Accounting Ch10

8/11/2019 Accounting Ch10

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Copyright 2010 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)

CHAPTER 10

Reporting and Analyzing Liabilities

ANSWERS TO QUESTIONS

1. While this is generally true, more precisely a current liability is a debt that can reasonably beexpected to be paid: (a) from existing current assets or through the creation of other currentliabilities and (2) within one year or the operating cycle, whichever is longer.

2. In the balance sheet, Notes Payable of $20,000 and Interest Payable of $450 ($20,000 X 9% X3/12) should be reported as current liabilities. In the income statement, Interest Expense of $450should be reported under other expenses and losses.

3. (a) Disagree. The company only serves as a collection agent for the taxing authority. It does notreport sales taxes as an expense; it merely forwards the amount paid by the customer to the

government.

(b) The entry to record the proceeds is:Cash ........................................................................................ 8,550

Sales ................................................................................ 8,000Sales Taxes Payable........................................................ 550

4. (a) The entry when the tickets are sold is:Cash ......................................................................................... 810,000

Unearned Football Ticket Revenue ................................... 810,000

(b) The entry after each game is:Unearned Football Ticket Revenue ........................................... 162,000

Football Ticket Revenue.................................................... 162,000

5. Three taxes commonly withheld by employers from employees gross pay are (1) federal incometaxes, (2) state income taxes, and (3) social security (FICA) taxes.

6. (a) Three taxes commonly paid by employers on employees salaries and wages are (1) socialsecurity (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes.

(b) Taxes withheld from employees gross pay and not yet remitted to the appropriategovernment agency are reported in the balance sheet as current liabilities.

7. The liabilities that Tootsie Roll identified as current are: Accounts payable, Dividends payable, Accrued liabilities, and Income taxes payable.

8. (a) Long-term liabilities are obligations that are expected to be paid after one year. Examplesinclude bonds and long-term notes.

(b) Bonds are a form of interest-bearing notes payable used by corporations, universities, andgovernmental agencies.


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10-2 Copyright 2010 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 10 (Continued)

9. (a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecuredbonds are issued against the general credit of the borrower.

(b) Convertible bonds permit bondholders to convert them into common stock at their option. Incontrast, callable bonds are subject to call and retirement at a stated dollar amount prior tomaturity at the option of the issuer.

0. (a) Face value is the amount of principal due at the maturity date.

(b) The contractual interest rate is the rate used to determine the amount of cash interest theborrower pays and the investor receives. This rate is also called the stated interest ratebecause it is the rate stated on the bonds.

(c) A bond certificate is a legal document that indicates the name of the issuer, the face value ofthe bonds, and such other data as the contractual interest rate and maturity date of the bonds.

1. (a) A convertible bond permits bondholders to convert it into common stock at the option of thebondholders.

(b) For bondholders, the conversion option gives an opportunity to benefit if the market priceof the common stock increases substantially. For the issuer, convertible bonds usually have:(1) a lower rate of interest than other debt securities, (2) a higher selling price.

2. The two major obligations incurred by a company when bonds are issued are the interestpayments due on a periodic basis and the principal which must be paid at maturity.

3. Less than. Investors were required to pay more than the face value; therefore, the market interestrate is less than the contractual rate.

4. No, Oprah is not right. The market price on any bond is a function of three factors: (1) the dollaramounts to be received by the investor (interest and principal), (2) the length of time until theamounts are received (interest payment dates and maturity date), and (3) the market interest rate.

5. $48,000. $800,000 X 6% X 1 year = $48,000.

6. $664,000. The balance of the Bonds Payable account minus the balance of the Discount onBonds Payable account (or plus the balance of the Premium on Bonds Payable account) equalsthe carrying value of the bonds.

7. Debits: Bonds Payable (for the face value) and Premium on Bonds Payable (for theunamortized balance).

Credits: Cash (for 97% of the face value) and Gain on Bond Redemption (to balance entry).

8. Two issues need to be considered. First, by financing a major purchase such as this with short-term financing the company will reduce its liquidity. In the case of Hangers Inc., its current ratiowill decrease from 2.2:1 to a less acceptable level of 1.5:1. However, of equal concern is that byfinancing a long-term project with short-term financing the company is exposing itself to interestrate risk. The company has the choice of locking in a long-term rate of 8%, or continually refina-ncing at whatever the short-term rate is when its short-term debt matures. If short-term ratesincrease substantially the increase in interest expense could significantly reduce the companysprofitability.


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19. (a) The nature and the amount of each long-term liability should be presented in the balancesheet or in schedules in the accompanying notes to the financial statements. The notesshould also indicate the interest rates, maturity dates, conversion privileges, and assetspledged as collateral.

(b) To evaluate liquidity a company may compute working capital and the current ratio. Toevaluate long-run solvency a company may compute a debt to total assets ratio, and a timesinterest earned ratio.

20. No, William is not correct. Liquidity involves measuring the short-term ability of a company to payits maturing obligations and to meet unexpected needs for cash. Solvency involves measuringthe ability of a company to survive over a long period of time.

21. When companies are trying to overcome customer skepticism about the quality of their productthey often consider providing a more generous warranty. While this may be effective in increasingsales, it is not without costs. Clearly a longer warranty will usually result in more warranty claims.

Warranties are a contingent liability that must be accrued for each year. If the warranty period isextended, the size of this accrual could increase significantly. If the quality of the companysproduct is not improved at the same time that the warranty is extended, it is quite possible thatthe increase in the estimated warranty accrual could exceed the increase in net income fromexpanded sales from the more generous warranty.

22. One alternative to purchasing the assets is to lease them through an operating lease agreement.In an operating lease, the lease payments are recorded as an expense. This allows the lessee tokeep the leased assets and, more importantly, lease liabilities off the balance sheet (referred to asoff-balance-sheet financing). Keeping lease liabilities off the balance sheet will have a favorableimpact on the lessees liquidity and solvency ratios.

Another option is to lease the assets through a capital lease agreement. However, in a capitallease the lessee must record the asset and a related liability for the lease payments. This treat-ment would impact liquidity and solvency ratios the same way the purchase of assets would.

23. Sam is not correct. In order to reduce costs, many companies today keep low amounts of inventoryon hand. Consequently, liquidity ratios are generally lower than they used to be. Companies thatkeep fewer liquid assets on hand frequently rely on a bank line of credit. A line of credit allows acompany to borrow money on a short-term basis to meet any cash shortfalls caused by a lowamount of liquid assets.

24. If a company has significant operating leases, most analysts would argue that its recordedassets and liabilities understate its true values. These analysts will increase the companysliabilities and assets for the unrecorded operating leases.

25. Two criteria must be met: (1) the contingency must be probable and (2) the company must beable to arrive at a reasonable estimate. If these criteria are not met, the company should disclosethe major facts concerning the contingency in the notes to its financial statements.


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26. The straight-line method of amortization results in the same amortized amount being assigned toInterest Expense each interest period. This amount is determined by dividing the total bonddiscount or premium by the number of interest periods the bonds will be outstanding.

27. The total amount of interest expense is $10,800. Interest expense is the interest to be paid in cashless the premium amortization for the year. Cash to be paid equals 6% X $200,000 or $12,000.Total premium equals 3% of $200,000 or $6,000. Since this is to be amortized over 5 years (the

life of the bonds) in equal amounts, the amortization amount is $6,000 5 = $1,200. Thus,$12,000 $1,200 or $10,800 is the interest expense for 2010.

28. Lucia is probably indicating that since the borrower has the use of the bond proceeds over theterm of the bonds, the borrowing rate in each period should be the same. The effective-interestmethod results in a varying amount of interest expense but a constant rate of interest on thebalance outstanding. Accordingly, it results in a better matching of expenses with revenues thanthe straight-line method.

29. Decrease. Under the effective-interest method the interest expense per period is determinedby multiplying the carrying value of the bonds by the effective-interest rate. When bonds areissued at a premium, the carrying value decreases over the life of the bonds. As a result, the interestexpense will also decrease over the life of the bonds because it is determined by multiplying thedecreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.


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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

(a) A note payable due in two years is a long-term liability, not a currentliability.

(b) $20,000 of the mortgage payable is a current maturity of long-termdebt. This amount should be reported as a current liability.

