ACC101 Ch. 09

CHAPTER 9
Current Liabilities, Contingencies,

and the Time Value of Money
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Learning Outcomes
Exercises
Estimated
Time in
Minutes
Level
1. Identify the components of the current liability category of

the balance sheet.
1
2
3
10
10
10
Easy
Easy
Easy
2. Examine how accruals affect the current liability category.
4
5
6
7
8
20
15
10
15
15
Mod
Mod
Mod
Mod
Mod
9
10
5
5
Easy
Mod
4. Determine when contingent liabilities should be presented on the

11
balance sheet or disclosed in notes and how to calculate their amounts.
15
Mod
5. Explain the difference between simple and compound interest.
12
20
Mod
6. Calculate amounts using the future value and present value concepts.
13
14
15
16
20*
21*
5
5
10
10
10
10
Easy
Mod
Mod
Mod
Diff
Diff
7. Apply the compound interest concepts to some common

accounting situations.
17
18
19
20*
21*
5
10
10
10
10
Mod
Mod
Diff
Diff
Diff
3. Show that you understand how changes in current liabilities

affect the statement of cash flows.
*Exercise, problem, or case covers two or more learning outcomes

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
9-1
9-2
FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Learning Outcomes
Problems
and
Alternates
Estimated
Time in
Minutes
Level

the balance sheet.
10*
10
Mod
1
9*
40
30
Mod
Mod
3. Show that you understand how changes in current

liabilities affect the statement of cash flows.
2
3
30
20
Mod
Diff
4
5
10*
20
10
10
Mod
Mod
Mod
6
9*
40
30
Diff
Mod
6. Calculate amounts using the future value and present value

concepts.
7
8
11*
12*
25
30
10
10
Easy
Mod
Diff
Diff

11*
12*
10
10
Diff
Diff

balance sheet or disclosed in notes and how to calculate
their amounts.

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY
Learning Outcomes
Cases
Estimated
Time in
Minutes
9-3
Level

the balance sheet.
1*
5*
30
25
Mod
Mod
1*
5*
30
25
Mod
Mod
3. Show that you understand how changes in current liabilities

affect the statement of cash flows.
2*
3*
20
25
Mod
Mod

balance sheet or disclosed in notes and how to calculate
their amounts.
2*
3*
4
7
8
15
20
30
20
Mod
Mod
Mod
Mod
15
Mod

6. Calculate amounts using the future value and present value
concepts.
9-4
QUESTIONS
1. A current liability is an obligation that will be satisfied within the next operating cycle,
or within one year if the cycle is shorter than one year. Current liabilities are
important to determine a firms liquidity, i.e., its ability to pay for those items due
within a short time period.
2. Generally, it is to the companys benefit to take advantage of discounts available
because of the rate of the discount. For example if a 2% discount is available for
payment within ten days, a firm can borrow money and pay interest on the loan in
order to take advantage of the discount. Also, prompt payment of accounts is
essential in order to ensure good relationships with suppliers and other creditors.
3. No, the real rate of interest is not 10%. The real interest rate could be calculated as
$100/$900, or approximately 11.11%. The rate should be calculated on the basis of
the amount that the firm actually obtained, rather than the face amount of the note.
4. The account Discount on Notes Payable is a balance sheet account. The account
has a debit balance and should be classified as a contra liability.
5. Income tax is an item that should be accrued as a liability as of year-end. If the firms
year-end is December 31, then the amount should appear as a current liability on
the balance sheet dated December 31.
6. A contingent liability involves an existing condition where the outcome of that
condition is not known with certainty and is dependent on some event that will occur
in the future. Contingent liabilities are accounted for differently than contingent
assets because of the principle of conservatism. It should be noted that this principle
leads to an inconsistency when accounting for contingent assets and contingent
liabilities.
7. A contingent liability should be recorded only if its likelihood of occurrence is
probable and the amount can be reasonably estimated. The firm must make a goodfaith effort to estimate the amount when it is not known. If the dollar amount cannot
be estimated, the contingent liability should be disclosed in the notes to the financial
statements.
8. The lawsuit should be described in as much detail as possible in the notes to the
financial statements. The nature of the lawsuit and the expected resolution should
be described. If the dollar amount can be estimated, it should be disclosed. If it
cannot be estimated, it may be possible to determine and disclose a range of values
that represents the potential loss to the firm.
9. Simple interest is calculated on the balance of the principal only. Compound interest
is calculated on the principal plus previous amounts of interest accumulated. The
amount of interest accumulated by simple interest is always less than the amount if
interest is compounded at the same interest rate.
9-5
10. If interest is compounded quarterly, it should be calculated at one fourth of the

