FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-37B
(5-15 min.)
Requirements
Solution:
Req. 1
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Warranty Expense ($120,000 × .08) 9,600
Req. 2
INCOME STATEMENT
Sales revenue $ 120,000
Warranty expense 9,600
BALANCE SHEET
Estimated warranty payable
Req. 3
1. Journalize Carmine’s warranty expense for the period and the company’s cash
payments to satisfy warranty claims. Explanations are not required.
2. Show what Carmine will report on its income statement and balance sheet for this
situation at the end of the period.
3. Which data item from requirement 2 will affect the current ratio? Will Carmine’s
current ratio increase or decrease as a result of this item?
Journal
Estimated warranty payable, a current liability, will cause a company’s current ratio to
decrease .
Chapter 9: Liabilities Page 41 of 115
Estimated Warranty Payable 9,600
Estimated Warranty Payable 7,000
Cash 7,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-38B
(10-15 min.)
Requirement
Solution:
Req.1
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2016
BALANCE SHEET:
Current liabilities:
1. Journalize these transactions (explanations not required). Then report any liability on
the company’s balance sheet at December 31, 2016.
Journal
DATE
Chapter 9: Liabilities Page 42 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-39B
(10 min.)
Solution:
INCOME STATEMENT
Expenses:
Payroll expense $ 215,000
Show what Penske will report for the foregoing on its income statement for the year and
on its year-end balance sheet.
Chapter 9: Liabilities Page 43 of 115
BALANCE SHEET
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-40B
(5-10 min.)
Requirements
Solution:
Req. 1
1. How much interest expense must be accrued at December 31, 2016? (Round your
answer to the nearest whole dollar.)
2. Determine the amount of Boston Sales’ final payment on April 1, 2017.
3. How much interest expense will Boston Sales report for 2016 and for 2017? (If
needed, round your answer to the nearest whole dollar.)
Interest to
Chapter 9: Liabilities Page 44 of 115
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-41B
(10-15 min.)
Solution:
Saglio’s balance sheet at Dec. 31, 2017 reported:
How much income tax payable did Saglio Real Estate report on its balance sheet at
December 31, 2017? How much income tax expense did Saglio report on its 2017
income statement?
Chapter 9: Liabilities Page 45 of 115
Saglio’s 2017 income statement reported:
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-42B
(10-20 min.)
Requirements
Solution:
Req. 1
1. Describe each of Great Earth Homes, Inc.’s liabilities and state how the liability arose.
2. What were the company’s total assets at December 31, 2016? Evaluate the
company’s leverage and debt ratios at the end of 2015 and 2016. Did the company
improve, deteriorate, or remain about the same over the year?
3. Assume that beginning and ending inventories for both periods did not differ by a
material amount. Accounts payable at the end of 2014 was $182 million. Calculate
accounts payable turnover as a ratio and days’ payable outstanding (DPO) for 2015 and
2016. Calculate current ratios for 2015 and 2016 as well. Evaluate whether the company
improved or deteriorated from the standpoint of ability to cover accounts payable and
current liabilities over the year.
Accounts payable are amounts owed to suppliers for products or services that have been
purchased on account.
Chapter 9: Liabilities Page 46 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Total assets =
(in millions) 2016
Req. 3
2016 2015
$ 2,784 = 16.0 $ 2,464 = 14.0
$174* $176**
Cost of Greats sold
$3,569 million, the sum of total liabilities and stockholders’ equity.
Accounts payable
turnover
Average Accounts
Chapter 9: Liabilities Page 47 of 115
*Or, $315 + $1,379 + $165 + $9 = $1,868
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-43B
(5-10 min.)
Requirements
Solution:
Req. 1
Req. 2
Nguyen would report:
INCOME STATEMENT
Estimated loss (or expense) due to lawsuit contingency 1,700,000$
1. Suppose Crockett’s lawyers believe that a significant legal judgment against the
company is reasonably possible. How should Crockett report this situation in its financial
statements?