(c) Interest payable is a current liability because it will be paid out ofcurrent assets in the near future.

(d) Accounts payable is a current liability because it will be paid out ofcurrent assets in the near future.

BRIEF EXERCISE 10-2

(a) July 1 Cash .......................................................... 90,000Notes Payable ................................... 90,000

(b) Dec. 31 Interest Expense....................................... 3,600Interest Payable

($90,000 X 8% X 6/12).................... 3,600

BRIEF EXERCISE 10-3

Sales tax payable

(1) Sales = ($11,395 1.06) = $10,750(2) Sales taxes payable = ($10,750 X 6%) = $645

or $11,395 $10,750 = $645

Mar. 16 Cash .................................................................. 11,395Sales .......................................................... 10,750Sales Taxes Payable................................. 645


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BRIEF EXERCISE 10-4

a) Cash (3,800 X $80) ................................................. 304,000Unearned Basketball Ticket Revenue........... 304,000

(To record sale of 3,800 season tickets)

b) Unearned Basketball Ticket Revenue................... 30,400Basketball Ticket Revenue ($304,000 10) ... 30,400

(To record basketball ticket revenueearned)

BRIEF EXERCISE 10-5

Issue Stock Issue Bond

ncome before interest and taxes

nterest ($2,000,000 X 6%)ncome before income taxesncome tax expense (30%)

Net income (a)

Outstanding shares (b)Earnings per share (a) (b)

$1,500,000

01,500,000450,000

$1,050,000

900,000$1.17

$1,500,000

120,0001,380,000414,000

$ 966,000

700,000$1.38

Net income is higher if stock is used. However, earnings per share is lowerhan earnings per share if bonds are used because of the additional shares

of stock that are outstanding.

BRIEF EXERCISE 10-6

a) Jan. 1 Cash................................................. 2,000,000Bonds Payable

(2,000 X $1,000) ................... 2,000,000

b) Dec. 31 Bond Interest Expense................... 140,000Bond Interest Payable($2,000,000 X 7%) ................ 140,000

c) Jan. 1 Bond Interest Payable .................... 140,000Cash......................................... 140,000


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BRIEF EXERCISE 10-7

Bonds Payable ......................................................... 2,000,000Loss on Bond Redemption

($2,040,000 $1,970,000) ..................................... 70,000Cash ($2,000,000 X 1.02) .................................. 2,040,000Discount on Bonds Payable ............................ 30,000

BRIEF EXERCISE 10-8

Long-term liabilitiesBonds payable, due 2014................................. $700,000Less: Discount on bonds payable.................. 21,000 $679,000Notes payable, due 2012 .................................. 80,000

Total long-term liabilities.......................... $759,000

BRIEF EXERCISE 10-9

SHEELY INC.Balance Sheet (Partial)

December 31, 2010

Current liabilitiesBank note payable..................................... $ 20,000

Accounts payable...................................... 155,000 Current portion of long-term debt ............ 240,000 Interest payable ......................................... 40,000 Employee benefits payable....................... 7,800 Property tax payable ................................. 3,500 Sales taxes payable................................... 1,400 Total current liabilities.......................... $ 467,700Long-term liabilities

Bonds payable, due 2014.......................... $900,000

Less: Discount on bonds payable........... 45,000 855,000 Notes payable, due 2012........................... 80,000 Total long-term liabilities..................... 935,000Total liabilities................................................... $1,402,700


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BRIEF EXERCISE 10-10

a) Working capital = $3,925 $2,192 = $1,733b) Current ratio = $3,925 $2,192 = 1.79c) Debt to total assets = $5,543 $8,379 = 66%d) Times interest earned = ($496 + $227 + $197) $197 = 4.67 times

Working capital and the current ratio measure a companys ability to payobligations and meet cash needs. Adidass current assets are 79% largerhan the amount of its current liabilities which indicates a relatively high

degree of liquidity.

Debt to total assets and times interest earned measure a companys abilityo survive over a long period of time. Adidass debt to total assets rationdicates that approximately $.66 of every dollar invested in assets was

provided by creditors. Adidass times interest earned ratio of 4.67 indicates

hat its earnings are adequate to make interest payments as they come due.

BRIEF EXERCISE 10-11

a) Debt to total assets:

$14,180Without operating leases$24,004

= 59%

$14,180 + $740With operating leases$24,004 + $740

= 60%

b) CN does not have significant operating leases, therefore its assets andliabilities reflect its true financial position. By increasing its assets andliabilities for these operating leases we see that its debt to total assetsratio increases only slightly from 59% to 60%.


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*BRIEF EXERCISE 10-12

(a) Jan. 1 Cash (.99 X $3,000,000) ................... 2,970,000Discount on Bonds Payable............ 30,000

Bonds Payable ......................... 3,000,000

(b) Dec. 31 Bond Interest Expense .................... 183,000Discount on Bonds

Payable ($30,000 10).......... 3,000Cash ($3,000,000 X 6%)............ 180,000


(a) Cash (1.03 X $4,000,000) .................................. 4,120,000Bonds Payable .......................................... 4,000,000

Premium on Bonds Payable..................... 120,000

(b) Interest Expense............................................... 296,000Premium on Bonds Payable

($120,000 5) ................................................ 24,000Bond Interest Payable ($4,000,000 X 8%) ... 320,000


(a) Interest Expense............................................... 46,884Discount on Bonds Payable..................... 1,884Cash ........................................................... 45,000

(b) Interest expense is greater than interest paid because the bonds soldat a discount. The bonds sold at a discount because investors demanda market interest rate higher than the contractual interest rate. Interestexpense is calculated using the effective interest rate which is higher

than the stated rate used to compute the cash payment.(c) Interest expense increases each period because the bond carrying

value increases each period. As the market interest rate is applied tothis bond carrying value, interest expense will increase.


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SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 10-1

1. $70,000 X 12% X 5/12 = $3,5002. $42,000/1.05 = $40,000; $40,000 X 5% = $2,0003. $42,000 X 2/6 = $14,000

DO IT! 10-2

a) To determine wages payable, reduce wages expense by the withholdingsfor FICA, federal income tax, and state income tax.

Feb. 28 Wages Expense ............................................. 74,000

FICA Taxes Payable .................................. 4,200Federal Income Taxes Payable................. 7,300State Income Taxes Payable..................... 1,800Wages Payable .......................................... 60,700

b) Payroll taxes would be for the companys share of FICA, as well as forfederal and state unemployment tax.

Feb. 28 Payroll Tax Expense...................................... 4,470FICA Taxes Payable .................................. 4,200Federal Unemployment Taxes Payable.... 110State Unemployment Taxes Payable ....... 160

DO IT! 10-3

1. False. Mortgage bonds and sinking fund bonds are both examples ofsecured bonds.

2. False. Convertible bonds can be converted into common stock at the

bondholders option; callable bonds can be retired by the issuer at aset amount prior to maturity.3. True.4. True.5. True.


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Copyright 2010 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 10

DO IT! 10-4

(a) Cash ...................................................................... 312,000Bonds Payable................................................ 300,000Premium on Bonds Payable .......................... 12,000

(To record sale of bonds at a premium)

(b) Long-term liabilitiesBonds payable ................................................ $300,000Plus: Premium on bonds payable ................ 12,000

$312,000

DO IT! 10-5

Bonds Payable ..................................................... 400,000

Loss on Bond Redemption.................................. 6,000Cash ($400,000 X .99) ..................................... 396,000Discount on Bonds Payable .......................... 10,000

(To record redemption of bonds at 99)


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SOLUTIONS TO EXERCISES

EXERCISE 10-1

a) June 1 Cash .......................................................... 16,000Notes Payable................................... 16,000

b) June 30 Interest Expense($16,000 X .09 X 1/12) ........................... 120

Interest Payable................................ 120

c) Interest payable accrued each month ...................... $120Number of months from borrowing

to year end.............................................................. X 7Balance in interest payable account ........................ $840

d) Jan. 1 Notes Payable........................................... 16,000Interest Payable........................................ 840

Cash .................................................. 16,840

EXERCISE 10-2

a) Principal X .08 X 4/12 = $400Principal = $400 (.08 X 4/12)Principal = $15,000

b) $18,500 X Interest Rate X 4/12 = $555Interest Rate = $555 ($18,500 X 4/12)Interest Rate = 9 percent

c) Initial Borrowing:

