Problem 9-6BA (Concluded)
July 15
FICA⎯Social Security Taxes Payable ……………….
992
FICA⎯Medicare Taxes Payable ………………………..
232
Employee Fed. Income Taxes Payable ………………
1,050
Cash ……………………………………………………….
2,274
Record payment of FICA and
federal income taxes.
15
Record payment of SUTA taxes.
31
Record payment of FUTA taxes.
31
No entry required upon filing Form 941.
Serial Problem — SP 11
Serial Problem — SP 11, Business Solutions (30 minutes)
1.
Gross pay (8 days x $125 per day) ……………………………..
FICA Social Security tax deduction (6.2%)* …………………
FICA Medicare tax deduction (1.45%) …………………………
Income tax deduction ………………………………………………..
Total deductions ……………………………………………………….
2. 2020
Feb. 26
Wages Expense ……………………………………………….
1,000.00
FICA—Social Security Taxes Payable ………….
62.00
FICA—Medicare Taxes Payable …………………..
14.50
Employee Federal Income Taxes Payable …….
159.00
Cash ……………………………………………………….
764.50
Record payroll period.
3. 2020
Feb. 26
Payroll Taxes Expense ……………………………………..
136.50
FICA—Social Sec. Taxes Payable ………………..
62.00
FICA—Medicare Taxes Payable …………………..
14.50
State Unemployment Taxes Payable* …………..
Federal Unemployment Taxes Payable** ………..
Record employer payroll taxes.
4. 2020
Mar. 25
Accounts Receivable – Wildcat Services …………..
2,912
Sales ……………………………………………………….
2,800
Sales Taxes Payable …………………………………..
112
Sold merchandise on credit and collected
sales tax of 4%.
Mar. 25
Cost of Goods Sold ………………………………………….
2,002
Merchandise Inventory ……………………………….
2,002
Record cost of March 25 sale.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 9
Comprehensive Problem
Bug-Off Exterminators (100 minutes)
Part 1
a. Correct ending balance of cash and the amount of the omitted check
Balance per bank …………………………..
$15,100
Plus deposit in transit ……………………..
2,450
Less outstanding checks …………………
(1,800)
Reconciled balance …………………………
$15,750
Balance per books …………………………..
$17,000
Less service charges ………………………
Balance before omitted check ………….
(15,750)
$ 1,287
Unadjusted balance …………………………
credit
Anticipated write-off ………………………..
Revised unadjusted balance ……………
credit
Desired ending balance …………………..
credit
Necessary adjustment ……………………..
credit
c. Depreciation expense on the truck
Cost ……………………………………………………….
$32,000
Less salvage value …………………………..
(8,000)
Depreciable cost …………………………..
$24,000
Useful life (years) …………………………..
4
Annual depreciation for 2019 ………………………
$ 6,000
d. Depreciation expense on the equipment
Sprayer
Injector
Cost ………………………………………………..
$27,000
Less salvage value ………………………….
(3,000)
Useful life (years) …………………………..
8
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 9
Comprehensive Problem (Continued)
e. Adjusted revenue and unearned revenue balances
Total advance received ………………………………….
$ 3,840
Months in contract …………………………………………
12
Revenue per month ……………………………………….
$ 320
Months of services provided ………………………….
5
Total earned ($320 x 5 months) ………………………
(1,600)
Overstatement of revenue ($3,840 – $1,600) ……
$ 2,240
Extermination Services Revenue account
Unadjusted balance …………………………..…………..
$60,000
Overstatement ……………………………………………….
(2,240)
Adjusted balance …………………………………………..
$57,760
Unearned Services Revenue account
Unadjusted balance …………………………..…………..
$ 0
Adjustment ……………………………………………………
2,240
Adjusted balance …………………………………………..
$ 2,240
f. Warranty expense
Adjusted services revenue for the year (from e) ….
$57,760
Warranty percent ………………………………………….
2.5%
Warranty expense (estimated) ……………………….
$ 1,444
Unadjusted balance …………………………..………….
$ 1,400
g. Note payable and interest accrual
The note originated on December 31, 2019. The first time interest
will be payable is December 31, 2020. The annual interest expense
on the note is $1,200 ($15,000 x .08).
Comprehensive Problem (Continued)
Part 2
BUG-OFF EXTERMINATORS
December 31, 2019
Unadjusted
Trial Balance
Adjustments .
Adjusted
Trial Balance
Cash …………………………………….
$ 17,000
(a)
$1,250
$ 15,750
Accounts receivable ……………..
4,000
(b1)
679
3,321
Allowance for
doubtful accounts ………………
$ 828
(b1)
$ 679
(b2)
551
$ 700
Merchandise inventory …………
11,700
11,700
Trucks …………………………………..
32,000
32,000
Accum. deprec.–Trucks ………..
0
(c)
Equipment …………………………..
45,000
45,000
Accum. deprec.–Equip …………
12,200
18,300
Accounts payable …………………
5,000
(a)
Estim. warranty liability …………
1,400
(f)
Unearned services rev ………….
