Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 9
Comparative Analysis — AA 9-2 (30 minutes)
1. Apple—Times interest earned
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income ………………………………………
$55,256
$59,531
$48,351
Add income taxes …………………………….
Google—Times interest earned
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income ………………………………………
$34,343
$30,736
$12,662
Add income taxes …………………………….
5,282
4,177
14,531
Add interest expense ……………………….
2. Google
Explanation: Google appears stronger in its ability to pay interest
3. a. Good
b. Good
Explanation: Apple and Google both are in strong positions in their
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Extended Analysis — AA 9-3 (20 minutes)
1. Samsung— Times interest earned
$ millions
Current Year
Prior Year
Net income …………………………………
$18,653
$38,049
2. Unfavorable
Explanation: The times interest earned ratio exhibits an unfavorable
change as it decreased in the current year versus the prior year.
3. a. Better
Explanation: Samsung’s times interest earned ratio is better than
b. Worse
Explanation: Samsung’s times interest earned ratio is worse than
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 9
DISCUSSION QUESTIONS
1. A current liability is expected to be paid within one year or the company’s operating
2. An estimated liability is an obligation to make a future payment, the exact amount of
which is uncertain, but it is capable of being reasonably estimated.
3. The three questions are: (1) Who must be paid? (2) When is payment due? (3) How
much is to be paid?
4. The combined Social Security tax rate (assuming the maximum wage amount is not
6. The employee is responsible for federal income taxes, state income taxes, local
7. An employee’s gross earnings along with the number of withholding allowances that
an employee claims, as well as whether they are married or single, determine the
amount deducted for federal income taxes.
8. An unemployment merit rating is based on an evaluation of an employer’s experience
in creating or avoiding unemployment with its employees. The merit rating affects the
9. The obligation to correct or replace defective products (or services) is created when
the products are sold with the warranties. Even though the seller does not know with
10. There are no conditions in which a probable loss tied to a future event can create a
11.A A wage bracket withholding table shows for a pay period of a given length (weekly,
12.A Single employee earning $725 with two allowances has $76 taxes withheld.
Single employee earning $625 with no allowances has $81 taxes withheld.
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 9
Ethics Challenge — BTN 9-1
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,
over several years the amounts should even out. The dealership should
probably adjust the warranty expense accrual to match the usual
(average) experience over time. Given the variable nature of warranty
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Communicating in Practice — BTN 9-2
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.
Your comment also raised the objection that we don’t know what costs will
be. If they are not reasonably estimable, generally accepted accounting
principles will allow us to leave them out of the financial statements. But
we must describe the contingency in the notes. I will be checking with the
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 9
Taking It to the Net — BTN 9-3
1. McDonald’s current liabilities include the following:
• Accounts payable
2. Times interest earned for McDonald’s is
$ millions
Net Income ……………………………………………………
$ 5,924.3
Plus income taxes …………………………………………
1,891.8
Plus interest expense ……………………………………
$ 8,797.3
Wild and Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 9
Teamwork in Action — BTN 9-4
1. Option A: Interest Expense = $6,000 x 10% x 90/360 = $150
Option B: Interest Expense = $6,000 x 8% x 120/360 = $160
The interest expense in option B does exceed option A. If interest cost
2. Entries:
2a. Issue date, Option A
June 1
Cash ………………………………………………………….
6,000
Notes Payable ……………………………………….
6,000
Borrowed cash by issuing an
Notes Payable ……………………………………….
6,000
Borrowed cash by issuing an
6,000
Interest Expense ………………………………………..
Cash …………………………………………………….
6,150
6,000
Interest Expense ………………………………………..
160
Cash …………………………………………………….
6,160
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Teamwork in Action (Concluded)
4. Entries:
4a. Adjusting entry, Option A (Dec. 31)
Dec. 31
Interest Expense ………………………………………..
50
Interest Payable …………………………………….
50
Accrue interest on note
payable [$6,000 x 10% x 30/360].
Dec. 31
Interest Expense ………………………………………..
Interest Payable …………………………………….
Accrue interest on note payable
4c. Maturity date entry, Option A
March 1
Interest Expense ………………………………………..
100
Interest Payable ………………………………………….
50
Notes Payable …………………………………………….
6,000
Cash …………………………………………………….
6,150
Repaid note plus interest.
Interest Expense ………………………………………..
120
Interest Payable ………………………………………….
40
Notes Payable …………………………………………….
6,000
Cash …………………………………………………….
6,160
Repaid note plus interest.
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Entrepreneurial Decision — BTN 9-5
1.
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.
Income Statement (Prospective)
Current
Operations
European
Total
Sales ……………………………………..
$1,000,000
$ 400,000
$1,400,000
$ 159,000
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Entrepreneurial Decision (concluded)
4.
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
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