May 15 Cash ........................................................ 15,000Notes Payable ................................. 15,000

Repayment:

Sept. 15 Notes Payable......................................... 15,000Interest Expense..................................... 400

Cash................................................. 15,400


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EXERCISE 10-3

(a) June 1 Cash ............................................................ 40,000Notes Payable ..................................... 40,000

(b) June 30 Interest Expense ($40,000 X .09 X 1/12) .... 300Interest Payable .................................. 300

(c) Dec. 1 Notes Payable............................................. 40,000Interest Payable

($40,000 X .09 X 6/12) .............................. 1,800Cash..................................................... 41,800

(d) Interest expense accrued each month ........................ $ 300

Number of months of loan ........................................... X 6Total interest expense.................................................. $1,800

EXERCISE 10-4

GRAINGER COMPANYApr. 10 Cash ..................................................................... 26,750

Sales ............................................................. 25,000Sales Taxes Payable.................................... 1,750

DARBY COMPANY15 Cash ..................................................................... 13,780

Sales ($13,780 1.06) .................................. 13,000Sales Taxes Payable

($13,780 $13,000)................................... 780


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EXERCISE 10-5

a) Mar. 31 Salaries and Wages Expense .............. 60,000FICA Taxes Payable...................... 4,590Federal Income Taxes Payable .... 7,500State Income Taxes Payable ........ 3,100Union Dues Payable ..................... 400Salaries and Wages Payable........ 44,410

b) Mar. 31 Payroll Tax Expense............................. 5,290FICA Taxes Payable...................... 4,590State Unemployment Taxes

Payable ...................................... 700

EXERCISE 10-6

a) $1,265,000 $230 = 5,500 season tickets sold.

b) $1,265,000 20 home games = $63,250 revenue recognized per homegame.

$759,000 $63,250 = 12 home games already played.

c) Cash......................................................................... 1,265,000

Unearned Season Ticket Revenue ................. 1,265,000

d) Unearned Season Ticket Revenue......................... 63,250Season Ticket Revenue .................................. 63,250

EXERCISE 10-7

a) Nov. Cash (6,000 X $26)................................ 156,000Unearned Subscription Revenue .. 156,000

b) Dec. 31 Unearned Subscription Revenue ........ 13,000Subscription Revenue

($156,000 X 1/12) ........................ 13,000


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EXERCISE 10-7 (Continued)

(c) Mar. 31 Unearned Subscription Revenue ......... 39,000Subscription Revenue

($156,000 X 3/12) .......................... 39,000

EXERCISE 10-8

2010(a) Sept. 1 Cash ....................................................... 600,000

Bonds Payable............................... 600,000

(b) Dec. 31 Bond Interest Expense.......................... 16,000Bond Interest Payable

($600,000 X 8% X 4/12)................ 16,000

2011(c) Sept. 1 Bond Interest Expense($600,000 X 8% X 8/12) ....................... 32,000

Bond Interest Payable........................... 16,000Cash ($600,000 X 8% X 12/12)....... 48,000

EXERCISE 10-9

(a) Jan. 1 Cash ....................................................... 300,000Bonds Payable ............................... 300,000

(b) Dec. 31 Bond Interest Expense.......................... 21,000Bond Interest Payable

($300,000 X 7% X 12/12).............. 21,000

(c) Jan. 1 Bond Interest Payable........................... 21,000Cash................................................ 21,000


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EXERCISE 10-10

a) The General Electric bonds were issued at a premium and the Boeingbonds were issued at a discount.

b) The prices of the two bonds differed because bond price is based on themarket rate of interest not the stated rate of interest. Market interestrates must have been different when the two bonds were issued causingthe selling prices to differ.

c) Cash (1.1112 X $800,000)....................................... 888,960Bonds Payable ................................................. 800,000Premium on Bonds Payable............................ 88,960

Cash (0.9908 X $800,000)....................................... 792,640Discount on Bonds Payable.................................. 7,360

Bonds Payable ................................................. 800,000

EXERCISE 10-11

2010a) Jan. 1 Cash....................................................... 400,000

Bonds Payable .............................. 400,000

b) Dec. 31 Bond Interest Expense......................... 32,000Bond Interest Payable

($400,000 X 8% X 12/12) ............. 32,000

2011c) Jan. 1 Bond Interest Payable .......................... 32,000

Cash............................................... 32,000

2030d) Jan. 1 Bonds Payable...................................... 400,000

Cash............................................... 400,000


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EXERCISE 10-12

(a) June 30 Bonds Payable...................................... 140,000Loss on Bond Redemption .................. 20,300*

Cash ($140,000 X 102%) ............... 142,800Discount on Bonds Payable *

($140,000 $122,500)................ 17,500

(b) June 30 Bonds Payable..................................... 170,000Premium on Bonds Payable ............... 14,000

Cash ($170,000 X 98%) ................ 166,600Gain on Bond Redemption.......... 17,400**

**$122,500 (102% X $140,000)**$184,000 (98% X $170,000)

EXERCISE 10-13

(a) Account Classification Reason

Accounts payable Current liability Due within one yearAccrued pension liability Long-term liability Likely relates to pensions. Not

due within one yearAccrued liabilities Current liability Due within one yearBonds payable Long-term liability Not due within one year

Current portion of long-term debt Current liability Due within one year

Income taxes payable Current liability Due within one yearNotes payablelong-term Long-term liability Not due within one yearOperating leases N/A Not a balance sheet itemmay

be disclosed in notesLoans payablelong-term Long-term liability Not due within one yearPayroll-related liabilities Current liability Due within one yearShort-term borrowings Current liability Due within one yearUnused operating line ofcredit

N/A Not a balance sheet item asunusedmay be disclosedin notes

Warranty liabilitycurrent Current liability Can be current and/or long-termdepending on the length of thewarranty. This is current


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b) EDMONDS INC.(Partial) Balance Sheet

January 31, 2010(in thousands)

Current liabilitiesAccounts payable...................................... $4,263.9

Short-term borrowings.............................. 2,563.6 Current portion of long-term debt ............ 1,992.2 Warranty liability........................................ 1,417.3 Accrued liabilities ...................................... 1,258.1 Payroll-related liabilities............................ 558.1 Income taxes payable................................ 235.2 Total current liabilities.......................... $12,288.4

Long-term liabilitiesNotes payable, long-term .......................... $6,746.7 Bonds payable ........................................... 1,961.2 Accrued pension liability .......................... 1,215.2 Loans payablelong-term........................ 335.6 Total long-term liabilities..................... 10,258.7Total liabilities ................................................... $22,547.1

EXERCISE 10-14

a) 1. Working capital = $3,625.3 $3,008.1 = $617.22. Current ratio = $3,625.3 $3,008.1 = 1.21:13. Debt to total assets ratio = $13,565.5 $29,023.8 = 47%4. Times interest earned ratio = ($3,544.2 + $1,293.4 + $402.0)

$402.0 = 13.03 times

A current ratio that is less than 1.30 indicates lower liquidity. The debt tototal assets ratio indicates that $.47 of each dollar of asset have beenfinanced by creditors. The times interest earned ratio of over 13 timesindicates that McDonalds income is large enough to make requiredinterest payments as they come due.


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(b) Debt to total assets ratio, adjusted for off-balance-sheet lease obligations.

$13,565.5 + $9,900$29,023.8 + $9,900

= 60%

By including these off-balance-sheet obligations the debt to total assetsratio increases from 47% to 60%, suggesting that McDonalds is not assolvent as it first appears.

EXERCISE 10-15

(a) Current ratio

2006 $8,946 $7,323 = 1.22:12005 $7,115 $5,238 = 1.36:1

(b) Current ratio

$8,646 $7,023 = 1.23

It would make its current ratio increase from 1.22 to 1.23.

EXERCISE 10-16

(a) Current ratio

2010 $6,444 $4,803 = 1.34:12009 $3,798 $3,508 = 1.08:1

(b) Current ratio

($6,444 $1,500) ($4,803 $1,500) = 1.50:1

It would make its current ratio increase (from 1.34:1 to 1.50:1).

(c) The liquidity ratios would not change but having access to a line ofcredit means that cash is available on a short-term basis and thereforethe assessment of the companys short-term liquidity would improve.