2. Suppose Crockett’s lawyers believe it is probable that a $1.7 million judgment will be
rendered against the company. Report this situation in Crockett’s financial statements.
Journalize any entry required by GAAP. Explanations are not required.
Crockett Security Systems should report this situation in a note to the financial
statements. It is the company’s policy to disclose legal situations where it is reasonably
Chapter 9: Liabilities Page 48 of 115
BALANCE SHEET
Estimated liability due to lawsuit contingency 1,700,000$
The note disclosure would be similar to Requirement 1.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-44B
(15-20 min.)
Requirement
Solution:
Current liabilities:
a. Estimated warranty payable
[$36,000 + ($2,500,000 × .03) − $52,000] 59,000$
Costello Electronics
Balance Sheet (partial)
Septemer 30, 2016
1. Report these items on Costello Electronics’ balance sheet at September 30, 2016.
Chapter 9: Liabilities Page 49 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-45B
(10-15 min.)
Requirement
Solution:
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
Journal
Record (a) issuance of the bonds on January 31, 2016, (b) the semiannual interest
payment and amortization of bond discount on July 31, 2016, and (c) the interest
accrual and discount amortization on December 31, 2016.
Chapter 9: Liabilities Page 50 of 115
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
To pay interest and amortize bond
Interest Expense 135,000
Interest Payable
Discount on Bonds Payable
To accrue interest and amortize bond discount
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-46B
(10-15 min.)
Requirements
Solution:
1 Cash received = $100,000 × 1.03 = 103,000$
1. How much cash did City Bank receive when it issued these bonds?
2. How much cash in total will City Bank pay the bondholders through the maturity date
of the bonds?
3. Take the difference between your answers to requirements 1 and 2. This difference
represents City Bank’s total interest expense over the life of the bonds.
4. Compute City Bank’s annual interest expense by the straight-line amortization
method. Multiply this amount by 20. Your 20-year total should be the same as your
answer to requirement 3.
Chapter 9: Liabilities Page 51 of 115
2 Principal 100,000$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-47B
(15-20 min.)
Requirements
Solution:
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
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
1. Use the PV function in Excel to calculate the issue price of the bonds.
2. Using Exhibit 9-4 as a model, prepare a bond amortization table for the term of the
bonds.
3. Record issuance of the bonds payable on December 31, 2016; the first semiannual
interest payment on June 30, 2017; and the second payment on December 31, 2017.
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)
Chapter 9: Liabilities Page 52 of 115
Dec. 31, 2018 80,000 86,851 6,851 133,126 3,866,874
June 30, 2019 80,000 87,005 7,005 126,122 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 88,750 8,750 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 9,780 3,990,220
Dec. 31, 2026 80,000 89,780 9,780 0 4,000,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 3 (journal entries)
DATE ACCOUNT TITLES & EXPLANATION DEBIT CREDIT
2016
Dec. 31 Cash 3,840,363
Discount on Bonds Payable 159,637
Bonds Payable 4,000,000
Journal
Chapter 9: Liabilities Page 53 of 115
To issue bonds at a discount.
2017
Cash 80,000
Discount on Bonds Payable 6,408
To pay semiannual interest and amortize
bond discount.
2017
Dec. 31 Interest Expense 86,552
Cash 80,000
Discount on Bonds Payable 6,552
To pay semiannual interest and amortize
bond discount.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-48B
(15-20 min.)
Requirements
Solution:
Req. 1
Using the PV function in EXCEL, the issue price of the bonds is $2,297,550.
Req. 2 (amortization table on next page)
Req. 3 (journal entries)
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
1. Use the PV function in Excel to calculate the issue price of the bonds.
2. Using Exhibit 9-7 as a model, prepare a bond amortization table for the term of the
bonds.
Journal
Chapter 9: Liabilities Page 54 of 115
To issue bonds at a premium.