annual rate but for four times as many compounding periods. The amount
accumulated for quarterly compounding will always exceed the amount accumulated
for annual compounding because of the interest on interest feature of compound
interest.
11. A future value represents the amount that will be accumulated at a future time if a
known amount is invested for a given time at a given interest rate. The present value
represents the value today of an amount to be received or paid at a future time. You
can determine whether or not to calculate a present value or future value based on
the timing of the known and unknown quantities. If the known amount is in the present time, you are attempting to calculate the future amount. If the known amount is in
the future, you are attempting to calculate the present value of an equivalent
amount.
12. The word annuity means a series of payments of the same amount. The present
value of an annuity could be calculated as a series of single amounts, but not with a
single calculation. You would first calculate the present value of a single payment
one year in the future; then the present value of a single payment two years in the
future, etc. The present value of the single sums would be totaled to determine the
present value of an annuity. To avoid the calculations, tables have been developed
to calculate the present value of an annuity based on one calculation.
13. The interest rate of the loan could be calculated by dividing the total dollar amount of
the loan by the dollar amount of the monthly payments. The result is a number that
represents an interest factor or table value in the table for the present value of an
annuity. Find the table value that corresponds to the number of years of the loan,
and then read across that row to find the interest rate.
14. Loan payable and bond payable accounts are recorded at present value amounts.
Other accounts based on present value concepts are pensions, leases, and some
long-term receivables.
9-6
BRIEF EXERCISES
LO 1
BRIEF EXERCISE 9-1 LIQUIDITY
If the company paid $40,000, it would have current assets of $40,000 and current
liabilities of $20,000 and achieve its goal of a 2:1 current ratio.
LO 2
BRIEF EXERCISE 9-2 CREDIT TERMS
If you pay within 15 days, you receive a 3% discount and must pay $4,850.
If you pay after 15 days, you must pay $5,000.
LO 3
BRIEF EXERCISE 9-3 CURRENT LIABILITIES AND CASH FLOW
A decrease in a current liability should appear as a negative amount, or a use of cash,

in the operating category of the statement of cash flows.
An increase in a current liability should appear as a positive amount, or a source of
cash, in the operating category of the statement of cash flows.
Most current liabilities affect the operating activities category but there are some
exceptions. For example, the change in a short-term note payable may be presented in
the financing activities category if the money obtained from or paid on the note was not
used directly for operating activities.
LO 4
BRIEF EXERCISE 9-4 CONTINGENT LIABILITIES
A contingent liability must be recorded as a liability on the balance sheet if the likelihood
of loss is probable, and the amount can be reasonably estimated. It must be disclosed
in the footnotes if the likelihood of loss is at least reasonably possible.
A contingent asset is treated more conservatively. It normally is not recorded as an
asset on the balance sheet until the asset is received.
LO 5
9-7
BRIEF EXERCISE 9-5 SIMPLE AND COMPOUND INTEREST
If simple interest at Bank 1, then the amount would be $1,250 or $1,000 + ($1,000
0.05 5 years).
If compound interest at Bank 2, then the amount would be $1,276 or ($1,000 1.276)
from Table 9-1 where n = 5, i = 5%.
LO 6
BRIEF EXERCISE 9-6 PRESENT VALUE AND FUTURE VALUE
$5,000 3.170 (From Table 9-4 where n = 4, i = 10%) = $15,850
LO 7
BRIEF EXERCISE 9-7 SOLVING FOR AN INTEREST RATE
$14,275/$5,000 = 2.855 table value

From Table 9-4, the value of 2.855 for 4 periods corresponds with an interest rate of
15%.
9-8
EXERCISES
EXERCISE 9-1 CURRENT LIABILITIES
LO 1
The treatment of the items should be as follows:

Taxes payableCurrent liability
Accounts receivableCurrent asset
Notes payable, 9%, due in 90 daysCurrent liability
Investment in bondsLong-term asset
Capital stockStockholders equity
Accounts payableCurrent liability
Estimated warranty payable in 2008Current liability
Retained earningsStockholders equity
TrademarkIntangible asset
Mortgage payable$10,000 due in 2008 should be current liability.
The remaining portion should be long-term liability.
EXERCISE 9-2 CURRENT LIABILITIES
LO 1
1. and 2.
Classification
a.
b.
c.
d.
e.
f.
Current liability
Current liability
Long-term liability
Current liability
Current liability
Current liability
and
Long-term liability
g. Current liability
Account Title
Accounts Payable
Notes Payable
Notes Payable
Wages Payable
Interest Payable
Current Portion of Long-Term Debt
Long-Term Debt
Taxes Payable
3. Investors are interested in this information because it enables them to better predict
the timing of future cash flows. Items that are classified as current liabilities require
the use of current assets to satisfy them, whereas long-term liabilities do not.
LO 1
EXERCISE 9-3 CURRENT LIABILITIES SECTION
JACKIE COMPANY
BALANCE SHEET
DECEMBER 31, 2008
Current liabilities:
Accounts payable
Notes payable, 10%, due June 2, 2009
Less: discount on notes payable
Current maturities of long-term debt
Other Accrued liabilities:
Interest payable
Wages payable
Unearned revenue
Income taxes payable
Total current liabilities
LO 2
$3,010
6,000
4,320
850
6,900
13,330
61,250
$106,730
EXERCISE 9-4 TRANSACTION ANALYSIS
1. a. Purchases
Accounts Payable
To record purchase of inventory on account.
BALANCE SHEET
Assets
Liabilities
Accounts Payable
Liabilities
44,500 Notes Payable

(8,900)*
*$44,500 20% = $8,900
8,000
INCOME STATEMENT
8,000
Purchases
(8,000)
44,500
8,900
35,600
BALANCE SHEET
Assets
8,000
+ Stockholders Equity + Revenues Expenses
b. Land
Cash (20% $44,500)
Notes Payable
To record purchase of land.
Land
Cash
$ 24,400
$1,000
150
INCOME STATEMENT
35,600
9-9
9-10
c. Accounts Payable
Purchase Returns and Allowances
To record purchase return.
BALANCE SHEET
Assets
Liabilities
Accounts Payable
INCOME STATEMENT
(450)
BALANCE SHEET
Cash
Liabilities
(7,550) Accounts Payable
Cash
13,800
Liabilities
Notes Payable
Discount on
Notes Payable
Cash
5,000*
*200 $25 = $5,000
Liabilities
Unearned
Revenue
7,550
13,800
1,200
15,000
INCOME STATEMENT

15,000
(1,200)
5,000
5,000
BALANCE SHEET
=
7,550
(7,550)
f. Cash (200 $25)

Unearned Revenue
To record gift certificates.
Assets
450
INCOME STATEMENT
BALANCE SHEET
=
Purchase Returns
and Allowances
e. Cash
Discount on Notes Payable
Notes Payable
To record loan less interest in advance.
Assets
450
d. Accounts Payable
Cash
To record payment of account payable.
Assets
450
INCOME STATEMENT
5,000
g. Cash ($127,200 90%)

Accounts Receivable
Sales
Sales Tax Payable
To record sales and related sales tax.
BALANCE SHEET
Assets
Cash
114,480*
Accounts
Receivable 12,720
Liabilities
Sales Tax
Payable
9-11
114,480
12,720
120,000
7,200
INCOME STATEMENT

Sales
120,000
7,200
*$127,200 90% = $114,480
2. b. Interest Expense ($35,600 8% 8/12)

Interest payable
To record accrued interest on note payable.
BALANCE SHEET
Assets
Liabilities
Interest Payable
Interest Expense
1,898.67
1,898.67
INCOME STATEMENT

1,898.67*
(1,898.67)
*$35,600 8% 8/12 = $1,898.67
e. Interest Expense
Discount on Notes Payable ($1,200 7/12)
To record interest in advance as interest expense.
BALANCE SHEET
Assets
Liabilities
Discount on
Notes Payable
700
700
INCOME STATEMENT

Interest Expense
(700)
700*
*$1,200 7/12 = $700
f. Unearned Sales Revenue

Sales (35% $5,000)
To record gift certificates redeemed.
BALANCE SHEET
Assets
Liabilities
Unearned
Revenue
*$5,000 35% = $1,750
1,750
1,750
INCOME STATEMENT

Sales
(1,750)*
1,750
9-12
3. Sales tax payable

Notes payable, due November 1
Notes payable, due June 1
Less: Discount on notes payable*
Unearned sales revenue**
Interest payable
$ 7,200.00
35,600.00
$15,000.00
500.00
14,500.00
3,250.00
1,898.67
$62,448.67
*$1,200 $700 = $500.

**$5,000 $1,750 = $3,250.
LO 2
1.
EXERCISE 9-5 CURRENT LIABILITIES AND RATIOS
KRUSE COMPANY
BALANCE SHEET
DECEMBER 31, 2008
Current liabilities:
Accounts payable
Notes payable, 12%, due in 60 days
Taxes payable
Salaries payable
$ 55,000
20,000
15,000
10,000
$100,000
2. Working capital = Current assets Current liabilities

= $300,000* $100,000
= $200,000
*Current assets = Cash
Accounts receivable
Less: Allowance
Marketable securities
Inventory
$ 15,000
180,000
(20,000)
40,000
85,000
$300,000
3. Current ratio = Current assets/Current liabilities

= $300,000/$100,000
= 3:1
Kruse has sufficient current assets to meet its short-term obligations (pay its current
liabilities).
9-13
EXERCISE 9-6 DISCOUNTS
LO 2
1. a. Purchase price discount rate = discount

$450 2% = $9.00
Annualized interest rate = 2% (360/30) = 0.24, or 24%
b. Discount = $1,500 1% = $15
Annualized interest rate = 1% (360/20) = 0.18, or 18%
2. a. Discount/purchase price = discount rate
($200 $196)/$200 = 0.02, or 2%
b. ($2,800 $2,674)/$2,800 = 0.045, or 4.5%
EXERCISE 9-7 NOTES PAYABLE AND INTEREST
LO 2
1. 2008
July 1
Cash
Note Payable
To record borrowing by note.
BALANCE SHEET
Assets
Cash
=
25,000
2. Dec. 31
Liabilities
Note Payable
INCOME STATEMENT
25,000
Interest Expense
Interest Payable
To record interest accrued on loan.
=
Liabilities
Interest Payable
*$25,000 8% 6/12 = $1,000
25,000
BALANCE SHEET
Assets
25,000
1,000
1,000
INCOME STATEMENT

1,000*
Interest Expense
(1,000)
9-14
3. 2009
May 1
Note Payable
Interest Expense
Interest Payable
Cash
To record payment of principal and interest.
BALANCE SHEET
Assets
Cash
(26,667)
Liabilities
Note Payable
Interest Payable
25,000
667
1,000
26,667
INCOME STATEMENT

(25,000)
(1,000)
Interest Expense
(667)*
*$25,000 8% 4/12 = $667
EXERCISE 9-8 NON-INTEREST-BEARING NOTES PAYABLE
LO 2
1. 2008
Oct. 1
Cash
Notes Payable
To record borrowing by note.
BALANCE SHEET
Assets
Cash 16,380
Liabilities
Notes Payable
Discount on
Notes Payable
16,380
1,620
18,000
INCOME STATEMENT

18,000
(1,620)*
*$18,000 9% = $1,620
2. Dec. 31
Interest Expense
To record accrued interest on note.
BALANCE SHEET
Assets
Liabilities
Discount on
Notes Payable
*$1,620 3/12 = $405
405
405
INCOME STATEMENT

Interest Expense
405*
(405)
3. 2009
Oct. 1
Interest Expense
Notes Payable
Cash
To record payment of note and
amortization of discount.
BALANCE SHEET
Assets
Cash
(18,000)
Liabilities
9-15
1,215
18,000
1,215
18,000
INCOME STATEMENT
Notes Payable
(18,000)
Discount on
Notes Payable 1,215*
Interest Expense
(1,215)
*$1,620 $405 = $1,215
4. Effective interest rate = $1,620/$16,380 = 9.89%
LO 3
EXERCISE 9-9 IMPACT OF TRANSACTIONS INVOLVING CURRENT LIABILITIES ON

STATEMENT OF CASH FLOWS
Accounts payable: O
Current maturities of long-term debt: F
Notes payable: F
Other accrued liabilities: O
Salaries and wages payable: O
Taxes payable: O
LO 3
EXERCISE 9-10 IMPACT OF TRANSACTIONS INVOLVING CONTINGENT

LIABILITIES ON STATEMENT OF CASH FLOWS
Estimated liability for warranties: O

Estimated liability for product premiums: O
Estimated liability for probable loss relating to litigation: O
9-16
EXERCISE 9-11 WARRANTIES
LO 4
Cash/Accounts Receivable
Sales
To record sales of dishwashers.
32,500,000
32,500,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Cash/Accounts
Receivable
32,500,000*
Sales
32,500,000
*$325 100,000 = $32,500,000
Warranty Expense
Estimated Liability for Warranties
To record current years estimated expense.
BALANCE SHEET
Assets
Liabilities
Estimated
Liability for
Warranties
168,000
168,000
INCOME STATEMENT

Warranty
Expense
(168,000)
168,000*
(100,000 units 12%) $14 = $168,000

Cash/Inventory
To record actual expenditures for warranty work.
BALANCE SHEET
Assets
Cash/
Inventory
(150,000)
Beginning Balance
Warranty Estimate
Actual Expense
Ending Balance
Liabilities
Estimated
Liability for
Warranties
150,000
150,000
INCOME STATEMENT
(150,000)
$ 120,000
168,000
(150,000)
$ 138,000
LO 5
9-17
EXERCISE 9-12 SIMPLE VERSUS COMPOUND INTEREST
Part 1.
1. $20,000 4% 6 years = $4,800
2. $20,000 6% 4 years = $4,800
3. $20,000 8% 3 years = $4,800
Part 2.
1. Table 9-1 n = 6, i = 4%
Future value = $20,000 1.265 = $25,300
Interest = future value beginning amount
= $25,300 $20,000
= $5,300
2. Table 9-1 n = 4, i = 6%
Future value = $20,000 1.262 = $25,240
= $25,240 $20,000
= $5,240
3. Table 9-1 n = 3, i = 8%
Future value = $20,000 1.260 = $25,200
= $25,200 $20,000
= $5,200
Part 3.
1. Table 9-1 n = 12, i = 2%
Future value = $20,000 1.268 = $25,360
= $25,360 $20,000
= $5,360
2. Table 9-1 n = 8, i = 3%
Future value = $20,000 1.267 = $25,340
Interest = $25,340 $20,000 = $5,340
3. Table 9-1 n = 6, i = 4%
Future value = $20,000 1.265 = $25,300
Interest = $25,300 $20,000 = $5,300
You would want to choose an investment that yields the highest future value. All
other factors being equal, higher interest rates, more frequent compounding, and a
longer term will increase the future value of your investment.
9-18
LO 6
EXERCISE 9-13 PRESENT VALUE, FUTURE VALUE
n = 10, i = 5%
Present value = amount table factor
= $150,000 0.614
= $92,100
or
Future value = amount table factor
$150,000
= ? 1.629
Amount
= $150,000/1.629
= $92,081
Slight difference due to rounding.
LO 6
EXERCISE 9-14 EFFECT OF COMPOUNDING PERIOD
1. $1,000 1.166 = $1,166
n = 2, i = 8%
2. $1,000 1.170 = $1,170
n = 4, i = 4%
3. $1,000 1.172 = $1,172
n = 8, i = 2%
LO 6
1. a. $7,000 1.469 = $10,283

b. $7,000 1.480 = $10,360
c. $7,000 1.486 = $10,402
n = 5, i = 8%
n = 10, i = 4%
n = 20, i = 2%
2. a. $15,000 0.681 = $10,215 n = 5, i = 8%

b. $15,000 0.676 = $10,140 n = 10, i = 4%
c. $15,000 0.673 = $10,095 n = 20, i = 2%
LO 6
1. a. $16,000 1.469 = $23,504 n = 5, i = 8%

b. $16,000 1.480 = $23,680 n = 10, i = 4%
c. $16,000 1.486 = $23,776 n = 20, i = 2%
2. a. $20,000 0.681 = $13,620 n = 5, i = 8%
b. $20,000 0.676 = $13,520 n = 10, i = 4%
c. $20,000 0.673 = $13,460 n = 20, i = 2%
LO 7
EXERCISE 9-17 ANNUITY
$2,000 20.024 = $40,048
LO 7
9-19
n = 15, i = 4%
EXERCISE 9-18 CALCULATION OF YEARS
$41,000/$1,600 = 25.625 table figure at 4% interest = about 18 years.
LO 7
EXERCISE 9-19 VALUE OF PAYMENTS
1. Present value = payment table factor