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EXERCISE 10-17

a) Wal-Mart does not have to record these contingent liabilities becausethey have determined that they are not likely to occur and the impactwould be immaterial in any event.

b) For financial statement users it is important to understand the possibleimplications that the contingent liabilities could have on the financialresults of the company. If the contingent liabilities result in materiallosses for the company it will negatively impact the companys finan-cial results and affect the decisions made by the users of the financialstatements.

*EXERCISE 10-18

2010a) Jan. 1 Cash ($500,000 X 103%) ...................... 515,000Bonds Payable ............................. 500,000Premium on Bonds Payable........ 15,000

b) Dec. 31 Bond Interest Expense ........................ 34,250Premium on Bonds Payable

($15,000 X 1/20)................................. 750Bond Interest Payable

($500,000 X 7%) ......................... 35,000

2011c) Jan. 1 Bond Interest Payable ......................... 35,000

Cash.............................................. 35,000

2030d) Jan. 1 Bonds Payable..................................... 500,000

Cash.............................................. 500,000


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*EXERCISE 10-19

2009(a) Dec. 31 Cash ...................................................... 290,000

Discount on Bonds Payable ................ 10,000Bonds Payable .............................. 300,000

2010(b) Dec. 31 Bond Interest Expense......................... 25,000

Discount on Bonds Payable($10,000 X 1/10) .......................... 1,000

Cash ($300,000 X 8%) ................... 24,000

2019(c) Dec. 31 Bonds Payable...................................... 300,000

Cash............................................... 300,000

*EXERCISE 10-20

2010(a) Jan. 1 Cash........................................................ 559,740

Discount on Bonds Payable.................. 40,260Bonds Payable ............................... 600,000

(b) Dec. 31 Bond Interest Expense(559,740 X 8%)..................................... 44,779Discount on Bonds Payable.......... 2,779Bond Interest Payable

($600,000 X 7%) ........................... 42,000

2011(c) Jan. 1 Bond Interest Payable ........................... 42,000

Cash ................................................ 42,000

For explanation of calculations, see the following table.


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1 0 -2 2

C o p y r i gh t 2 0 1 0

J oh nWi l e y

& S on s ,I n c .

K i mm

el ,F i n

an

c i al A

c c o un

t i n g , 5 / e , S ol u t i on s M

an u al

( F or I n s t r u c t or

U s e Onl y )

(b), (c)

Interest

Periods

(A)

Interest toBe Paid

(7% X $600,000)

(B)Interest Expenseto Be Recorded(8% X Preceding

Bond Carrying Value)

[(E) X .08]

(C)

DiscountAmortization

(B) (A)

(D)

UnamortizDiscoun

(D) (CIssue date

12

42,00042,000

44,77945,002

2,7793,002

40,26037,48134,479


23/81

Copyright 2010 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 10-23

*EXERCISE 10-21

2010(a) Jan. 1 Cash ....................................................... 483,120

Bonds Payable............................... 450,000Premium on Bonds Payable ......... 33,120

(b) Dec. 31 Bond Interest Expense($483,120 X 6%) .................................. 28,987

Premium on Bonds Payable................. 2,513Bond Interest Payable

($450,000 X 7%)........................... 31,500

2011(c) Jan. 1 Bond Interest Payable .......................... 31,500

Cash ............................................... 31,500

For explanation of calculations, see the following table.


24/81

1 0 -2 4

C o p y r i gh t 2 0 1 0

J oh nWi l e y

& S on s ,I n c .

K i mm

el ,F i n

an

c i al A

c c o un


an u al


U s e Onl y )

(b), (c)

InterestPeriods

(A)

Interest toBe Paid

(7% X $450,000)

(B)Interest Expenseto Be Recorded(6% X Preceding

Bond Carrying Value)[(E) X .06]

(C)

PremiumAmortization

(A) (B)

(D)

UnamortiPremium(D) (C

Issue date12

31,50031,500

28,98728,836

2,5132,664

33,12030,6027,943


25/81


*EXERCISE 10-22

Issuance of Note2010 Dec. 31 Cash ................................................. 330,000

Mortgage Notes Payable ......... 330,000

First Installment Payment2011 June 30 Interest Expense($330,000 X 8% X 6/12) ................ 13,200

Mortgage Notes Payable................. 7,923Cash.......................................... 21,123

Second Installment PaymentDec. 31 Interest Expense

[($330,000 $7,923) X 8% X 6/12] ... 12,883Mortgage Notes Payable................. 8,240

Cash.......................................... 21,123

(A) (B) (C) (D)Semiannual Interest Reduction Principal

Interest Cash Expense of Principal BalancePeriod Payment (D X 4%) (A) (B) (D) (C)

Issue date $330,0006/30/11 $21,123 $13,200 $7,923 322,07712/31/11 21,123 12,883 8,240 313,837


26/81


SOLUTIONS TO PROBLEMS

PROBLEM 10-1A

a) Jan. 1 Cash.......................................................... 15,000Notes Payable................................... 15,000

5 Cash.......................................................... 6,510Sales ($6,510 1.05)......................... 6,200Sales Taxes Payable

($6,510 $6,200) ........................... 310

12 Unearned Service Revenue..................... 10,000Service Revenue............................... 10,000

14 Sales Taxes Payable................................ 6,600Cash .................................................. 6,600

20 Accounts Receivable ............................... 25,200Sales.................................................. 24,000Sales Taxes Payable

(500 X $48 X 5%) ........................... 1,200

b) Jan. 31 Interest Expense ...................................... 100Interest Payable

($15,000 X 8% X 1/12) ................... 100

31 Salaries and Wages Expense.................. 70,000FICA Taxes Payable ......................... 5,355Federal Income Taxes Payable........ 5,000State Income Taxes Payable............ 1,500Salaries and Wages Payable ........... 58,145

31 Payroll Tax Expense ................................ 5,355FICA Taxes Payable ......................... 5,355


27/81


PROBLEM 10-1A (Continued)

(c) Current liabilitiesNotes payable................................................................. $ 15,000Accounts payable .......................................................... 42,500Salaries and wages payable.......................................... 58,145FICA taxes payable ($5,355 X 2).................................... 10,710Unearned service revenue ($19,000 $10,000)............ 9,000Federal income taxes payable....................................... 5,000Sales taxes payable ....................................................... 1,510*State income taxes payable .......................................... 1,500Interest payable.............................................................. 100

Total current liabilities ........................................... $143,465

*($6,600 + $310 $6,600 + $1,200)


28/81


PROBLEM 10-2A

a) Sept. 1 Merchandise Inventory orPurchases ........................................... 12,000

Notes Payable ................................. 12,000

30 Interest Expense($12,000 X .08 X 1/12).......................... 80

Interest Payable .............................. 80

Oct. 1 Climbing Wall.......................................... 16,000Notes Payable ................................. 16,000

31 Interest Expense

[($16,000 X .09 X 1/12) + $80] ............. 200Interest Payable .............................. 200

Nov. 1 Vehicles................................................... 33,000Notes Payable ................................. 25,000Cash................................................. 8,000

30 Interest Expense[($25,000 X .06 X 1/12) + $120 + $80] ....... 325

Interest Payable .............................. 325

Dec. 1 Notes Payable......................................... 12,000Interest Payable...................................... 240

Cash................................................. 12,240

31 Interest Expense ($120 + $125).............. 245Interest Payable .............................. 245

b)Notes Payable

12/1 12,000 9/1 12,000 10/1 16,000 11/1 25,000 12/31 Bal. 41,000

Interest Payable12/1 240 9/30 80 10/31 200 11/30 325 12/31 245

12/31 Bal. 610


29/81


PROBLEM 10-2A (Continued)

Interest Expense9/30 8010/31 20011/30 32512/31 24512/31 Bal. 850

(c) Current liabilitiesNotes payable..................................................................... 41,000Interest payable.................................................................. 610

(d) Total interest expense is $850. See (b) above.


30/81


PROBLEM 10-3A

a) Jan. 1 Bond Interest Payable ...................... 40,000Cash........................................... 40,000 **

b) Jan. 1 Bonds Payable.................................. 100,000Loss on Bond Redemption .............. 4,000

Cash ($100,000 X 104%)........ 104,000

c) Dec. 31 Bond Interest Expense..................... 32,000Bond Interest Payable

($400,000 X 8%) ...................... 32,000


31/81


PROBLEM 10-4A

2009(a) Oct. 1 Cash .................................................. 700,000

Bonds Payable .......................... 700,000

(b) Dec. 31 Bond Interest Expense..................... 12,250Bond Interest Payable

($700,000 X 7% X 3/12)........... 12,250

(c) Current LiabilitiesBond Interest Payable .................................. 12,250

Long-term LiabilitiesBonds Payable.............................................. 700,000

2010(d) Oct. 1 Bond Interest Expense

($700,000 X 7% X 9/12) .................. 36,750Bond Interest Payable...................... 12,250

Cash ($700,000 X 7%) ............... 49,000

(e) Dec. 31 Bond Interest Expense..................... 12,250Bond Interest Payable .............. 12,250

2011(f) Jan. 1 Bond Interest Payable...................... 12,250

Cash........................................... 12,250

Bonds Payable.................................. 700,000Loss on Bond Redemption .............. 14,000

Cash ($700,000 X 102%) ........... 714,000


32/81


PROBLEM 10-5A

2010a) Jan. 1 Cash ($6,000,000 X 98%) ............... 5,880,000

Discount on Bonds Payable ......... 120,000Bonds Payable ....................... 6,000,000 *

b) Long-term LiabilitiesBonds Payable, due 2030 ....................... $6,000,000Less: Discount on bonds payable ........ 114,000 $5,886,000 *

2011c) Dec. 31 Bonds Payable............................... 6,000,000

Loss on Bond Redemption($6,120,000 $5,892,000)........... 228,000

Cash ($6,000,000 X 102%)...... 6,120,000 * Discount on Bonds

Payable ............................... 108,000*

*$6,000,000 $5,892,000


33/81


PROBLEM 10-6A

(a)2006 2005

1. Current ratio $2,601 $2,887= .90:1

$3,620 $3,848= .94:1

2. Free cash flow $1,406 $1,399 $14 = ($7) $2,118 $1,146 $14 = $958

3. Debt to total assetsratio

$7,011 $13,460= 52%

$7,328 $14,003= 52%

4. Times interestearned ratio

$918 1 $128= 7.17 times

$901 2 $122= 7.39 times

1$499 + $291 + $128 = $9182$484 + $295 + $122 = $901

(b) The companys liquidity position as measured through the currentratio and free cash flow has deteriorated. The debt to total assets ratioremained constant, but the times interest earned ratio declined slightlyin 2006. Southwest appears to be less liquid and solvent when compar-ing 2006 to 2005.

(c) Southwests use of operating leases (vs. capital leases) would reduce itssolvency. If the leases were capital rather than operating, the balance sheet

would include higher total assets and higher liabilities. Using the $1,500as an estimate of the increase in liabilities and assets that would resultif the operating leases were capital leases, the revised debt to totalassets ratio would be [($7,011 + $1,500) ($13,460 + $1,500)] = 57%.


34/81


*PROBLEM 10-7A

a) Jan. 1 Bond Interest Payable ...................... 168,000Cash........................................... 168,000 **

b) Dec. 31 Bond Interest Expense..................... 172,200Discount on Bonds Payable

($42,000 10)......................... 4,200 ** Cash ($2,400,000 X 7%)............. 168,000 **

c) Jan. 1 Bonds Payable.................................. 400,000Loss on Bond Redemption .............. 18,300

Cash ($400,000 X 103%)............ 412,000 ** Discount on Bonds Payable..... 6,300* *

*($42,000 $4,200) X 400,000/* 2,400,000 = $6,300

d) Dec. 31 Bond Interest Expense..................... 143,500Discount on Bonds Payable..... 3,500* * Bond Interest Payable............... 140,000**

**$42,000 $4,200 $6,300 = $31,500;**$31,500 9 = $3,500 or**$4,200 X 2,000,000/2,400,000 = $3,500

**($2,400,000 $400,000 = $2,000,000;**($2,000,000 X 7% = $140,000)


35/81


*PROBLEM 10-8A

(a) Jan. 1 Cash ($2,000,000 X 103%) ............... 2,060,000Bonds Payable ......................... 2,000,000Premium on Bonds Payable.... 60,000

Dec. 31 Bond Interest Expense.................... 114,000Premium on Bonds Payable

($60,000 10) .............................. 6,000Bond Interest Payable

($2,000,000 X 6%) ................. 120,000

(b) Jan. 1 Cash ($2,000,000 X 98%) ................. 1,960,000Discount on Bonds Payable ........... 40,000

Bonds Payable ......................... 2,000,000Dec. 31 Bond Interest Expense.................... 124,000

Discount on BondsPayable ($40,000 10) ......... 4,000

Bond Interest Payable ............. 120,000

(c) Premium

Current LiabilitiesBond interest payable.............................. $ 120,000

Long-term LiabilitiesBonds payable, due 2020 ........................ $2,000,000Add: Premium on bonds payable .......... 54,000 2,054,000

Discount

Current Liabilities

Bond interest payable.............................. $ 120,000Long-term Liabilities

Bonds payable, due 2020 ........................ $2,000,000Less: Discount on bonds payable ......... 36,000 1,964,000


36/81


*PROBLEM 10-9A

a) 1. 1/1/10 Cash ($3,000,000 X 101%) ....... 3,030,000Bonds Payable ................. 3,000,000Premium on Bonds

Payable ......................... 30,000

2. 1/1/10 Cash ($3,000,000 X 97%) ......... 2,910,000Discount on Bonds

Payable................................. 90,000Bonds Payable ................. 3,000,000

b) See amortization tables on following page.

c) 1. 12/31/10 Bond Interest Expense............ 264,000Premium on BondsPayable................................. 6,000

Bond InterestPayable ......................... 270,000

2. 12/31/10 Bond Interest Expense............ 288,000Discount on Bonds

Payable ......................... 18,000Bond Interest

Payable ......................... 270,000

d) 1. Long-term Liabilities:Bonds Payable.................................... $3,000,000Plus: Unamortized Bond

Premium................................... 24,000 $3,024,000

2. Long-term Liabilities:Bonds Payable.................................... $3,000,000

Less: Unamortized BondDiscount................................... 72,000 $2,928,000


37/81

C o p y r i gh t 2 0 1

0 J oh nWi l e y

& S on s ,I n c .

K i mm

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U s e Onl y )

1 0 - 3 7

(b), (1)

AnnualInterestPeriods

(A)Interest to

Be Paid(9% X $3,000,000)

(B)Interest Expenseto Be Recorded

(A) (C)

(C)Premium

Amortization($30,000 5)

(D)Unamorti

Premium(D) (

Issue date

123

$270,000270,000270,000

$264,000264,000264,000

$6,0006,0006,000

$30,000

24,00018,00012,000

(2)


(A)Interest to

Be Paid(9% X $3,000,000)


(A) + (C)

(C)Discount


(D)Unamortiz

Discoun(D) (C

Issue date123

$270,000270,000270,000

$288,000288,000288,000

$18,00018,00018,000

$90,00072,00054,00036,000


38/81


*PROBLEM 10-10A

2010a) Jan. 1 Cash................................................. 1,679,219

Discount on Bonds Payable .......... 120,781Bonds Payable ........................ 1,800,000

b) IRIK CORP.Bond Discount Amortization

Effective-Interest MethodAnnual Interest Payments7% Bonds Issued at 8%


(A)

Interestto BePaid

(B)Interest

Expenseto BeRecorded

(C)Discount

Amor-tization(B) (A)

(D)Unamor-

tizedDiscount(D) (C)

(E)Bond

CarryingValue($1,800,000 D)

Issue date123

$126,000 126,000 126,000

$134,338

135,005135,725

$8,338

9,0059,725

$120,781 112,443 103,438 93,713

$1,679,2191,687,5571,696,5621,706,287

c) Dec. 31 Bond Interest Expense($1,679,219 X 8%) ................................. 134,338

Discount on Bonds Payable............ 8,338Bond Interest Payable

($1,800,000 X 7%) ......................... 126,000

2011d) Jan. 1 Bond Interest Payable ............................. 126,000

Cash.................................................. 126,000

e) Dec. 31 Bond Interest Expense[($1,679,219 + $8,338) X 8%]................ 135,005Discount on Bonds Payable............ 9,005Bond Interest Payable...................... 126,000


39/81


*PROBLEM 10-11A

2010(a) 1. Jan. 1 Cash............................................ 3,441,605

Bonds Payable ................... 3,000,000Premium on Bonds

Payable ........................... 441,605

2. Dec. 31 Bond Interest Expense($3,441,605 X 6%) ................... 206,496

Premium on BondsPayable................................... 33,504

Bond Interest Payable($3,000,000 X 8%) ........... 240,000

20113. Jan. 1 Bond Interest Payable ............... 240,000

Cash.................................... 240,000

4. Dec. 31 Bond Interest Expense.............. 204,486[($3,441,605 $33,504) X 6%]

Premium on BondsPayable................................... 35,514

Bond Interest Payable........ 240,000

(b) Bonds payable .................................................... 3,000,000Add: Premium on bonds payable ..................... 372,587* 3,372,587

*($441,605 $33,504 $35,514)

(c) 1. Total bond interest expense2011, $204,486.

