CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-33
PROBLEM 9-1A (Concluded)
j.
Journal Dec. 31 Notes Payable ………………………………………. 35,000
Entry Interest Payable ……………………………………. 1,750
Analysis Interest Expense …………………………………… 1,750
2. Line of credit:
($210,000 – $140,000) × 9% × 10/12 ………………………………. $ 5,250
LO 3 PROBLEM 9-2A EFFECTS OF MCDONALD’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 cash
2. McDonald’s must have access to cash, or other assets that can be converted to
cash, in amounts sufficient to pay its current liabilities. McDonald’s current ratio
9-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 3 PROBLEM 9-3A EFFECTS OF DARDEN RESTAURANTS’ CHANGES IN CURRENT
ASSETS AND LIABILITIES ON ITS STATEMENT OF CASH FLOWS
1. Adjustments to reconcile net income to net cash provided by operating activities:
Net income ………………………………………………………………….. $xxx,xxx
Adjustments to reconcile net income to net
2. The changes to current portion of long-term debt during the year are not included as
adjustments above because they do not directly relate to the company’s operating
activities. The change in liabilities associated with assets held for sale is also not re-
lated to operating activities.
LO 4 PROBLEM 9-4A WARRANTIES
1. XX defective units × $300 per unit = $25,200
LO 4 PROBLEM 9-5A WARRANTIES
1.
Journal Warranty Expense ……………………………………………… 15,360
Entry Estimated Liability for Warranties ……………………. 15,360
Analysis To record estimated warranty expense.
Balance Sheet Income Statement
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-35
PROBLEM 9-5A (Concluded)
2.
Journal Estimated Liability for Warranties …………………………. 10,200
Entry Inventory …………………………………………………….. 10,200
Analysis To record actual warranty costs.
Balance Sheet Income Statement
LO 5 PROBLEM 9-6A COMPARISON OF SIMPLE AND COMPOUND INTEREST
1. Dec. 31, 2016 $25,000 × 6% × 6/12 $ 750
2. Dec. 31, 2016 ($25,000 × 6% × 1/2) $ 750
Dec. 31, 2017:
First 6 months [($25,000 + $750) × 6% × 1/2 year] $ 773
Second 6 months [($25,750 + $773) × 6% × 1/2 year] 796
Total for 2017 $1,569
9-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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LO 6 PROBLEM 9-7A INVESTMENT WITH VARYING INTEREST RATE
Principal at Interest Accumulated
Year Beginning of Year Factor at End of Period
2016 $2,000 1.04 $2,080
LO 6 PROBLEM 9-8A COMPARISON OF ALTERNATIVES
a. $270,000 × 1.0 = $270,000 n = 0, i = 8%
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-37
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 2,5 PROBLEM 9-9A INTEREST IN ADVANCE VERSUS INTEREST PAID WHEN LOAN
IS DUE
1. a. $206,400
b. $206,400/(100% – 14%) = $240,000
3. a.
Journal 2016
Entry July 1 Cash ………………………………………………. 206,400
Analysis Notes Payable ……………………………. 206,400
To record issuance of note.
Balance Sheet Income Statement
Journal Dec. 31 Interest Expense ……………………………… 14,448
Entry Interest Payable ………………………….. 14,448
Analysis To record accrual of interest.
Balance Sheet Income Statement
9-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 9-9A (Continued)
Journal 2017
Entry July 1 Notes Payable …………………………………. 206,400
Analysis Interest Expense ……………………………… 14,448
Interest Payable ………………………………. 14,448
Cash …………………………………………. 235,296
To record payment of note plus interest.
b.
Journal 2016
Entry July 1 Cash ………………………………………………. 206,400
Analysis Discount on Notes Payable ……………….. 33,600
Notes Payable ……………………………. 240,000
To record non-interest-bearing loan.
Balance Sheet Income Statement
Journal Dec. 31 Interest Expense ……………………………… 16,800
Entry Discount on Notes Payable…………… 16,800
Analysis To record interest on loan.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Discount on Notes
Payable* 16,800**
(16,800)
Interest
Expense 16,800
(16,800)
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-39
PROBLEM 9-9A (Concluded)
Journal 2017
Entry July 1 Interest Expense ……………………………… 16,800
Analysis Notes Payable …………………………………. 240,000
Discount on Notes Payable…………… 16,800
Cash …………………………………………. 240,000
To record payment of the loan.
