Chapter 9
Liabilities
Ethics Check
(5-10 min.) EC 9-1
a. Integrity
b. Integrity
c. Due care
d. Objectivity and independence
Short Exercises
(5-10 min.) S 9-1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Inventory …………………………………………………
23,000
Note Payable, Short-Term ……………………
23,000
Purchased inventory by issuing a
note payable.
July
1
Note Payable, Short-Term ………………………..
23,000
Interest Expense ($23,000 × .10 × 6/12) ……..
Cash ………………………………………………….
24,150
Paid note payable and interest at
maturity.
(5-10 min.) S 9-2
Req. 1
2016
2015
Accounts payable turnover:
Purchases*
Average accounts payable
$3,050,000 = 10.0
$305,000
$2,900,000 =11.4
$255,000
Days payable outstanding:
Accounts payable turnover
10.0
Req. 2
The company’s liquidity position has deteriorated during 2016.
(10 min.) S 9-3
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ($460,000 × .15) ……………………………..
69,000
Notes Receivable ($460,000 − $69,000) ……
391,000
Sales Revenue ………………………………….
460,000
To record sales and receipt of cash and
notes receivable.
Warranty Expense ($460,000 × .07) ………….
32,200
Estimated Warranty Payable ………………
To accrue warranty expense.
Estimated Warranty Payable …………………..
19,700
Cash…………………………………………………
19,700
To pay warranty claims.
Req. 2
Estimated Warranty Payable
Bal.
16,000
19,700
32,200
Bal.
28,500
(5-10 min.) S 9-4
Warranty expense = $32,200
The expense recognition principle addresses this situation.
(5-10 min.) S 9-5
1. These are contingent liabilities, because, at the time of the note,
Hamm Cycles, Inc., was not liable for any of these product losses.
2. In the United States, the contingency can become a real liability if a
user of a Hamm Cycles, Inc., product suffers a loss for which the
company is responsible.
3. Outside the United States, the contingency becomes a real liability the
same way — if a Hamm Cycles, Inc., user suffers a loss for which the
company is responsible.
(5-10 min.) S 9-6
1. False – the cash received is equal to the present value of the future
cash flows.
2. False – the contract (stated) rate, not the market rate, is always used
to calculate the cash interest payment.
3. True – because interest expense includes both cash interest and
amortization of the discount.
(5 min.) S 9-7
a. Par (face) value
b. Discount
(5-10 min.) S 9-8
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
July
1
Cash …………………………………………………..
90,000
Bonds Payable …………………………..…..
90,000
To issue bonds at par.
b.
Dec.
31
Interest Expense ($90,000 × .075 × 6/12) …..
3,375
Interest Payable ……………………………..
3,375
To accrue interest expense.
2017
c.
Jan.
1
Interest Payable ………………………………….
Cash ………………………………………………
To pay semiannual interest on bonds.
2023
July
1
Bonds Payable ……………………………………
90,000
Cash ………………………………………………
To pay bonds at maturity.
(10-15 min.) S 9-9
Req. 1—Received $965,000:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
1
Cash ($1,000,000 × .965) ………………..
965,000
Discount on Bonds Payable ………….
35,000
Bonds Payable ………………………..
1,000,000
Req. 2—Pay back $1,000,000 at maturity, July 1, 2026.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
31
Interest Expense …………………………….
36,750
Discount on Bonds Payable ……….
1,750
Interest Payable …………………………
35,000
2017
Jan.
1
Interest Payable ……………………………..
35,000
Cash …………………………………………
35,000
(10-15 min.) S 9-10
Req. 1—Received $2,030,000:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
1
Cash ($2,000,000 × 1.015) ……………..
2,030,000
Premium on Bonds Payable ……..
30,000
Bonds Payable ………………………..
2,000,000
Req. 2—Pay back $2,000,000 at maturity, July 1, 2021.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
31
Interest Expense …………………………….
57,000
Premium on Bonds Payable ……………
3,000
Interest Payable ………………………..
60,000
Jan.
Interest Payable ……………………………..
60,000
Cash …………………………………………
(10-15 min.) S 9-11
Req. 1 Using the PV function in EXCEL, the bond price is $401,074.
Req. 2 Amortization table
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(2.5% of
Maturity
Value)
Interest
Expense
(4% of
Preceding
Bond
Carrying
Amount)
Discount
Amortization
(B – A)
Discount
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($520,000
– D)
Mar. 31, 2016
115,883
404,117
109,427
410,573
118,926
401,074
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Mar.
31
Cash (from Req. 1) ……………………….
401,074
Discount on Bonds Payable …………
118,926
Bonds Payable ……………………….
520,000
Sept.
30
Interest Expense ………………………….
Discount on Bonds Payable …….
Cash ………………………………………
(10 min.) S 9-12
Req. 1— Borrowed $401,074. Maturity value is $520,000.
Req. 2—Cash interest is $13,000.
Req. 3—Interest expense September 30, 2016 is $16,043.
Interest expense March 31, 2017 is $16,165.
(10-15 min.) S 9-13
Req. 1 Using the PV function in EXCEL, the bond price is $698,109.