2. The effective-interest method will result in more interest expensereported than the straight-line method in 2011 when the bondsare sold at a premium. Straight-line interest expense for 2011 is$195,840 [$240,000 ($441,605 10)].


40/81


*PROBLEM 10-12A

a)

QuarterlyInterest Period

(A)

CashPayment

(B)Interest

Expense(D) X 2%

(C)Reduction

of Principal(A) (B)

(D)PrincipalBalance(D) (C)

Issue Date12345

$22,09522,09522,09522,09522,095

$6,0005,6785,3505,0154,673

$16,09516,41716,74517,08017,422

$300,000 283,905 267,488 250,743 233,663 216,241

b) Dec. 31 Interest Expense .................................. 6,000Mortgage Notes Payable...................... 16,095

Cash............................................... 22,095

c) Current liabilitiesCurrent portion of 8% mortgage notes

payable......................................................... $ 67,664*

Long-term liabilitiesMortgage notes payable, 8%, duein 2014 and secured by plant assets.......... 216,241** *

Total liabilities .................................. $283,905 *

**($16,417 + $16,745 + $17,080 + $17,422)**($283,905 $67,664)


41/81


*PROBLEM 10-13A

(a)

PeriodCash

Payment(A)

InterestExpense

(B) = (D) X 7%

PrincipalReduction

(C) = (A) (B)Balance

(D) = (D) (CJuly 1, 2009 $120,000June 30, 2010 $29,267 $8,400 $20,867 99,133June 30, 2011 29,267 6,939 22,328 76,805June 30, 2012 29,267 5,376 23,891 52,914June 30, 2013 29,267 3,704 25,563 27,351June 30, 2014 29,267 1,916* 27,351 0Total 146,335 26,335 120,000

*Rounded to make principal element equal to balance.

(b) July 1/09 Cash................................................... 120,000Notes Payable .............................. 120,000

June 30/10 Notes Payable ................................... 20,867Interest Expense ............................... 8,400

Cash.............................................. 29,267

June 30/11 Notes Payable ................................... 22,328Interest Expense ............................... 6,939

Cash.............................................. 29,267

(c) 2011Current liabilities

Current portion of 7% notes payable ................ $23,891Long-term liabilities

Note payable, 7%, due in 2014($76,805 $23,891).......................................... $52,914


42/81


PROBLEM 10-1B

a) Jan. 1 Cash.......................................................... 18,000Notes Payable................................... 18,000

5 Cash.......................................................... 18,550Sales ($18,550 106%)..................... 17,500Sales Taxes Payable

($18,550 $17,500) ....................... 1,050

12 Unearned Service Revenue..................... 8,000Service Revenue............................... 8,000

14 Sales Taxes Payable................................ 8,500

Cash .................................................. 8,50020 Accounts Receivable ............................... 26,500

Sales.................................................. 25,000Sales Taxes Payable

(500 X $50 X 6%) ........................... 1,500

b) Jan. 31 Interest Expense ...................................... 105Interest Payable

($18,000 X 7% X 1/12 = $105) ....... 105

31 Salaries and Wages Expense.................. 50,000FICA Taxes Payable ......................... 3,825Federal Income Taxes Payable........ 3,800State Income Taxes Payable............ 1,100Salaries and Wages Payable ........... 41,275

31 Payroll Tax Expense ................................ 3,825

FICA Taxes Payable ......................... 3,825


43/81


PROBLEM 10-1B (Continued)

(c) Current liabilitiesNotes payable................................................................. $ 18,000Accounts payable .......................................................... 52,000Salaries and wages payable.......................................... 41,275FICA taxes payable ($3,825 X 2).................................... 7,650Federal income taxes payable....................................... 3,800Unearned service revenue ($11,000 $8,000).............. 3,000Sales taxes payable ....................................................... 2,550*State income taxes payable .......................................... 1,100Interest payable.............................................................. 105

Total current liabilities $129,480

*$8,500 + $1,050 $8,500 + $1,500


44/81


PROBLEM 10-2B

a) Mar. 1 Bicycles..................................................... 10,000Notes Payable ................................... 10,000

31 Interest Expense($10,000 X .06 X 1/12)............................ 50

Interest Payable ................................ 50

Apr. 1 Land........................................................... 30,000Notes Payable ................................... 30,000

30 Interest Expense[($30,000 X .08 X 1/12) + $50] ............... 250

Interest Payable ................................ 250May 1 Cash .......................................................... 15,000

Notes Payable ................................... 15,000

31 Interest Expense[($15,000 X .06 X 1/12) + $50 + $200]......... 325

Interest Payable ................................ 325

June 1 Notes Payable........................................... 10,000Interest Payable ($10,000 X .06 X 3/12) ... 150

Cash................................................... 10,150

30 Interest Expense ($200 + $75).................. 275Interest Payable ................................ 275

b)Notes Payable

6/1 10,000 3/1 10,000

4/1 30,000 5/1 15,000 6/30 Bal. 45,000

Interest Payable6/1 150 3/31 50

4/30 250 5/31 325 6/30 275

6/30 Bal. 750


45/81


PROBLEM 10-2B (Continued)

Interest Expense3/31 504/30 2505/31 3256/30 2756/30 Bal. 900

(c) Current liabilitiesNotes payable..................................................................... 45,000Interest payable.................................................................. 750

(d) $900. See (b) above.


46/81


PROBLEM 10-3B

a) Jan. 1 Bond Interest Payable............................ 96,000Cash................................................. 96,000

b) Jan. 1 Bonds Payable........................................ 300,000Loss on Bond Redemption .................... 15,000

Cash ($300,000 X 105%) ................. 315,000

c) Dec. 31 Bond Interest Expense........................... 72,000Bond Interest Payable

($900,000 X 8%)............................ 72,000


47/81


PROBLEM 10-4B

(a) 2009 Cash ......................................................... 600,000April 1 Bonds Payable................................. 600,000

(b) Dec. 31 Bond Interest Expense............................ 31,500Bond Interest Payable

($600,000 X 7% X 9/12).................. 31,500

(c) Current LiabilitiesBond Interest Payable .......................................... 31,500

Long-term LiabilitiesBonds Payable ...................................................... 600,000

(d) 2010 Bond Interest ExpenseApril 1 ($600,000 X 7% X 3/12) ......................... 10,500Bond Interest Payable............................. 31,500

Cash ($600,000 X 7%) ...................... 42,000

(e) Dec. 31 Bond Interest Expense............................ 31,500Bond Interest Payable ..................... 31,500

(f) 2011 Bond Interest Payable............................. 31,500Jan. 1 Cash.................................................. 31,500

Bonds Payable ........................................ 600,000Loss on Bond Redemption..................... 12,000

Cash ($600,000 X 102%) .................. 612,000


48/81


PROBLEM 10-5B

a) 2010Jan. 1 Cash ($5,000,000 X 103%) ................ 5,150,000 *

Bonds Payable .......................... 5,000,000Premium on Bonds

Payable .................................. 150,000

b) Long-term LiabilitiesBonds payable, due 2030.......................... $5,000,000Add: Premium on bonds payable........... 142,500 $5,142,500

c) 2011Dec. 31 Bonds Payable.................................. 5,000,000 *

Premium on Bonds Payable ............ 135,000*Loss on Bond Redemption

($5,135,000 $5,200,000).............. 65,000 * Cash ($5,000,000 X 104%)......... 5,200,000

*$5,135,000 $5,000,000


49/81


PROBLEM 10-6B

(a)2007 2006

1. Current ratio $131,818 $134,870= .98:1

$147,025 $153,919= .96:1

2. Free cash flow $22,108 $4,005= $18,103

$1,865 $10,381= ($8,516)

3. Debt to total assetsratio

$270,530 $349,492= 77%

$302,184 $410,855= 74%

(b) In terms of liquidity, Krispy Creme is not in good health. Its currentratio improved slightly in 2007 over 2006, but is still below 1. Its free cashflow did improve from a negative $8,516 to positive $18,103. Krispy

Creme may have difficulty meeting its current obligations with existingcurrent assets. Solvency also appears unhealthy since its debt to totalassets ratio for 2007 and 2006 is 77% and 74% respectively.