Balance Sheet Income Statement
4. a. Note payable $206,400
b. Note payable $240,000
LO 1,4 PROBLEM 9-10A CONTINGENT LIABILITIES
1. Items (a), (d), (e): The liability is probable in occurrence, and an estimate is avail-
able.
LO 6,7 PROBLEM 9-11A TIME VALUE OF MONEY CONCEPT
a. $19,500 × 6.86604 (future value of $1 for n = 17, i = 12%) = $133,887.78
9-40 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6,7 PROBLEM 9-12A COMPARISON OF ALTERNATIVES
a. $16,000 × 1.36049 (future value of $1 for n = 4, i = 8%) = $21,768
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,2 DECISION CASE 9-1 COMPARING TWO COMPANIES: PANERA BREAD AND CHI-
POTLE’S CURRENT LIABILITIES
1. Panera Bread Company for 2014: Current assets $406,166,000/Current liabilities
2. Under Chipotle for 2014: Current assets $878,479,000/Current liabilities
$245,710,000 = 3.45
3. Both companies indicate they are party to lawsuits and litigation. Neither company
has recorded an amount on the balance sheet as a liability because of these mat-
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-41
LO 4 DECISION CASE 9-2 CARIBOU COFFEE’S CASH-FLOW STATEMENT
1. Current ratio for January 1, 2012: Current Assets/Current Liabilities
$92,129/$33,845 = 2.72
Current ratio for January 2, 2011: Current Assets/Current Liabilities
$59,468/$29,676 = 2.00
LO 3,4 DECISION CASE 9-3 WALMART’S CONTINGENT LIABILITIES
1. In this case, the company could consider whether accrual of a contingent liability is
required. A contingent liability should be recorded if the amount is a material
amount, if the likelihood of an unfavorable outcome is probable, and if the amount of
9-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 DECISION CASE 9-4 HEWLETT-PACKARD’S CONTINGENT LIABILITY
1. It seems like none were accrued. A company should record the amounts if they are
material and if the likelihood of the loss is probable and can be reasonably esti-
2. Contingent liabilities should be disclosed if they do not meet the probable criterion
MAKING FINANCIAL DECISIONS
LO 1,2 DECISION CASE 9-5 CURRENT RATIO LOAN PROVISION
1. The company is experiencing difficulties that are similar to many small, start-up
companies. The company must either take action to get a 2 to 1 ratio of current as-
sets to current liabilities or must approach its bank and ask for a modification of that
provision. If the firm wishes to achieve a 2 to 1 ratio, it must increase current assets,
decrease current liabilities, or both. Actions that should be considered include the
following:
a. Request from the bank a long-term line of credit to be used to pay the current lia-
bilities.
2. Some actions to improve liquidity are referred to as window-dressing. The term re-
fers to actions that artificially make the financial statements appear more favorable
for a short time. An example of window-dressing in this case would be to use current
CHAPTER 9 • CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY 9-43
LO 7 DECISION CASE 9-6 ALTERNATIVE PAYMENT OPTIONS
The only way to compare the dollars is to determine the present value of each of these
options discounted at 8%.
a. $2,000 + [($18,000 × 1.08) × 0.92593] = $20,000
ETHICAL DECISION MAKING
LO 4 DECISION CASE 9-7 WARRANTY COST ESTIMATE
The purpose of the case is to allow students to understand that judgment is necessary
in the accrual of an estimated liability such as warranty costs. Because the decision re-
quires the exercise of judgment, it should be emphasized that there is no right answer,
and in this case few good alternatives seem to exist. Discussion of the case should
begin with the evidence available, which convinced John that 5% is inadequate as an
accrual for warranties. Can he rely on the evidence? Would others reach the same con-
clusion with the same evidence? If students conclude that John should stick with his de-
cision, then the available courses of action should be examined.
9-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 4 DECISION CASE 9-8 RETAINER FEES AS SALES
1. Recognize an ethical dilemma:
Students should be asked to consider why the controller wishes to include the re-
tainer fees as income. The controller may be eager to show the amount as sales be-
2. Analyze the key elements in the situation:
Students must consider the nature of return fees. At what point in time are they
“earned and realized or realizable.” They may want to investigate other aspects of
the retainer fee process such as whether the fees are refundable, the past history of
the receipt of the fees, and how other companies record such fees.
3. List alternatives and evaluate the impact of each on those affected:
In this case, the alternatives are fairly clear. The retainer fees can be recorded as
4. Select the best alternative:
In this case, it appears that the retainer fee should be recorded as sales when the