Premium on Bonds Payable 11,073
Cash 80,000
To pay semiannual interest and amortize bond
June 30 Interest Expense 68,594
Premium on Bonds Payable 11,406
Cash 80,000
To pay semiannual interest and amortize bond
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2 See next page
A B C D E
297,550 2,297,550
Dec. 31, 2016 80,000 68,927 11,073 286,477 2,286,477
80,000 68,594 11,406 275,071 2,275,071
Dec. 31, 2017 80,000 68,252 11,748 263,323 2,263,323
Semiannual
Interest Date
Interest
Payment
(2% of
Maturity
Value)
Interest
Expense
(1.5% of
Preceding
Bond
Carrying
Amount)
Premium
Amortization
(A – B)
Premium
Account
Balance
(Preceding
D – C)
Bond Carrying
Amount
($1,600,000 +
D)
June 30, 2016
June 30, 2017
Chapter 9: Liabilities Page 55 of 115
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
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
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
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
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
80,000 63,738 16,262 108,345 2,108,345
Dec. 31, 2023 80,000 63,250 16,750 91,595 2,091,595
80,000 62,748 17,252 74,343 2,074,343
Dec. 31, 2024 80,000 62,230 17,770 56,573 2,056,573
80,000 61,697 18,303 38,270 2,038,270
Dec. 31, 2025 80,000 61,148 18,852 19,418 2,019,418
80,000 60,583 19,418 -0- 2,000,000
June 30, 2021
June 30, 2022
June 30, 2023
June 30, 2024
June 30, 2025
June 30, 2026
June 30, 2018
June 30, 2019
June 30, 2020
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-49B
(15-20 min.)
Requirements
Solution:
Req. 1
1. Interpret the information in the footnote. What rights does the company have? What
obligations?
2. Are the rights and obligations discussed in requirement 1 reported in the liability
section of the balance sheet? Why or why not? How does this impact the company’s
debt and leverage ratios?
3. How is this type of reporting likely to change in the future?
The company has the right to occupy space and operate out of leased stores for several
years to come. In return, the company is obligated to make payments amounting to
Chapter 9: Liabilities Page 56 of 115
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 occurs, companies like Ann
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-50B
(20-25 min.)
Solution:
Company Company Company
E L R
Current Total current assets $ 434 ¥5,383 € 155,364
Compare three leading companies (Company E, Company L, and Company R) by calculating the
following ratios: current ratio, debt ratio, leverage ratio, and times-interest-earned ratio. Use year-
end figures in place of averages where needed for the purpose of calculating ratios in this exercise.
Based on your computed ratio values, which company looks the least risky.
Ratio
Amounts in millions or billions
Chapter 9: Liabilities Page 57 of 115
E L R
E L R
E L R
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E9-51B
(15-20 min.)
Requirements
Solution:
Req. 1
Net income before expansion
Project income before interest and income tax
1. Analyze Stockwell Financial Services’ situation to determine which plan will result in
the
higher earnings per share.
2. Which plan allows you to retain control of the company? Which plan creates more
financial risk for the company? Which plan do you prefer? Why? Present your conclusion
AT 6%
OF COMMON
300,000$
300,000$
500,000$
500,000$
STOCK
PLAN A
PLAN B
BORROW
ISSUE
$ 600,000
$ 600,000
Chapter 9: Liabilities Page 58 of 115
Total company net income
Plan A ($648,000 / 100,000 shares)
Plan B ($675,000 / 225,000 shares)
Plan A has a higher EPS.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
TO: Board of Directors of Stockwell Financial Services
FROM: Student Name
SUBJECT: Financing plan to expand operations
MEMORANDUM
Plan A (borrowing) results in much higher earnings per share. Plan A also allows the
Chapter 9: Liabilities Page 59 of 115
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Quiz
Q9-52 a
Q9-53 a
Chapter 9: Liabilities Page 60 of 115
Q9-55 d
Q9-57 a
Q9-59 d
Q9-62 a
Q9-63 d($300,000 × .13) + [($300,000 − $290,552) / 15] = $39,630
Q9-66 a($92,927 x .065) = $6,040
Q9-69 b