to provide a service (free flight) based on past trans-
ing from present obligations of one entity to transfer assets or provide future
–
$675
=
6.4
$6,604
$1,027 =
Times
6.4 times, or every 57.0 days. The resulting impact on cash flows would be ex-
or every 19.1 days, whereas Sun Microsystems pays its year-end level of payables
Chapter 8, C 4.
Payables turnover and days’ payable computed and compared (in millions)
=Cisco Systems $13,023 $161
Cisco Systems pays its accounts payable more than 37 days faster than Sun Micro-
systems does. Cisco Systems pays its year-end level of payables 19.1 times a year,
424
Chapter 8, C 5.
The FASB has established two conditions for determining when a contingency
able that these rebates will be exercised and that the company will be liable for
them. Also, by putting a dollar amount on the outstanding rebates, General Motors
that according to the matching rule, they should be matched against the sales of
is acknowledging that it can be reasonably estimated. Thus, the only reasoning the
the cars “as reductions in revenues at the time of vehicle sale.”
company can use for not recording them as expenses and estimated liabilities is
425
with the sale of some stores that management feels the ultimate disposition of
will not have adverse effects on the business. The company is involved in several
Chapter 8, C 6.
Commitments and contingencies discussed
Note 12 on commitments and contingencies describes a guarantee in connection
426
+
(+)÷2
Payables turnover and days’ payable computed (in millions)
Chapter 8, C 7.
CVS:
2008
=$70,326
$3,593
$1,144
=
$3,697 =
$69,182
$3,801
19.0
Times
427
(+ )÷2
$4,012
=
=
Chapter 8, C 7. (Continued)
Walgreens:
Times
10.7
$42,850 =
$3,734
$459+
$42,391
$4,289
2008
in its operating cycle.
days’ payable in 2009 to about half those of Walgreens. Thus, CVS pays its cred-
itors more quickly. Walgreens currently makes more use of creditors for financing
CVS and Walgreens manage their payables in different ways. CVS has reduced its
428
1.
job again.
Failure to withhold and remit income and payroll taxes is a serious criminal offense.
ant is behaving ethically. He did talk to the boss, who, it turned out, had been feeling
guilty about his practices and wanted to rectify the situation. He asked the student
This case actually happened to one of the author’s students, who sought the au-
to update and computerize the payroll system and make sure the restaurant was in
Chapter 8, C 8.
The alternatives available to Swift are as follows:
Alternative 1 is the worst choice because it is unethical to be associated with an ille-
Do nothing and overlook the wrongdoing.
gal activity. Swift would be subjecting himself to possible criminal action, and if the
maneuver were discovered, it would be difficult for Swift ever to get an accounting
thor’s advice (names have been changed). The student needed the job badly and
was afraid of losing it, but recognized that an important aspect of being an account-
× 0.683 (4 years, 10%) = $ 4,098,000
× 0.621 (5 years, 10%) = 5,589,000
1.
2.
per year to you at the present time, using the interest rate of 10 percent. To receive
Because the offer lies so far in the future, it is actually worth only about $6.0 million
$ 6,000,000
Whether or not the contract is guaranteed if you are injured or otherwise cannot
play will affect the amount of risk.
$ 9,000,000
this bonus, the range of the possible bonus is from zero or no bonus to $17,850,000.
Other considerations in evaluating the offer are as follows:
The choice of interest rate should be considered. The bank prime rate may not
properly reflect the amount of risk.
Chapter 8, C 9.
Re:
Student
Management Contract Offer
Management’s offer does not accurately reflect the value to you because it does not
Memorandum
Today’s Date
Devon Turner
take into account the time value of money. You will have to wait until the fourth year
Date:
To:
From: