Solution manual financial accounting 8th by harrison CH08

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Chapter 8
Liabilities
Short Exercises
(10 min.)

S 8-1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
Sept. 30 Inventory…………………………………….. 5,000
Note Payable, Short-Term……………..
5,000
Purchased inventory by issuing a
note payable.
2011
June 30 Interest Expense ($5,000 × .08 × 9/12)….
Interest Payable…………………………
Accrued interest expense.

300
300

Sept. 30 Note Payable, Short-Term………………... 5,000
Interest Payable…………………………….
300
Interest Expense ($5,000 × .08 × 3/12)….
100
Cash……………………………………….
5,400
Paid note payable and interest at
maturity.

Chapter 8

Liabilities

605


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S 8-2

(5-10 min.)
Req. 1

ASSETS

Balance Sheet
June 30, 2011
LIABILITIES

Current liabilities:
Note payable, shortterm..
Interest payable
($5,000 × .08 ×
9/12)….

$5,000

300

Income Statement
Year Ended June 30, 2011
Revenues:
Expenses:
Interest expense ($5,000 × .08 × 3/12)……………..

$

300

Req. 2
The 2012 income statement will report:
Interest expense ($5,000 × .08 × 3/12)……….

606

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$100

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(10 min.)

S 8-3

Req. 1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Cash ($483,000 × .30)…………………..…..
Notes Receivable ($483,000 − $144,900)..
Sales Revenue……………………………
To record sales on account.

144,900
338,100

Warranty Expense ($483,000 × .06)………
Estimated Warranty Payable……….….
To accrue warranty expense.

28,980

Estimated Warranty Payable……………...
Cash…………………………………….….
To pay warranty claims.

19,000

483,000

28,980

9,000

Req. 2
Estimated Warranty Payable
Bal.
11,000
19,000
28,980
Bal.
20,980

Chapter 8

Liabilities

607

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(5-10 min.)

S 8-4

Warranty expense = $28,980
The matching principle addresses this situation.
The warranty expense for the year does not necessarily equal
the year’s cash payments for warranties. Cash payments for
warranties do not determine the amount of warranty expense
for that year. Instead, the warranty expense is estimated and
matched against revenue during the period of the sale,
regardless of when the company pays for warranty claims.

Student responses may vary.

608

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(5-10 min.)

S 8-5

1. These are contingent liabilities because at the time of the
note Marley David, Inc., was not liable for any of these

product losses.
2. In the United States, the contingency can become a real
liability if the user of a Marley David product suffers a loss
for which the company is responsible.
Marley David must pay for all losses up to $3.2 million and all
losses above $25.2 million. The company is insured against
losses between $3.2 million and $25.2 million.
3. Outside the United States, the contingency becomes a real
liability the same way — if a Marley David user suffers a loss
for which the company is responsible.
Outside the United States, Marley David must pay only for
losses above $25.2 million because the company is insured
against losses up to $25.2 million.

Chapter 8

Liabilities

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a. $227,250

($ 300,000 × .7575)

b. $308,250

($ 300,000 × 1.0275)

c. $283,500

($ 300,000 × .9450)

d. $313,500

($ 300,000 × 1.0450)

a. Discount
b. Premium
c. Par (face) value
d. Discount

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(5-10 min.)

S 8-6

(5 min.)

S 8-7


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(5-10 min.)

S 8-8

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

2010
a. July 1 Cash…………………………………………… 80,000
Bonds Payable……………………………
80,000
To issue bond at par.
b. Dec. 31 Interest Expense ($80,000 × .055 × 6/12)
2,200
Interest Payable…………………………..
2,200
To accrue interest expense.
2011
c. Jan. 1 Interest Payable……………………………..
Cash………………………………………..
To pay semiannual interest on bonds.

2,200
2,200

2025
d. July 1 Bonds Payable………………………………. 80,000

Cash………………………………………...
80,000
To pay bonds at maturity.

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Liabilities

611


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(10-15 min.)

S 8-9

1. Amortization table
A
Interest
Payment
Semiannual (2.5% of
Interest
Maturity
Date
Value)

B

C

$138,000
$3,480 134,520

$15,000

$462,000
465,480

$18,480
15,000

3,619

130,901

469,099

3,764

127,137

472,873

18,619

Mar. 31, 2011
Sept. 30,
2011

E

Interest
Expense
(4 % of
Discount
Bond
Preceding
Account Carrying
Bond
Discount
Balance Amount
Carrying Amortization (Preceding ($600,000
Amount)
(B - A)
D - C)
- D)

Mar. 31, 2010
Sept. 30,
2010

D

15,000
18,764

2.

Journal

DATE

2010
Mar. 31

Sept. 30

612

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash ($600,000 × .77)……………
Discount on Bonds Payable……
Bonds Payable…………………

462,000
138,000

Interest Expense…………………
Discount on Bonds Payable…
Cash……………………………

18,480

Financial Accounting 8/e Solutions Manual

CREDIT

600,000

3,480
15,000


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(10 min.)

S 8-10

1. Borrowed $462,000
Pay back $600,000 at maturity
2. Pay cash interest of $15,000 each six months.
3. Interest expense:
Sept. 31, 2010……………..
Mar. 31, 2011……………….

$18,480
$18,619

Interest expense increases because the bond carrying amount
increases as the bonds move toward maturity. An increasing
bond carrying amount produces an increasing amount of
interest expense each period.

(5-10 min.)
1. $1,825,000

S 8-11

($5,000,000 × .365)

2. $5,000,000 on July 1, 2020
3. $75,000 ($5,000,000 × .03 × 6/12)
4.
$5,000,000 − $1,825,000
$233,750 $75,000 +

× 6
12

10

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Liabilities

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(10 min.)

S 8-12

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
a. July 1 Cash ($500,000 × .94)……………………… 470,000
Discount on Bonds Payable……………...
30,000
Bonds Payable…………………………...
500,000
To issue bonds at a discount.
b. Dec. 31 Interest Expense……………………………
Discount on Bonds Payable
($30,000 / 10 × 6/12)………………….
Interest Payable ($500,000 × .08 × 6/12)
To accrue interest and amortize bonds.
2011
c. Jan. 1 Interest Payable……………………………..
Cash………………………………………..
To pay semiannual interest.

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21,500
1,500

20,000

20,000
20,000


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(10-15 min.)

Net income before
expansion………………..
Project income before interest
and income
tax……………………………...
Less interest expense ($3,000,000 ×
.08)…..
Project income before income
tax…………..
Less income tax expense
(35%)……………..
Project net
income……………………………..
Total company net
income……………………
Earnings per share including expansion:
Plan A ($469,000 / 100,000
shares)………
Plan B ($625,000 / 200,000
shares)………

S 8-13

Plan A
Plan B
Borrow $3,000,000
Issue $3,000,000
at 8%
of Common Stock
$300,000
$300,000

$ 500,000

$500,000

(240,000)

-0-

260,000

500,000

(91,000)

(175,000)
169,000

325,000

$469,000

$625,000

$4.69
$3.13

Recommendation: To increase earnings per share,
Speedtown Marina should borrow the
money.

Chapter 8

Liabilities

615


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(5-10 min.)
Times-interestearned ratio

=

Operating income
Interest expense

=

$5.0
$1.6

S 8-14

= 3.1 times

This means that for every dollar of interest expense, Houle
Plumbing earned $3.10 of operating income.
Based on this ratio, the authors would be willing to lend
$1 million to Houle Plumbing. In 2010 Houle Plumbing was able
to cover its existing interest expense 3.1 times with operating
income.

Students’ conclusions may vary.

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(10 min.)

S 8-15

LIABILITIES
Current:

Accounts
payable………………………..
Current portion of bonds
payable…….
Interest
payable…………………………..
Total current
liabilities……………….
Long term:
Notes payable, longterm……………….
Bonds
payable……………………………
Less: Discount on bonds
payable…….

$ 36,000
51,000
1,000
$ 88,000

300,000
$400,000
(12,000)

Total
liabilities……………………………….

388,000

$776,000

Chapter 8

Liabilities

617


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Exercises
Group A
(5-15 min.)

E 8-16A

Req. 1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Warranty Expense ($161,000 × .07)….. 11,270
Estimated Warranty Payable………
11,270

Estimated Warranty Payable………….
Cash……………………………………

8,000
8,000

Req. 2
INCOME STATEMENT
Sales revenue………………………………………
Warranty expense…………………………………

$161,000
11,270

BALANCE SHEET
Current liabilities
Estimated warranty payable
($3,000 + $11,270 − $8,000)……………….

$

6,270

Req. 3
Estimated warranty payable, a current liability, will cause a
company’s current ratio to decrease.
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(10-15 min.)

E 8-17A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

2010
Oct. 1 Cash………………………………………….
Unearned Subscription Revenue…….
Sales Tax Payable ($1,400 × .08)……..

CREDIT

1,512
1,400
112

Nov. 15 Sales Tax Payable…………………………
Cash……………………………………….

112

Dec. 31 Unearned Subscription Revenue……….
Subscription Revenue ($1,400 × 3/12)

350

112

350

BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($1,400 −
$350)……

$1,050

(10 min.)
INCOME STATEMENT
Expenses:
Payroll
expense……………………………………….
Payroll tax expense ($200,000 ×
.08)………………

E 8-18A

$200,000
16,000

BALANCE SHEET

Current liabilities:
Salary
payable…………………………………………

$
Chapter 8

8,100

Liabilities

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Payroll tax
payable…………………………………...

620

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800


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(5-10 min.)

E 8-19A

Req. 1
Interest to
accrue at
Dec. 31, 2010

=

$83,000 × .06 × 8/12

=

$3,320

Req. 2
Final payment
=
on May 1, 2011

$83,000 + ($83,000 × .06)

= $87,980

Req. 3
Interest expense for:
2010 = $83,000 × .06 × 8/12
2011 = $83,000 × .06 × 4/12

=

=

Chapter 8

$3,320
$1,660

Liabilities

621


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(10-15 min.)

E 8-20A

Souza’s balance sheet
at December 31, 2011, reported:
Income tax payable…………………………………... $242,000*
Young’s 2011 income statement reported:
Income tax expense ($1,200,000 × .36)…………… $432,000
_____
* Beginning income tax payable…………………….. $180,000
+ Income tax expense (and payable) for the year
($1,200,000 × .36)………………………………
432,000
− Income tax payments during the year……………. (370,000)
= Ending income tax payable………………………… $242,000

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E 8-21A

(10-20 min.)
Req. 1

Accounts payable are amounts owed to suppliers for products
or services that have been purchased on account.
Accrued expenses are expenses that the company has incurred
but not paid. They are liabilities for expenses such as interest
and income taxes.
Employee compensation and benefits are amounts owed to
employees for salaries and other payroll-related expenses.
Current portion of long-term debt is next year’s payment on the
company’s long-term debt.
Long-term debt is the amount of long-term notes and bonds
payable that the company expects to pay after the coming year.
Postretirement benefits are the company’s liabilities for
providing benefits — mainly health care — to retirees.
The other liabilities are a catch-all group of liabilities that do
not fit one of the more specific categories. The other liabilities
are long-term, as shown by the fact that they are not listed
among the current liabilities.

Chapter 8

Liabilities

623


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(continued)

E 8-21A

Req. 2
Total assets = $3,995 million, the sum of total liabilities and
shareholders’ equity
Debt ratio =

Total liabilities ($3,995 million − $2,027 million)*
= 0.49
Total assets ($3,995 million)

A debt ratio of 49% is satisfactory.
____
*Or, $340 + $1,494 + $122 + $12 = $1,968

624

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(5-10 min.)

