9-1
CHAPTER 9
Current Liabilities, Contingencies,
and the Time Value of Money
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Identify the components of the Current Liability category of 1 10 Easy
the balance sheet. 2 10 Easy
3 10 Easy
Module 2
3. Explain how changes in current liabilities affect the 9 5 Easy
Module 3
Module 4
5. Explain the difference between simple and compound interest. 12 20 Mod
6. Calculate amounts using the future value and present value 13 6 Easy
concepts. 14 5 Mod
15 10 Mod
16 10 Mod
17 6 Mod
20* 10 Diff
9-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Identify the components of the Current Liability category of 10* 10 Mod
the balance sheet.
Module 2
3. Explain how changes in current liabilities affect the 2 30 Mod
statement of cash flows. 3 20 Diff
Module 3
Module 4
5. Explain the difference between simple and compound interest. 6 40 Diff
9* 30 Mod
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Identify the components of the Current Liability category of 1* 30 Mod
the balance sheet. 5* 25 Mod
Module 2
3. Explain how changes in current liabilities affect the 3* 25 Mod
statement of cash flows.
Module 3
Module 4
5. Explain the difference between simple and compound interest.
6. Calculate amounts using the future value and present value
concepts.
9-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 1 EXERCISE 9-1 CURRENT LIABILITIES
The treatment of the items should be as follows:
Taxes Payable—Current liability
Accounts Receivable—Current asset
Notes Payable, 9%, due in 90 days—Current liability
LO 1 EXERCISE 9-2 CURRENT LIABILITIES
1. and 2.
Classification Account Title
a. Current liability Accounts Payable
b. Current liability Notes Payable
3. Investors are interested in this information because it enables them to better predict
the timing of future cash flows. Items that are classified as current liabilities require
the use of current assets to satisfy them, whereas long-term liabilities do not.
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-5
LO 1 EXERCISE 9-3 CURRENT LIABILITIES SECTION
JACKIE COMPANY
BALANCE SHEET
DECEMBER 31, 2016
Current liabilities:
Accounts payable ………………………………………………… $ 24,400
Notes payable, 10%, due June 2, 2017 ………………….. $1,000
LO 2 EXERCISE 9-4 TRANSACTION ANALYSIS
1. a.
Journal Purchases ………………………………………………….. 8,000
Entry Accounts Payable …………………………………. 8,000
Analysis To record purchase of inventory on account.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accounts Payable 8,000 (8,000) Purchases 8,000 (8,000)
9-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 9-4 (Continued)
c.
Journal Accounts Payable …………………………………………. 450
Entry Purchase Returns and Allowances…………….. 450
Analysis To record purchase return.
Balance Sheet Income Statement
d.
Journal Accounts Payable ……………………………………….. 7,550
Entry Cash ……………………………………………………. 7,550
Analysis To record payment of account payable.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash(7,550)
Accounts
Payable(7,550)
e.
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-7
EXERCISE 9-4 (Continued)
f.
g.
Journal Cash ($127,200 × 90%) …………………………………. 114,480
Entry Accounts Receivable …………………………………….. 12,720
Analysis Sales …………………………………………………….. 120,000
Sales Tax Payable ………………………………….. 7,200
To record sales and related sales tax.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash
114,480*
Accounts
Receiv-
able 12,720
Sales Tax Payable 7,200
120,000
Sales 120,000
120,000
*$127,200 × 90% = $114,480
2. b.
9-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 9-4 (Concluded)
e.
Journal Interest Expense …………………………………………… 700
Entry Discount on Notes Payable ($1,200 × 7/12) … 700
Analysis To record interest in advance as interest expense.
f.
Journal Unearned Sales Revenue ………………………………. 1,750
Entry Sales (35% × $5,000) ………………………………. 1,750
Analysis To record gift certificates redeemed.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Unearned Sales
Revenue (1,750)*
1,750 Sales 1,750 1,750
*$5,000 × 35% = $1,750
3. Sales tax payable …………………………………………………….. $ 7,200.00
Notes payable, due November 1 ……………………………….. 35,600.00
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-9
LO 2 EXERCISE 9-5 CURRENT LIABILITIES AND RATIOS
1. KRUSE
BALANCE SHEET
DECEMBER 31, 2016
2. Working Capital = Current Assets – Current Liabilities
= $300,000* – $100,000
= $200,000
*Current Assets = Cash ……………………………………………………… $ 15,000
Accounts receivable ………………………………… 180,000
LO 2 EXERCISE 9-6 DISCOUNTS
1. a. Purchase Price × Discount Rate = Discount
$450 × 2% = $9.00
Annualized Interest Rate = 2% × (360/30) = 0.24, or 24%
9-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 2 EXERCISE 9-7 NOTES PAYABLE AND INTEREST
1.
2.
Journal Dec. 31 Interest Expense ……………………………… 1,000
Entry Interest Payable ………………………….. 1,000
Analysis To record interest accrued on loan.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Interest Payable 1,000* (1,000)
Interest
Expense 1,000 (1,000)
*$25,000 × 8% × 6/12 = $1,000
3.
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-11
LO 2 EXERCISE 9-8 NON-INTEREST-BEARING NOTES PAYABLE
1.
Journal 2016
Entry Oct. 1 Cash ………………………………………………. 16,380
Analysis Discount on Notes Payable ……………….. 1,620
Notes Payable ……………………………. 18,000
2.
Journal Dec. 31 Interest Expense …………………………………… 405
Entry Discount on Notes Payable………………… 405
Analysis To record accrued interest on note.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Discount on Notes
Payable 405*
(405) Interest Expense 405 (405)
*$1,620 × 3/12 = $405
3.