0
(e)
Interest payable ……………………
0
15,000
15,000
Common stock ……………………..
10,000
10,000
Retained earnings …………………
49,700
49,700
Dividends …………………………..
10,000
10,000
Extermination
services revenue ………………..
60,000
(e)
2,240
57,760
Interest revenue ……………………
872
(a)
52
924
Sales ……………………………………..
71,026
71,026
Cost of goods sold ……………….
46,300
46,300
Deprec. expense–Trucks ………
0
(c)
6,000
Deprec. expense–Equip ………..
0
6,100
Wages expense …………………….
35,000
35,000
Interest expense ……………………
0
Rent expense ………………………..
9,000
9,000
Bad debts expense ……………….
0
(b2)
551
551
Miscellaneous expense ………..
1,226
(a)
15
1,241
Repairs expense …………………..
8,000
8,000
Utilities expense ……………………
6,800
6,800
Warranty expense …………………
0
_______
(f)
1,444
______
1,444
_______
Totals ……………………………………
$226,026
$226,026
$18,316
$18,316
$238,207
$238,207
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 9
Comprehensive Problem (Continued)
Part 3
2019
(a)
Miscellaneous Expenses ……………………………………..
Accounts Payable …………………………..……………………
1,287
Interest Revenue …………………………………………….
Cash ………………………………………………………………
1,250
Adjust cash account. (Separate entries are acceptable.)
(b1)
Allowance for Doubtful Accounts ………………………….
679
Accounts Receivable ………………………………………
679
Wrote off uncollectible accounts.
(b2)
Bad Debts Expense ………………………………………………
551
Allowance for Doubtful Accounts …………………….
551
Recognize bad debts expense.
(c)
Depreciation Expense—Trucks ……………………………..
6,000
Accumulated Depreciation—Trucks …………………
6,000
Depreciation on truck.
(d)
Depreciation Expense—Equipment ……………………….
6,100
Accumulated Depreciation—Equipment …………..
6,100
Depreciation on equipment.
(e)
Extermination Services Revenue …………………………..
2,240
Unearned Services Revenue …………………………..
Adjust for unearned revenues.
(f)
Warranty Expense ………………………………………………..
1,444
Estimated Warranty Liability …………………………..
1,444
Estimate warranty expense.
(g)
No interest accrual required for 2019
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 9
Comprehensive Problem (Continued)
Part 4
BUG-OFF EXTERMINATORS
Income Statement
For Year Ended December 31, 2019
Revenues
Extermination services revenue ……………
$57,760
Sales ……………………………………………………
71,026
Interest revenue …………………………………..
924
Total revenues……………………………………..
$129,710
Expenses
Cost of goods sold …………………………..….
46,300
Depreciation expense—Trucks …………….
6,000
Depreciation expense—Equipment ………
6,100
Wages expense ……………………………………
35,000
Interest expense…………………………………..
0
Rent expense……………………………………….
9,000
Bad debts expense ………………………………
Miscellaneous expenses ………………………
1,241
Repairs expense ………………………………….
8,000
Utilities expense…………………………………..
6,800
Warranty expense ………………………………..
1,444
Total expenses …………………………………….
BUG-OFF EXTERMINATORS
Statement of Retained Earnings
For Year Ended December 31, 2019
Retained earnings, December 31, 2018 …………………..
$ 49,700
Add: Net income …………………………………………………..
9,274
(10,000)
Retained earnings, December 31, 2019 …………………..
$ 48,974
Comprehensive Problem
Part 4 (concluded)
BUG-OFF EXTERMINATORS
Balance Sheet
December 31, 2019
Assets
Current assets
Cash ……………………………………………………….
$15,750
Accounts receivable ………………………………..
$ 3,321
Allowance for doubtful accounts ……………..
(700)
2,621
Merchandise inventory …………………………..
11,700
Total current assets ………………………………..
30,071
Plant assets
Trucks …………………………………………………….
32,000
Accumulated depreciation—Trucks …………
(6,000)
26,000
Equipment ………………………………………………
45,000
Accumulated depreciation—Equipment …..
(18,300)
Total plant assets ……………………………………
Total assets ………………………………………………
$82,771
Liabilities
Current liabilities
Accounts payable ……………………………………
$ 3,713
Estimated warranty liability ……………………..
2,844
Unearned services revenue ……………………..
2,240
Total current liabilities …………………………..
$ 8,797
Long-term liabilities
Long-term notes payable …………………………
15,000
Total liabilities …………………………………………..
23,797
Equity
Common stock ………………………………………….
10,000
Retained earnings ……………………………………..
48,974
Total equity ……………………………………………….
58,974
Total liabilities and equity ………………………….
$82,771
Company Analysis — AA 9-1 (20 minutes)
1. Times interest earned
$ millions
2017
2016
2015
Net income …………………………………………..
$48,351
$45,687
$53,394
Add income taxes ………………………………..
15,738
15,685
19,121
Add interest expense …………………………..
2,323
1,456
733
2. Good position
Explanation: Apple’s risk of not being able to cover its interest
expense grew over this period as evidenced by its decreasing times
interest earned. Although its times interest earned ratio had declined,
there is no evidence to suggest it is in danger of not paying interest
payments based on times interest earned. Further, Apple’s times
interest earned ratio is much higher than the industry average of 10 for
each of its fiscal years shown here.
3. Apple’s balance sheet shows total accrued expenses of $25,744
million.
Comparative Analysis — AA 9-2 (40 minutes)
1. Apple—Times interest earned
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income …………………………………………..
$48,351
$45,687
$53,394
Add income taxes ………………………………..
15,738
15,685
19,121
Add interest expense …………………………..
2,323
1,456
733
Income before taxes and interest ………….
$66,412
$62,828
$73,248
Times interest earned ratio ……………….
$ millions
Current
Year
One Year
Prior
Two Years
Prior
Net income …………………………………………..
$12,662
$19,478
$16,348
Add income taxes ………………………………..
14,531
4,672
3,303
Add interest expense …………………………..
109
124
104
Income before taxes and interest ………….
$27,302
$24,274
$19,755
Times interest earned ratio ……………….
250.48a
195.76b
189.95c
a$27,302 / $109 b$24,274 / $124 c$19,755 / $104
2. Google
3. a. Good
b. Good
Explanation: Apple and Google both are in strong positions in their
ability to make interest payments as implied by the times interest
earned ratio. For the current year, the times interest earned ratio of both
Apple and Google exceeds the industry average of 10.
Global Analysis — AA 9-3 (30 minutes)
1. Samsung— Times interest earned
KRW in millions
Current Year
Prior Year
Net income ………………………………………….
₩ 42,186,747
₩ 22,726,092
Add income taxes …………………………..
14,009,220
7,987,560
Income before income taxes ………………..
56,195,967
30,713,652
Add interest expense …………………………..
2. Favorable
Explanation: The times interest earned ratio exhibits a favorable
change as it increased in the current year versus the prior year.
3. a. Better
Explanation: Samsung’s times interest earned ratio is better than
Apple’s ratio of 28.59 in the current year. However, both are in strong
positions to make interest payments as implied by the times interest
earned ratio. (Computations in AA 9-2.)
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
has some input into setting the warranty expense accrual percent, he
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
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
Taking It to the Net — BTN 9-3
1. McDonald’s current liabilities include the following:
• Accounts payable
• Income taxes
• Other taxes
2. Times interest earned for McDonald’s is
$ millions
Net Income ………………………………………………………
$ 4,686.5
Plus income taxes ……………………………………………
2,179.5
Plus interest expense …………………………..…………..
884.8
Income before interest and taxes ……………………..
$ 7,750.8
Times interest earned ………………………………………
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
2. Entries:
2a. Issue date, Option A
June 1
Cash ………………………………………………………………..
6,000
Notes Payable …………………………………………….
6,000
Borrowed cash by issuing an
interest-bearing note.
Cash ………………………………………………………………..
6,000
Notes Payable …………………………………………….
6,000
Borrowed cash by issuing an
interest-bearing note.
2c. Maturity date, Option A
Aug. 30
Notes Payable ………………………………………………….
6,000
Interest Expense ………………………………………………
150
Cash ……………………………………………………….
6,150
Repaid note plus interest.
Notes Payable ………………………………………………….
6,000
Interest Expense ………………………………………………
160
Cash ……………………………………………………….
6,160
Repaid note plus interest.
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 ……………………………………………………….
Repaid note plus interest.
Entrepreneurial Decision — BTN 9-5
1.
Pandora
Income Statement (Prospective)
Current
Operations
European
Total
Sales …………………………………….
$1,000,000
$ 250,000
$1,250,000
Operating expenses (55%) …….
550,000
137,500
687,500
Income before interest ………….
450,000
112,500
562,500
Interest expense……………………
0
21,000
21,000
2. Times interest earned = $562,500 / $21,000 = 26.8 times
3.
Pandora
Income Statement (Prospective)
Current
Operations
European
Total
Sales ………………………………………
$1,000,000
$ 400,000
$1,400,000
Operating expenses (55%) ………
550,000
220,000
770,000
Income before interest ……………
450,000
180,000
630,000
Interest expense……………………..
0
21,000
21,000
$ 159,000
Entrepreneurial Decision (concluded)
4.
Pandora
Income Statement (Prospective)
Current
Operations
European
Total
Sales ……………………………………..
$1,000,000
$ 100,000
$1,100,000
Operating expenses (55%) ……..
550,000
55,000
605,000
Income before interest …………..
450,000
45,000
495,000
5. In each of these cases, the company’s times interest earned is at least
23.6, so it appears that if it takes out the loan and can generate at least
$100,000 in sales in Europe, then the company will have little trouble
paying its interest expense.
Hitting the Road — BTN 9-6