$270,530,000 + $135,000,000(c) Debt to total assets ratioadjusting foroperating leases $349,492,000 + $135,000,000 = 84%

Krispy Cremes use of operating leases (vs. capital leases) causes thecompany to appear less solvent. Accounting for the operating leases as

if they were capital leases increases assets and liabilities by $135 million.The debt to total assets ratio increases from 77% to 84%.


50/81


*PROBLEM 10-7B

2010a) Jan. 1 Bond Interest Payable ................... 324,000 **

Cash ........................................ 324,000

b) Dec. 31 Bond Interest Expense.................. 284,000 ** Premium on Bonds Payable

($400,000 10) ........................... 40,000 ** Bond Interest Payable............ 324,000

c) Jan. 1 Bonds Payable............................... 1,800,000 ** Premium on Bonds Payable ......... 180,000* *

Cash ($1,800,000 X 1.02)........ 1,836,000Gain on Bond Redemption

($1,980,000 $1,836,000) ... 144,000

*($400,000 $40,000) X 1/2 = $180,000

d) Dec. 31 Bond Interest Expense.................. 142,000 ** Premium on Bonds Payable ......... 20,000**

Bond Interest Payable($1,800,000 X 9%) ............... 162,000

**$400,000 $40,000 $180,000 = $180,000;$180,000

9 = $20,000 or $40,000 X 1/2.


51/81


*PROBLEM 10-8B

2010(a) Jan. 1 Cash ($2,500,000 X 1.02) ................. 2,550,000

Bonds Payable ......................... 2,500,000Premium on Bonds Payable.... 50,000

Dec. 31 Bond Interest Expense.................... 245,000Premium on Bonds Payable

($50,000 10) ............................... 5,000Bond Interest Payable

($2,500,000 X 10%) ............... 250,000

2010(b) Jan. 1 Cash ($2,500,000 X .96) ................... 2,400,000

Discount on Bonds Payable ........... 100,000Bonds Payable ......................... 2,500,000

Dec. 31 Bond Interest Expense.................... 260,000Discount on Bonds

Payable ($100,000 10) ....... 10,000Bond Interest Payable

($2,500,000 X 10%) ............... 250,000

(c) Premium

Current LiabilitiesBond interest payable.............................. $ 250,000

Long-term LiabilitiesBonds payable, due 2020 ........................ $2,500,000Add: Premium on bonds payable ......... 45,000 2,545,000

DiscountCurrent Liabilities

Bond interest payable.............................. $ 250,000Long-term Liabilities

Bonds payable, due 2020 ........................ $2,500,000Less: Discount on bonds payable ......... 90,000 2,410,000


52/81


*PROBLEM 10-9B

a) 1. 12/31/09 Cash ($2,500,000 X 98%) ...... 2,450,000Discount on Bonds

Payable.............................. 50,000Bonds Payable .............. 2,500,000

2. 12/31/09 Cash ($2,500,000 X 104%) .... 2,600,000Premium on Bonds

Payable ...................... 100,000Bonds Payable .............. 2,500,000

b) See page 10-58.

c) 1. 12/31/10 Bond Interest Expense......... 177,500Discount on Bonds

Payable ...................... 2,500Cash............................... 175,000

12/31/11 Bond Interest Expense......... 177,500Discount on Bonds

Payable ...................... 2,500Cash............................... 175,000

2. 12/31/10 Bond Interest Expense......... 170,000Premium on Bonds

Payable.............................. 5,000Cash............................... 175,000

12/31/11 Bond Interest Expense......... 170,000Premium on Bonds

Payable.............................. 5,000Cash............................... 175,000


53/81


*PROBLEM 10-9B (Continued)

(d) 1. Long-term Liabilities:Bonds Payable............................. $2,500,000Less: Unamortized Bond

Discount ........................... 47,500 $2,452,500

2. Long-term Liabilities:Bonds Payable............................. $2,500,000Plus: Unamortized BondPremium....................................... 95,000 $2,595,000


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1 0 - 5 4

C o p y r i gh t 2 0 1 0

J oh nWi l e y

& S on s ,I n c .

K i mm

el ,F i n

an

c i al A

c c o un


an u al


U s e Onl y )

(b), (1)


(A)Interest to

Be Paid(7% X $2,500,000)


(A) + (C)

(C)Discount


(D)Unamortiz

Discoun(D) (C

Issue date123

$175,000175,000175,000

$177,500177,500177,500

$2,5002,5002,500

$50,00047,50045,00042,500

(2)


(A)Interest to

Be Paid(7% X $2,500,000)


(A) (C)

(C)Premium


(D)Unamortiz

Premium(D) (C

Issue date123

$175,000175,000175,000

$170,000170,000170,000

$5,0005,0005,000

$100,00095,00090,00085,000


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*PROBLEM 10-10B

2010(a) Jan. 1 Cash ................................................. 2,245,783

Bonds Payable ......................... 2,000,000Premium on Bonds Payable.... 245,783

(b) VINEYARD CORPORATIONBond Premium Amortization

Effective-Interest MethodAnnual Interest Payments12% Bonds Issued at 10%

Annual

InterestPeriods

(A)

Interest

to BePaid

(B)

InterestExpense

(C)Premium

Amor-

tization(A) (B)

(D)Unamor-

tized

Premium(D) (C)

(E)Bond

Carrying

Value($2,000,000 + D)

Issue date123

$240,000240,000240,000

$224,578

223,036221,340

$15,42216,96418,660

$245,783 230,361 213,397 194,737

$2,245,7832,230,3612,213,3972,194,737

(c) Dec. 31 Bond Interest Expense($2,245,783 X 10%)................................ 224,578

Premium on Bonds Payable .................... 15,422Bond Interest Payable

($2,000,000 X 12%) ........................ 240,000

(d) 2011Jan. 1 Bond Interest Payable.............................. 240,000

Cash................................................... 240,000

(e) Dec. 31 Bond Interest Expense[($2,245,783 $15,422) X 10%]............. 223,036

Premium on Bonds Payable .................... 16,964Bond Interest Payable ...................... 240,000


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*PROBLEM 10-11B

a) 1. 2010Jan. 1 Cash......................................... 3,455,131

Discount on BondsPayable ................................. 544,869

Bonds Payable................. 4,000,000

2. Dec. 31 Bond Interest Expense($3,455,131 X 12%) ............... 414,616

Discount on BondsPayable......................... 14,616

Bond Interest Payable($4,000,000 X 10%) ...... 400,000

3. 2011Jan. 1 Bond Interest Payable ............ 400,000

Cash ................................. 400,000

4. Dec. 31 Bond Interest Expense ........... 416,370[($3,455,131 + $14,616) X 12%]

Discount on BondsPayable......................... 16,370

Bond Interest Payable..... 400,000

b) Bonds Payable ................................................. $4,000,000 * Less: Discount on bonds payable ................. 513,883* 3,486,117

*($544,869 $14,616 $16,370)

c) 1. Total bond interest expense2011, $416,370.

2. The effective-interest method will result in less interest expensereported than the straight-line method in 2011 when the bondsare sold at a discount. Straight-line interest expense for 2011 is$436,325 [$400,000 + ($544,869 15)].