Journal 2017
Entry Oct. 1 Interest Expense ……………………………… 1,215
Analysis Notes Payable …………………………………. 18,000
Discount on Notes Payable…………… 1,215
9-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 9-8 (Concluded)
4. Effective interest rate = $1,620/$16,380 = 9.89%
LO 3 EXERCISE 9-9 IMPACT OF TRANSACTIONS INVOLVING CURRENT LIABILITIES
ON STATEMENT OF CASH FLOWS
Accounts payable: O
Current maturities of long-term debt: F
LO 3 EXERCISE 9-10 IMPACT OF TRANSACTIONS INVOLVING CONTINGENT
LIABILITIES ON STATEMENT OF CASH FLOWS
Estimated liability for warranties: O
LO 4 EXERCISE 9-11 WARRANTIES
Journal Cash/Accounts Receivable ………………………… 32,500,000
Entry Sales ………………………………………………… 32,500,000
Analysis To record sales of dishwashers.
Balance Sheet Income Statement
Journal Warranty Expense ………………………………………… 168,000
Entry Estimated Liability for Warranties ………………. 168,000
Analysis To record current year’s estimated expense.
Balance Sheet Income Statement
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-13
EXERCISE 9-11 (Concluded)
Journal Estimated Liability for Warranties ………………….. 150,000
Entry Cash/Inventory ……………………………………… 150,000
Analysis To record actual expenditures for warranty work.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
LO 5 EXERCISE 9-12 SIMPLE VERSUS COMPOUND INTEREST
Part 1.
1. *$20,000 × 4% × 6 years = $4,800
2. *$20,000 × 6% × 4 years = $4,800
3. *$20,000 × 8% × 3 years = $4,800
*Formula for Simple Interest Calculation:
Part 2.
1. Table 9-1 n = 6, i = 4%
Future Value = $20,000 × 1.26532 = $25,306
9-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 9-12 (Concluded)
2. Table 9-1 n = 4, i = 6%
Future Value = $20,000 × 1.26248 = $25,250
3. Table 9-1 n = 3, i = 8%
Part 3.
1. Table 9-1 n = 12, i = 2%
Future Value = $20,000 × 1.26824 = $25,365
Interest = Future Value – Beginning Amount
= $25,365 – $20,000
= $5,365
LO 6 EXERCISE 9-13 PRESENT VALUE AND FUTURE VALUE
n = 10, i = 5%
Present Value = Amount × Table Factor
= $150,000 × 0.61391
= $92,087
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-15
LO 6 EXERCISE 9-14 EFFECT OF COMPOUNDING PERIOD
1. $1,000 × 1.16640 = $1,166 n = 2, i = 8%
LO 6 EXERCISE 9-15 PRESENT VALUE AND FUTURE VALUE
1. a. $7,000 × 1.46933 = $10,285 n = 5, i = 8%
b. $7,000 × 1.48024 = $10,362 n = 10, i = 4%
c. $7,000 × 1.48595 = $10,402 n = 20, i = 2%
LO 6 EXERCISE 9-16 PRESENT VALUE AND FUTURE VALUE
1. a. $16,000 × 1.46933 = $23,509 n = 5, i = 8%
2. a. $20,000 × 0.68058 = $13,612 n = 5, i = 8%
LO 6 EXERCISE 9-17 ANNUITY
$2,000 × 20.02359 = $40,047 n = 15, i = 4%
9-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 7 EXERCISE 9-18 CALCULATION OF YEARS
LO 7 EXERCISE 9-19 VALUE OF PAYMENTS
1. Present Value = Payment × Table Factor
2. n = 8, i = 3%
Present Value = Payment × Table Factor
$2,501.27 = Payment × 7.01969
Payment = $2,501.27/7.01969 = $356.32
With annual payments:
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-17
MULTI-CONCEPT EXERCISES
LO 6,7 EXERCISE 9-20 COMPARISON OF ALTERNATIVES
Present value of 1: $100,000 × 1.00000 = $100,000
Present value of 2: $108,000 × 0.92593 = $100,000
n = 1, i = 8%
LO 6,7 EXERCISE 9-21 TWO SITUATIONS
1. $53,300/$13,000 = 4.100 table factor for present value of an annuity for 5 years,
i = 7%
9-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEMS
LO 2 PROBLEM 9-1 NOTES AND INTEREST
1. a.
Journal Jan. 1 Cash ……………………………………………………. 25,000
Entry Notes Payable …………………………………. 25,000
Analysis To record loan at 10% interest.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 25,000 Notes Payable 25,000
b. On January 10, only a memorandum entry is made.
d.
Journal Mar. 1 Cash ……………………………………………………. 150,000
Entry Loan Payable …………………………………… 150,000
Analysis To record loan with line of credit.
PROBLEM 9-1 (Continued)
e.
f.
Journal June 30 Interest Expense …………………………………… 2,750
Entry Interest Payable ……………………………….. 2,750
Analysis To record interest on interest-bearing loan.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Interest Payable 2,750 (2,750)
Interest
Expense 2,750* (2,750)
*Interest-bearing:
$25,000 × 10% × 6/12 $1,250
$50,000 × 9% × 4/12 1,500
Subtotal $2,750
9-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 9-1 (Continued)
g.
h.
Journal Sept. 1 Cash ……………………………………………………. 200,000
Entry Notes Payable …………………………………. 200,000
Analysis To record loan from line of credit.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 200,000 Notes Payable 200,000
i.
Journal Nov. 1 Accounts Payable …………………………………. 12,000
Entry Notes Payable …………………………………. 12,000
Analysis To record loan in repayment of account.