(continued) E 9-42B
Req. 2
Total assets = $3,569 million, the sum of total liabilities and
stockholders’ equity.
(in millions) 2016
Leverage
ratio
=
Total assets ($3,569)
Total stockholders’ equity ($1,701)
=
2.10
2015
Leverage
ratio
=
Total assets ($3,048)
Total stockholders’ equity ($1,175)
=
2.59
Both the leverage ratio and debt ratio improved. Therefore, the company
improved.
____
*Or, $315 + $1,379 + $165 + $9 = $1,868
Req. 3
2016 2015
Accounts
payable
turnover
Cost of goods sold
$2,784
= 16.0
$2,464
= 14.0
Average accounts
payable
$174*
$176**
*($178 + $170) / 2
**($170 + $182) / 2
payable
The company’s ability to cover accounts payable and current liabilities
over the year improved.
(5-10 min.) E 9-43B
Req. 1
Crockett Security Systems should report this situation in a note to the
financial statements. It is the company’s policy to disclose legal
situations where it is reasonably possible a liability has been incurred.
Req. 2
Crockett would report:
INCOME STATEMENT
Estimated loss (or expense) due to lawsuit
contingency ……………………………………..
$1,700,000
BALANCE SHEET
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Estimated Loss from Lawsuit Contingency ………
1,700,000
Estimated Liability from Lawsuit Contingency
1,700,000
(15-20 min.) E 9-44B
Costello Electronics
Balance Sheet (partial)
September 30, 2016
Current liabilities:
a. Estimated warranty payable
[$36,000 + ($2,500,000 × .03) − $52,000] …………………
$ 59,000
b. Current portion of long-term note payable ………………..
13,000
Interest payable ($65,000 × .05 × 1/12) ……………………….
271
c. Unearned sales revenue ($110,000 − $60,000) ……………
d. Employee withheld income tax payable …………………….
FICA tax payable ($200,000 × .0765 x 2) …………………….
Total current liabilities …………………………………………
Long-term liabilities:
Note payable ($65,000 − $13,000) ………………………………
*Federal income tax laws require that both the employer and the
employee pay 7.65% FICA tax on the employees’ wages.
(10-15 min.) E 9-45B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Jan.
31
Cash ($6,000,000 × 0.96) ………………..
5,760,000
Discount on Bonds Payable ………….
240,000
Bonds Payable …………………………
6,000,000
To issue bonds at a discount.
b.
July
31
Interest Expense …………………………..
162,000
Cash ($6,000,000 × .05 × 6/12) ……
150,000
Discount on Bonds Payable
($240,000 / 20) ……………………..
12,000
discount.
c.
Dec.
31
Interest Expense …………………………..
135,000
Interest Payable
($6,000,000 × .05 × 5/12) ……….
125,000
Discount on Bonds Payable
($12,000 × 5/6) ……………………..
10,000
(10-15 min.) E 9-46B
1.
Cash received = $100,000 × 1.03 =
$103,000
2.
Principal ………………………………………………………………
$100,000
Interest ($100,000 × .07 × 20) …………………………………
140,000
Total cash paid …………………………………………………….
$240,000
3.
Total cash paid …………………………………………………….
$240,000
Less: Cash received …………………………………………..
(103,000)
Difference = Total interest expense ……………………….
$137,000
4.
Annual interest expense by the straight-line amortization method:
20
$150
=
Cash interest payment
Premium amortization
× 20 years
Total interest expense over the life of the bonds
$137,000
(15-20 min.) E 9-47B
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$3,840,363.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(2.25% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($4,000,000
– D)
Dec. 31, 2016
159,637
3,840,363
June 30, 2017
80,000
86,408
6,408
153,229
3,846,771
Dec. 31, 2017
80,000
86,552
6,552
146,676
3,853,324
June 30, 2018
80,000
86,700
6,700
139,977
3,860,023
Dec. 31, 2018
80,000
86,851
6,851
133,126
3,866,874
June 30, 2019
80,000
126,122
3,873,878
Dec. 31, 2019
80,000
87,162
7,162
118,959
3,881,041
June 30, 2020
80,000
87,323
7,323
111,636
3,888,364
Dec. 31, 2020
80,000
87,488
7,488
104,148
3,895,852
June 30, 2021
80,000
87,657
7,657
96,491
3,903,509
Dec. 31, 2021
80,000
87,829
7,829
88,662
3,911,338
June 30, 2022
80,000
88,005
8,005
80,657
3,919,343
Dec. 31, 2022
80,000
88,185
8,185
72,472
3,927,528
June 30, 2023
80,000
88,369
8,369
64,102
3,935,898
Dec. 31, 2023
80,000
88,558
8,558
55,545
3,944,455
June 30, 2024
80,000
46,794
3,953,206
Dec. 31, 2024
80,000
88,947
8,947
37,847
3,962,153
June 30, 2025
80,000
89,148
9,148
28,699
3,971,301
Dec. 31, 2025
80,000
89,354
9,354
19,345
3,980,655
June 30, 2026
80,000
89,565
9,565
3,990,220
Dec. 31, 2026
80,000
89,780
9,780
4,000,000
Note: numbers may differ slightly due to rounding differences
(continued) E 9-47B
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
31
Cash ………………………………………………
3,840,363
Discount on Bonds Payable ……………
159,637
Bonds Payable …………………………..
4,000,000
To issue bonds at a discount.
2017
June
30
Interest Expense …………………………….
86,408
Cash ………………………………………….
80,000
Discount on Bonds Payable ………..
6,408
To pay semiannual interest and
amortize bond discount.
2017
Dec.
31
Interest Expense …………………………….
Cash ………………………………………….
80,000
Discount on Bonds Payable ………..
To pay semiannual interest and
amortize bond discount.
(15-20 min.) E 9-48B
Req. 1 Using the PV function in EXCEL, the issue price of the bonds is
$2,297,550.
Req. 2 (amortization table)
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(4% of
Maturity
Value)
Interest
Expense
(3% of
Preceding
Bond
Carrying
Amount)
Premium
Amortization
(A – B)
Premium
Account
Balance
(Preceding
D–C)
Bond
Carrying
Amount
($2,000,000
+ D)
June 30, 2016
Dec. 31, 2016
80,000
68,927
11,073
286,477
2,286,477
June 30, 2017
80,000
68,594
11,406
275,071
2,275,071
80,000
68,252
11,748
263,323
2,263,323
June 30, 2018
80,000
67,900
12,100
251,223
2,251,223
Dec. 31, 2018
80,000
67,537
12,463
238,759
2,238,759
297,550
2,297,550
June 30, 2019
80,000
67,163
12,837
225,922
2,225,922
Dec. 31, 2019
80,000
66,778
13,222
212,700
2,212,700
June 30, 2020
80,000
66,381
13,619
199,081
2,199,081
Dec. 31, 2020
80,000
65,972
14,028
185,053
2,185,053
June 30, 2021
80,000
65,552
14,448
170,605
2,170,605
Dec. 31, 2021
80,000
65,118
14,882
155,723
2,155,723
June 30, 2022
80,000
64,672
15,328
140,395
2,140,395
Dec. 31, 2022
80,000
64,212
15,788
124,606
2,124,606
June 30, 2023
80,000
63,738
16,262
108,345
2,108,345
Dec. 31, 2023
80,000
63,250
16,750
2,091,595
June 30, 2024
80,000
62,748
17,252
2,074,343
Dec. 31, 2024
80,000
62,230
17,770
2,056,573
June 30, 2025
80,000
61,697
18,303
2,038,270
Dec. 31, 2025
80,000
61,148
2,019,418
June 30, 2026
80,000
60,583
19,418
Note: numbers may differ slightly due to rounding differences
(continued) E 9-48B
Req. 3 (journal entries)
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
June
30
Cash ……………………………………………….
2,297,550
Bonds Payable …………………………….
2,000,000
Premium on Bonds Payable …………
297,550
To issue bonds at a premium.
Dec.
31
Interest Expense …………………………..….
68,927
Premium on Bonds Payable ……………..
11,073
Cash …………………………………………..
80,000
To pay semiannual interest and amortize
bond premium.
2017
June
30
Interest Expense …………………………..….
68,594
Premium on Bonds Payable ……………..
Cash …………………………………………..
80,000
To pay semiannual interest and amortize
bond premium.
(15-20 min.) E 9-49B
Req. 1
The company has the right to occupy space and operate out of leased
stores and leased facilities for several years to come. In return, the
company is obligated to make payments amounting to over $1 billion
dollars to various landlords (lessors). A very small portion of these
payments may be offset by receipts from sub-leases to other tenants.
Req. 2
Req. 3
In the future, the FASB and IASB are proposing to eliminate the current
accounting treatment of most operating leases. If this rule change
(20-25 min.) E 9-50B
Amounts in millions or billions
Company
Company
Company
Ratio
E
L
R
Current
=
Total current assets
=
$434
¥5,383
€155,364
ratio
Total current liabilities
$207
¥2,197
€72,600
= 2.10
= 2.45
= 2.14
E
L
R
Total liabilities
E
L
R
= 16.67
E
L
R
Operating income
earned
Interest expense
Student responses may vary, but based on the information given,
company E looks the least risky, with relatively high current ratio and
times-interest earned coverage, and relatively low debt ratio and
leverage ratio.
(15-20 min.) E 9-51B
Req. 1
PLAN A
BORROW
$600,000
AT 6%
PLAN B
ISSUE
$600,000
OF COMMON
STOCK
Net income before expansion ………………………….
$300,000
$300,000
Project income before interest and income tax …
$500,000
$500,000
Less: interest expense ($600,000 × .06) …………….
(36,000)
-0-
Project income before income tax ……………………
464,000
500,000
Project net income ………………………………………….
348,000
Total company net income ………………………….
$648,000
Earnings per share including new project:
Plan A ($648,000 / 100,000 shares) ……………….
(continued) E 9-51B
Req. 2
MEMORANDUM
TO: Board of Directors of Stockwell Financial Services
FROM: Student Name
SUBJECT: Financing plan to expand operations
Plan A (borrowing) results in much higher earnings per share. Plan A
also allows the existing stockholders to retain control of the company
because the company issues no new stock. But Plan A also creates
more financial risk because borrowing obligates the company to pay the
Quiz
Q9–52
a
Q9–53
a
Q9–54
c
Q9–55
d
Q9-56
c
Q9-57
a
Q9-58
c
Q9-59
d
Q9–60
Q9–61
c
Q9–62
a
Q9–63
d
Q9–64
Interest Expense ………………………………………..
Q9–65
Interest Payable …………………………………………
Interest Expense ………………………………………..
Cash ($300,000 × .13)……………………………..
Q9-66
a
Q9-67
c
Q9-68
c
Q9-69
b
Q9–70
c
Problems
(15-20 min.) P 9-71A
a. Sales tax payable ($110,000 × .05) ………………………………….
$ 5,500
b. Note payable, short-term ……………………………………………….
$88,000
Interest payable ($88,000 × .09 × 4/12) …………………………….
2,640
c. Unearned service revenue ($3,000 × 2/6) …………………………
d. Estimated warranty payable
e. Portion of long-term note payable due
within one year …………………………………………………………
$40,000
Interest payable ($75,000 × .10) ………………………………………
7,500
(30-40 min.) P 9-72A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Mar.
3
Inventory ………………………………………………..
50,000
Note Payable, Short-term ……………………
50,000
May
31
Cash ………………………………………………………
90,000
Note Payable, Short-term ……………………
15,000
Note Payable, Long-term …………………….
75,000
Sept.
3
Note Payable, Short-term ………………………..
50,000
Interest Expense ($50,000 × .04 × 6/12) …….
1,000
Cash ………………………………………………….
51,000
Dec.
Warranty Expense ($196,000 × .025) …………
Estimated Warranty Payable ……………….
31
Interest Expense ($90,000 × .08 × 7/12) …….
4,200
Interest Payable …………………………………
2017
May
31
Note Payable, Short-term ………………………..
15,000
Interest Payable ……………………………………..
Interest Expense ($90,000 × .08 × 5/12) …….
3,000
Cash ………………………………………………….
22,200
(20-25 min.) P 9-73A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
May
31
Cash ($9,000,000 × 1/2) …………………
4,500,000
Bonds Payable ………………………..
4,500,000
To issue bonds at par.
Nov.
30
Interest Expense ………………………….
Cash ($4,500,000 × .08 × 6/12) …..
To pay interest on bonds.
Dec.
31
Interest Expense
($4,500,000 × .08 × 1/12) ……………….
Interest Payable ………………………
To accrue interest.
2017
d.
May
31
Interest Payable …………………………..
30,000
Interest Expense
($4,500,000 × .08 × 5/12) ……………….
150,000
Cash ($4,500,000 × .08 × 6/12) …..
180,000
To pay interest on bonds.
Req. 2 (reporting the liabilities on the balance sheet at
Dec. 31, 2016)
(30-40 min.) P 9-74A
Req. 1
The 6% bonds issued when the market interest rate is 5% will be priced
at a premium. They are relatively attractive in this market, so investors
will pay a price above par value to acquire them.
Req. 2
(continued) P 9-74A
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
Feb.
28
Cash ($1,800,000 × .96) ………………………..
1,728,000
Discount on Bonds Payable …………………
72,000
Bonds Payable ……………………………….
1,800,000
To issue bonds at a discount.
Aug.
31
Interest Expense …………………………………
55,800
Cash ($1,800,000 × .06 × 6/12) ………….
Discount on Bonds Payable
($72,000 / 40)………………………………..
discount.
c.
Dec.
31
Interest Expense …………………………………
37,200
Interest Payable ($54,000 × 4/6) ……….
36,000
Discount on Bonds Payable
($1,800 × 4/6) ……………………………….
1,200
To accrue interest and amortize bond
discount.
2017
Feb.
28
Interest Payable (from Dec. 31) …………….
Interest Expense …………………………………
Cash ($1,800,000 × .06 × 6/12) ………….
Discount on Bonds Payable
($1,800 × 2/6) ……………………………….
Req. 4 (reporting the liabilities on the balance sheet at Dec. 31, 2016)
Current liabilities:
Interest payable ……………………………………
$ 36,000
Long-term liabilities:
Bonds payable …………………………………….
$1,800,000
Less: Discount on bonds payable
($72,000 − $1,800 − $1,200) ………..
(69,000)
1,731,000
(30-40 min.) P 9-75A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Cash ($3,000,000 × .94) ………………………….
2,820,000
Discount on Bonds Payable …………………..
180,000
Bonds Payable …………………………………
3,000,000
To issue bonds at a discount.
July
1
Interest Expense …………………………..………
99,000
Cash ($3,000,000 × .06 × 6/12) ……………
90,000
Discount on Bonds Payable
($180,000 / 20) ………………………………..
9,000
To pay interest and amortize bond discount.
Dec.
31
Interest Expense …………………………..………
99,000
Interest Payable
($3,000,000 × .06 × 6/12) ………………….
90,000
Discount on Bonds Payable ……………
9,000
To accrue interest and amortize bond discount.
Interest Payable ……………………………………
Cash ……………………………………………….
90,000
To pay interest.
2026
Jan.
1
Bonds Payable ……………………………………..
3,000,000
Cash ………………………………………………..
3,000,000
To pay bonds at maturity.