E 8-22A

Req. 1
Roden Security Systems should report this situation in a note
to the financial statements. The note should convey essentially
the same message given in Note 14.

Req. 2
Roden would report:
INCOME STATEMENT
Estimated loss (or expense)………………

$1,500,000

BALANCE SHEET
Estimated liability……………………………

$1,500,000

Note 14 Same as above.

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
Estimated Loss (or Expense)…... 1,500,000
Estimated Liability…………….

Chapter 8

1,500,000

Liabilities

625


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(15-20 min.)

E 8-23A

McKinley Electronics
Balance Sheet (partial)
June 30, 2010
Current liabilities:
a. Estimated warranty payable

[$34,000 + ($2,200,000 × .07) − $50,000]……… $138,000
b. Current portion of long-term note payable……...
13,750
Interest payable ($55,000 × .06 × 1/12)……………
275
c. Unearned sales revenue ($125,000 − $70,000)….
55,000
d. Employee withheld income tax payable…………
30,000
FICA tax payable ($260,000 × .0765)………………
19,890
Total current liabilities………………………….. $256,915
Long-term liabilities:
Note payable ($55,000 − $13,750)……………...
$41,250

626

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(10-15 min.)

E 8-24A

Req. 1

Journal

DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
a. Jan. 31 Cash ($13,000,000 × 0.94)..…………… 12,220,000
Discount on Bonds Payable………….
780,000
Bonds Payable………………………
13,000,000
To issue bonds at a discount.
b. July

31 Interest Expense………………………..
Cash ($13,000,000 × .06 × 6/12)…..
Discount on Bonds Payable
($780,000 / 10 × 6/12)……………
To pay interest and amortize bonds.

429,000
390,000
39,000

c. Dec. 31 Interest Expense………………………..
Interest Payable
($13,000,000 × .06 × 5/12)………

Discount on Bonds Payable
($780,000 / 10 × 5/12)……………
To accrue interest and amortize bonds.

357,500

Chapter 8

325,000
32,500

Liabilities

627


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(10-15 min.)

E 8-25A

1. Cash received = $500,000 × 1.03 =

$515,000

2. Principal………………………………………………………
Interest ($500,000 × .07 ×
20)……………………..............
Total cash

paid………………………………………………

$500,000
700,000

3. Total cash
paid………………………………………………
Less: Cash received……………………………………...
Difference = Total interest
expense……………………...

$1,200,000

$1,200,000
(515,000)
$685,000

4. Annual interest expense by the straight-line amortization method:
$500,000 × (1.03 − 1.00)
20

$500,000 × .07

$35,000

−

Cash interest payment

$750

=

$ 34,250same

Premium amortization
× 20 years

Total interest expense over the life of the bonds

628

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$685,000


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(15-20 min.)

E 8-26A

Req. 1 (amortization table)
A

SEMIANNUAL
INTEREST
DATE

B
C
D
E
INTEREST
EXPENSE
INTEREST
(6% OF
DISCOUNT
PAYMENT PRECEDING
ACCOUNT
BOND
(5% OF
BOND
DISCOUNT
BALANCE
CARRYING
MATURITY CARRYING AMORTIZATION (PRECEDING
AMOUNT
VALUE)
AMOUNT)
(B – A)
D – C)
($2,400,000 – D)

Dec. 31, 2010
June 30, 2011 $120,000
Dec. 31, 2011 120,000
June 30, 2012 120,000
Dec. 31, 2012 120,000

$127,728
128,192
128,683
129,204

$ 7728
8,192
8,683
9,204

$271,200
263,472
255,280
246,597
237,393

Chapter 8

$2,128,800
2,136,528
2,144,720
2,153,403
2,162,607

Liabilities

629