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CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-21
PROBLEM 9-1 (Concluded)
j.
Journal Dec. 31 Notes Payable .............................................. 25,000
Entry Interest Payable ........................................... 1,250
Analysis Interest Expense .......................................... 1,250
2. Line of credit:
$50,000 × 9% × 10/12 ............................................................ $3,750
$200,000 × 9% × 4/12 ............................................................ 6,000
LO 3 PROBLEM 9-2 EFFECTS OF BURGER KING’S CURRENT LIABILITIES ON ITS
STATEMENT OF CASH FLOWS
1. Adjustments to reconcile net income to net cash provided by operating activities:
Net income ................................................................................... $ xxx
Adjustments to reconcile net income to net
2. Burger King must have access to cash or other assets that can be converted to
cash, in amounts sufficient to pay its current liabilities. Burger King’s current ratio
would be useful in assessing its liquidity. However, Burger King would be expected
to have some amount of inventory on hand. Therefore, its quick ratio would be a
more conservative measure of its ability to pay its bills on time.
9-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 3 PROBLEM 9-3 EFFECTS OF BRINKER INTERNATIONAL’S CURRENT LIABILITIES
ON ITS STATEMENT OF CASH FLOWS
1. Operating Activities section of cash-flow statement:
Net income ............................................................................. $xxx,xxx
Adjustments to reconcile net income to net
2. Changes in the balance of current liability accounts should be reflected in the Oper-
ating Activities category of the statement of cash flows. An increase in a current lia-
bility account indicates that the company increased its cash position by incurring a
LO 4 PROBLEM 9-4 WARRANTIES
1. XX defective units × $150 per unit = $12,600
XX defective units = $12,600/$150 per unit
Defective units = 84
3. If the actual amount of warranty costs incurred during 2017 is significantly higher
than the estimated liability recorded for warranty costs at the end of 2016, Clearview
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-23
LO 4 PROBLEM 9-5 WARRANTIES
1.
Journal Warranty Expense ...................................................... 5,400
Entry Estimated Liability for Warranties ......................... 5,400
2.
Journal Estimated Liability for Warranties ............................... 4,950
Entry Inventory .............................................................. 4,950
Analysis To record actual warranty repairs.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Inven-
tory (4,950)
Estimated Liability for
Warranties (4,950)
LO 5 PROBLEM 9-6 COMPARISON OF SIMPLE AND COMPOUND INTEREST
1.
Journal 2016
Entry Dec. 31 Interest Expense .................................... 1,000
9-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 9-6 (Continued)
Journal 2018
Entry June 30 Interest Expense .................................... 1,000
Analysis Interest Payable ..................................... 3,000
Notes Payable ........................................ 25,000
Cash ................................................. 29,000
To record repayment of note plus interest.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (29,000)
Notes Payable (25,000)
Interest Payable (3,000)* (1,000)
Interest
Expense 1,000**
(1,000)
*$1,000 + $2,000 = $3,000
**$25,000 × 8% × 1/2 = $1,000
2.
Journal 2016
Entry Dec. 31 Interest Expense .................................... 1,000
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-25
PROBLEM 9-6 (Concluded)
Journal 2017
Entry Dec. 31 Interest Expense .................................... 2,122
Analysis Interest Payable ................................ 2,122
To record accrued interest for 2017.
Balance Sheet Income Statement
Journal 2018
Entry June 30 Interest Expense .................................... 1,125
Analysis Interest Payable ..................................... 3,122
Notes Payable ........................................ 25,000
Cash ................................................. 29,247
To record repayment of note plus interest.
Balance Sheet Income Statement
LO 6 PROBLEM 9-7 INVESTMENT WITH VARYING INTEREST RATE
Principal at Interest Accumulated
Year Beginning of Year Factor at End of Period
2016 $1,000 1.04 $1,040
2017 1,040 1.05 1,092
9-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 PROBLEM 9-8 COMPARISON OF ALTERNATIVES
a. $180,000 × 1.0 = $180,000
MULTI-CONCEPT PROBLEMS
LO 2,5 PROBLEM 9-9 INTEREST IN ADVANCE VERSUS INTEREST PAID WHEN LOAN IS
DUE
1. a. $103,200
b. $103,200/(100% – 14%) = $120,000
3. a.
Journal 2016
Entry July 1 Cash ....................................................... 103,200
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-27
PROBLEM 9-9 (Continued)
Journal Dec. 31 Interest Expense .......................................... 7,224
Entry Interest Payable ...................................... 7,224
Analysis To record the accrual of interest.
Balance Sheet Income Statement
Journal 2017
Entry July 1 Notes Payable .............................................. 103,200
Analysis Interest Expense .......................................... 7,224
Interest Payable ........................................... 7,224
Cash ....................................................... 117,648
To record payment of interest and principal.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash
(117,648)
Notes
Payable (103,200)
Interest Payable (7,224) (7,224)
Interest
Expense 7,224
(7,224)
b.
9-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 9-9 (Concluded)
Journal Dec. 31 Interest Expense .......................................... 8,400
Entry Discount on Notes Payable..................... 8,400
Analysis To record interest for the year.
Journal 2017
Entry July 1 Interest Expense .................................... 8,400
Analysis Notes Payable ........................................ 120,000
Discount on Notes Payable............... 8,400
Cash ................................................. 120,000
To record payment of the note.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
$103,200
LO 1,4 PROBLEM 9-10 CONTINGENT LIABILITIES
1. Items (a), (d), (e): The liability is probable, and an estimate is available.
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-29
LO 6,7 PROBLEM 9-11 TIME VALUE OF MONEY CONCEPT
1. $9,750 × 6.86604 (future value of $1 for n = 17, i = 12%) = $66,944
LO 6,7 PROBLEM 9-12 COMPARISON OF ALTERNATIVES
a. $15,000 × 1.36049 (future value of $1 for n = 4, i = 8%) = $20,407
9-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 2 PROBLEM 9-1A NOTES AND INTEREST
1. a.
Journal Jan. 1 Cash ............................................................. 35,000
Entry Notes Payable ........................................ 35,000
Analysis To record issuance of note.
Balance Sheet Income Statement
c.
Journal Feb. 1 Equipment .................................................... 26,320
Entry Discount on Notes Payable .......................... 1,680
Analysis Notes Payable ........................................ 28,000
To record non-interest-bearing note.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Equip-
ment 26,320
Notes Payable 28,000
Discount on Notes
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-31
PROBLEM 9-1A (Continued)
e.
Journal June 1 Loan Payable ............................................... 140,000
Entry Interest Expense .......................................... 3,150
Analysis Cash ....................................................... 143,150
To record partial payment of line of credit.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash
(143,150) Loan Payable (140,000) (3,150)
Interest
Expense 3,150* (3,150)
*$140,000 × 9% × 3/12 = $3,150
Journal June 30 Interest Expense .......................................... 1,400
Entry Discount on Notes Payable..................... 1,400
Analysis To record accrued interest on
non-interest-bearing note.
Balance Sheet Income Statement
9-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 9-1A (Continued)
g.
Journal Aug. 1 Notes Payable .............................................. 28,000
Entry Interest Expense .......................................... 280
Analysis Cash ....................................................... 28,000
Discount on Notes Payable..................... 280
Repaid non-interest-bearing note.
Balance Sheet Income Statement
h.
Journal Sept. 1 Cash ............................................................. 280,000
Entry Notes Payable ........................................ 280,000
Analysis Borrowed on line of credit.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 280,000 Notes Payable 280,000
i.