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*PROBLEM 10-11B (Continued)

3. Annual interest payments($4,000,000 X 10%) = $400,000; $400,000 X 15 ...... $6,000,000

Add: Bond discount ($4,000,000 $3,455,131) ....... 544,869Total cost of borrowing....................................... $6,544,869

4. Total bond interest expense would be the same under both thestraight-line method and the effective-interest method.


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*PROBLEM 10-12B

a)

QuarterlyInterest Period

(A)

CashPayment

(B)Interest

Expense(D) X 2%

(C)Reduction

of Principal(A) (B)

(D)PrincipalBalance(D) (C)

Issue Date12345

$29,46029,46029,46029,46029,460

$8,0007,5717,1336,6866,231

$21,46021,88922,32722,77423,229

$400,000 378,540 356,651 334,324 311,550 288,321

b) Dec. 31 Interest Expense .................................. 8,000Mortgage Notes Payable...................... 21,460

Cash............................................... 29,460

c) Current liabilitiesCurrent portion of 8% mortgage notes

payable......................................................... $ 90,219*

Long-term liabilitiesMortgage notes payable, 8%, duein 2014 and secured by plant assets.......... 288,321**

Total liabilities .................................. $378,540 *

**($21,889 + $22,327 + $22,774 + $23,229)**($378,540 $90,219)


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*PROBLEM 10-13B

(a)

PeriodCash

Payment(A)

InterestExpense

(B) = (D) X 2%

PrincipalReduction

(C) = (A) (B)Balance

(D) = (D) (C)May 1, 2010 $90,000May 31, 2010 $3,531 $1,800 $1,731 88,269June 30, 2010 3,531 1,765 1,766 86,503July 31, 2010 3,531 1,730 1,801 84,702Aug. 31, 2010 3,531 1,694 1,837 82,865

(b) May 1 Cash ....................................................... 90,000Notes Payable................................ 90,000

May 31 Notes Payable ....................................... 1,731Interest Expense ................................... 1,800

Cash ............................................... 3,531

June 30 Notes Payable ....................................... 1,766Interest Expense ................................... 1,765

Cash ............................................... 3,531

July 31 Notes Payable ....................................... 1,801Interest Expense ................................... 1,730Cash ............................................... 3,531


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COMPREHENSIVE PROBLEM SOLUTION

a) 1. Bond Interest Payable .................................... Cash .........................................................

3,0003,000

2. Merchandise Inventory................................... Accounts Payable ...................................

241,100241,100

3. Cash................................................................. Sales......................................................... Sales Taxes Payable ...............................

477,000450,000

27,000

Cost of Goods Sold ........................................ Merchandise Inventory ...........................

250,000250,000

4. Account Payable............................................. Cash .........................................................

230,000230,000

5. Bond Interest Expense ................................... Cash .........................................................

3,0003,000

6. Insurance Expense ......................................... Prepaid Insurance ...................................

5,6005,600

7. Prepaid Insurance........................................... Cash .........................................................

10,20010,200

8. Sales Taxes Payable....................................... Cash .........................................................

17,00017,000

9. Other Operating Expenses............................. Cash .........................................................

91,00091,000

10. Bond Interest Expense ................................... Cash ......................................................... 3,000 3,000

Bonds Payable ................................................ Cash ......................................................... Gain on Bond Redemption .....................

50,00048,000

2,000


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COMPREHENSIVE PROBLEM SOLUTION (Continued)

11. Cash (90,000 X 104%) ..................................... Bonds Payable ........................................ Premium on Bonds Payable...................

93,60090,00

3,60

Adjusting Entries

12. Insurance Expense ($10,200 X 5/12).............. Prepaid Insurance...................................

4,2504,25

13. Depreciation Expense ($38,000 $3,000) 5....

Accumulated Depreciation ..................... 7,000

7,00

14. Income Tax Expense ...................................... Income Tax Payable................................

26,44526,44

(b) ABER CORPORATIONTrial Balance

12/31/2010

Account Debit CreditCash............................................................ $195,900Merchandise Inventory.............................. 16,850Prepaid Insurance...................................... 5,950Equipment .................................................. 38,000

Accumulated Depreciation........................ $ 7,000Accounts Payable...................................... 24,850Sales Tax Payable...................................... 10,000Income Tax Payable................................... 26,445Bonds Payable ........................................... 90,000Premium on Bonds Payable...................... 3,600Common Stock .......................................... 20,000Retained Earnings ..................................... 13,100Sales ........................................................... 450,000Cost of Goods Sold ................................... 250,000Depreciation Expense ............................... 7,000Insurance Expense .................................... 9,850Other Operating Expenses........................ 91,000Bond Interest Expense .............................. 6,000Gain on Bond Redemption........................ 2,000Income Tax Expense ................................. 26,445

$646,995 $646,995


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a) and (b) Optional T accounts

CashBal. 30,500

477,00093,600

3,000 230,000 3,000 10,200 17,000 91,000 3,000 48,000

Bal. 195,900

Merchandise InventoryBal. 25,750241,100

250,000

Bal. 16,850

Prepaid InsuranceBal. 5,600

10,2005,600

4,250

Bal. 5,950

EquipmentBal. 38,000

Accumulated Depreciation7,000

Accounts Payable230,000 Bal. 13,750

241,100Bal. 24,850

Bond Interest Payble3,000 Bal. 3,000

Bal. 0

Sales Tax Payable17,000 27,000

Bal. 10,000

Income Tax Payable26,445

Bonds Payable50,000 Bal. 50,000

90,000 Bal. 90,000

Premium on Bonds Payable3,600

Common StockBal. 20,000

Retained EarningsBal. 13,100

Sales450,000


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(a) and (b) (Continued)

Cost of Goods Sold250,000

Depreciation Expense7,000

Insurance Expense5,600

4,250Bal. 9,850

Other Operating Expenses91,000

Bond Interest Expense3,0003,000

Bal. 6,000

Income Tax Expense26,445

Gain on Bond Redemption

2,00

(c) ABER CORPORATION

Income StatementFor the Year Ending 12/31/10

Sales ........................................................... $450,000Cost of goods sold .................................... 250,000Gross profit ................................................ 200,000Operating expenses

Insurance expense ............................. $9,850Depreciation expense ........................ 7,000Other operating expenses ................. 91,000

Total operating expenses.......................... 107,850Income from operations ............................ 92,150Other revenues and gains

Bond interest expense....................... 6,000Gain on bond redemption.................. 2,000 4,000

Income before taxes .................................. 88,150Income tax expense ........................... 26,445

Net income ................................................. $ 61,705


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ABER CORPORATIONRetained Earnings StatementFor the Year Ending 12/31/10

Retained earnings, 1/1/10 $13,100Add: Net income 61,705

74,805Less: Dividends Retained earnings, 12/31/10 $74,805

ABER CORPORATIONBalance Sheet

12/31/2010

Current Assets

Cash..................................................... $195,900 Merchandise inventory....................... 16,850 Prepaid insurance............................... 5,950 Total current assets ...................... $218,700 Property, Plant, and Equipment

Equipment........................................... 38,000 Accumulated depreciation ................. 7,000 Total plant assets.......................... 31,000Total assets $249,700

Current LiabilitiesAccounts payable............................... $24,850 Income taxes payable......................... 26,445 Sales tax payable................................ 10,000 Total current liabilities.................. $ 61,295 Long-term liabilities

Bonds payable .................................... 90,000 Premium on bonds payable ............... 3,600 Total long-term liabilities.............. 93,600 Total liabilities ............................... 154,895 Stockholders Equity

Common stock.................................... 20,000 Retained earnings............................... 74,805 Total stockholders equity............ 94,805Total liabilities and stockholders

equity .......................................................

$249,700


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BYP 10-1 FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at December 31, 2007, $57,972,000. TootsieRolls total current liabilities decreased by $4,239,000 ($62,211,000 $57,972,000) relative to the prior year.

(b) Tootsie Rolls accounts payable at December 31, 2007, $11,572,000.

(c) The other components of current liabilities are:

Dividends payable .............................................................. $ 4,344,000Accrued liabilities ............................................................... 42,056,000


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BYP 10-2 COMPARATIVE ANALYSIS PROBLEM

a) Hershey Tootsie Roll

(1)

Documents

Accounting Ch10