Req. 2 Amortization table
A
B
C
D
E
Semiannual
Interest Date
Interest
Payment
(3% of
Maturity
Value)
Interest
Expense
(2% of
Preceding
Bond
Carrying
Amount)
Premium
Amortization
(A – B)
Premium
Account
Balance
(Preceding
D – C)
Bond
Carrying
Amount
($600,000
+ D)
Jan. 1, 2016
94,071
694,071
85,752
685,752
98,109
698,109
Req. 3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Cash (from Req. 1) ……………………….
698,109
Premium on Bonds Payable …….
98,109
Bonds Payable ……………………….
600,000
June
30
Interest Expense ………………………….
Premium on Bonds Payable …………
Cash ………………………………………
(10 min.) S 9-14
Req. 1— Borrowed $698,109. Maturity value is $600,000.
Req. 2—Cash interest is $18,000.
Req. 3—Interest expense June 30, 2016 is $13,962.
Interest expense December 31, 2016 is $13,881.
(10-15 min.) S 9-15
Req. 1
Best Buy
Co.
Walmart
Stores
5
Leverage
ratio
$15,256 / $4,995
3.05
$203,706 / $81,394
2.50
6
Total
debt
7
$122,312 / $203,706
$15,256 − $4,995
$10,261
$203,706 − $81,394
$122,312
Req. 2
Best Buy has a slightly higher leverage ratio, a higher debt ratio, and a
higher times-interest-earned, than Walmart Stores. Best Buy Co.’s long–
term debt-paying ability is slightly weaker than Walmart’s.
(Student responses may vary.)
(10-15 min.) S 9-16
Plan A
Issue $1,000,000 of
8% Bonds Payable
Plan B
Issue $1,000,000
of Common Stock
Net income before expansion ………………
$400,000
$400,000
Project income before interest
and income tax……………………………….
$ 100,000
$100,000
Less: interest expense ($1,000,000 × .08)
(80,000)
-0-
Project income before income tax ……….
20,000
100,000
Less income tax expense (40%). ………….
(8,000)
(40,000)
Project net income ………………………………
12,000
60,000
Total company net income…………………..
Earnings per share including
expansion:
Plan A ($412,000 / 100,000 shares) …..
$4.12
Plan B ($460,000 / 200,000 shares) …..
$2.30
(5-10 min.) S 9-17
Leverage
ratio
$200.0 / $74.0
=
2.70
This means that Jalbert has $2.70 of assets for every dollar of
stockholders’ equity.
Debt ratio
$126.0 / $200.0
=
.63
This means that Jalbert has $.63 in liabilities (debt) for every
dollar of assets.
(5-10 min.) S 9-18
1. Operating lease
2. Capital lease
8. (10 min.) S 9-19
LIABILITIES
Current:
Accounts payable…………………………………..
$ 41,000
Current portion of bonds payable ……………
50,000
Interest payable ……………………………………..
1,200
Total current liabilities ………………………..
92,200
Long term:
Notes payable, long-term ………………………..
Bonds payable ……………………………………….
Less: Discount on bonds payable …………..
Total liabilities ……………………………………………
Exercises
(10-15 min.) E 9-20A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
31
Inventory …………………………………………………
28,000
Note Payable, Short-Term ……………………
28,000
Purchased inventory by issuing a
note payable.
2017
Apr.
30
Interest Expense ($28,000 × .07 × 9/12) ……..
1,470
Interest Payable ………………………………….
1,470
Accrued interest expense.
July
31
Note Payable, Short-Term …………………………
28,000
Interest Payable ……………………………………….
1,470
Interest Expense ($28,000 × .07 × 3/12) ……..
Cash…………………………………………………..
29,960
Paid note payable and interest at
maturity.
Balance Sheet on April 30, 2017:
Current liabilities:
Note payable, short-term $28,000
Interest payable 1,470
(5-15 min.) E 9-21A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Warranty Expense ($106,000 × .09) ……….
9,540
Estimated Warranty Payable …………….
9,540
Estimated Warranty Payable …………………
9,000
Cash ……………………………………………….
9,000
Req. 2
INCOME STATEMENT
Sales revenue ………………………………………………….
$106,000
Warranty expense ……………………………………………
9,540
BALANCE SHEET
Current liabilities
Estimated warranty payable
Req. 3
Estimated warranty payable, a current liability, will cause a company’s
current ratio to decrease.
(10-15 min.) E 9-22A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Oct.
1
Cash ………………………………………………………..
2,160
Unearned Subscription Revenue……………
2,000
Sales Tax Payable ($2,000 × .08) ……………
160
Nov.
Sales Tax Payable …………………………………….
Cash…………………………………………………….
160
Dec.
Unearned Subscription Revenue ……………….
Subscription Revenue ($2,000 × 3/12) …….
BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($2,000 − $500) …………….
$1,500
(10 min.) E 9-23A
INCOME STATEMENT
Expenses:
Salary & wage expense ……………………………………………
$190,000
Payroll tax expense ($190,000 × .08) …………………………
15,200
BALANCE SHEET
Current liabilities:
Salary payable ………………………………………………………..
Payroll tax payable ………………………………………………….
(5-10 min.) E 9-24A
Req. 1
Accrued interest,
Dec. 31, 2016
=
$57,000 × .06 × 6/12
=
$1,710
Interest expense for:
=
$1,710
(10-15 min.) E 9-25A
Hawley’s balance sheet at Dec. 31, 2017, reported:
Income tax payable ………………………………………..
$133,500*
Hawley’s 2017 income statement reported:
Income tax expense ($650,000 × .35) ……………….
$227,500