= $1,480 1.690 = $2,501.20
(present value of an annuity of $1 for n = 2, i = 12%)
2. n = 8, i = 3%
Present value = payment table factor
$2,501.20 = payment 7.020
payment = $2,501.20/7.020 = $356.30
With annual payments:
2 payments at $1,480 =
Less: present value
Interest expense
With quarterly payments:
8 payments at $356.30 =
Less present value
Interest expense
Interest with annual payments
Less: interest with quarterly payments
Interest saved
$2,960.00
2,501.20
$ 458.80
$2,850.40
2,501.20
$ 349.20
$458.80
349.20
$109.60
Payments would be smaller and total interest would be less if she made monthly
payments.
9-20
MULTICONCEPT EXERCISES
LO 6,7
EXERCISE 9-20 COMPARE ALTERNATIVES
Present value of 1:
Present value of 2:
$100,000
$108,000
Present value of 3:
$ 20,000
Present value of 4:
$ 10,000
1.000 =
0.926 =
n =
5.747 =
n =
11.258 =
n =
$100,000
$100,008
1, i = 8%
$114,940
8, i = 8%
$112,580
30, i = 8%
Jane should choose Option 3.
LO 6,7
EXERCISE 9-21 TWO SITUATIONS
1. $53,300/$13,000 = 4.100 table factor for present value of an annuity for 5 years,
i = 7%.
2. $13,300 15.026 (future value of an annuity for n = 12, i = 4%) = $199,846.
No, Sampson will not have accumulated quite enough money.
9-21
PROBLEMS
PROBLEM 9-1 NOTES AND INTEREST
LO 2
1. a. Jan. 1
Cash
Note Payable
To record loan at 10% interest.
BALANCE SHEET
Assets
Cash
=
25,000
Liabilities
Note Payable
25,000
25,000
INCOME STATEMENT

25,000
b. On January 10, only a memorandum entry is made.

c.
Feb. 1 Equipment
Notes Payable
To record non-interest-bearing note.
BALANCE SHEET
Assets
Equipment
=
18,800
Liabilities
Notes Payable
Discount on
Notes Payable
18,800
1,200
20,000
INCOME STATEMENT

20,000
(1,200)*
*$20,000 12% 1/2 = $1,200
d.
Mar. 1 Cash
Loan Payable
To record loan with line of credit.
BALANCE SHEET
Assets
Cash
150,000
Liabilities
Loan Payable
INCOME STATEMENT
150,000
BALANCE SHEET
Cash
(102,250)
Liabilities
Loan Payable
*$100,000 9% 3/12 = $2,250
150,000
e. June 1 Loan Payable

Interest Expense
Cash
To record partial payment of line of credit.
Assets
150,000
100,000
2,250
102,250
INCOME STATEMENT

(100,000)
Interest
Expense
(2,250)*
9-22
PROBLEM 9-1 (Continued)
f. June 30 Interest Expense

Interest Payable
To record interest on interest-bearing loan.
BALANCE SHEET
Assets
Liabilities
Interest Payable
*Interest-bearing
$25,000 10%
6/12
$50,000 9%
4/12
Sub-total
1,250
1,500
2,750
2,750
2,750
INCOME STATEMENT

2,750*
Interest Expense
June 30 Interest Expense

To record interest on non-interest-bearing note.
BALANCE SHEET
Assets
Liabilities
1,000
INCOME STATEMENT
Interest Expense(1,000)
Note Payable
1,000
Notes Payable
Interest Expense
Cash
Discount on Note Payable
To record payment of non-interest-bearing note.
BALANCE SHEET
Assets
Cash
1,000
Discount on
g. Aug. 1
(2,750*)
(20,000)
Discount on
Liabilities
Note Payable
20,000
200
INCOME STATEMENT
(20,000)
Expense
Note Payable
20,000
200
Interest
(200)
200*
*$1,200 $1,000 = $200
h. Sept. 1 Cash
Loan Payable
To record loan from line of credit
BALANCE SHEET
Assets
Cash
200,000
Liabilities
Loan Payable
200,000
200,000
INCOME STATEMENT

200,000
9-23
PROBLEM 9-1 (Concluded)
i. Nov. 1 Accounts Payable

Notes Payable
To record loan in repayment of account.
BALANCE SHEET
Assets
Liabilities
Accounts
Payable
Notes Payable
INCOME STATEMENT
(12,000)
12,000
BALANCE SHEET
Cash
(27,500)
Liabilities
Note Payable
Interest Payable
12,000
j. Dec. 31 Note Payable

Interest Payable
Interest Expense
Cash
Repay the 10% note plus interest.
Assets
12,000
25,000
1,250
1,250
27,500
INCOME STATEMENT

(25,000)
(1,250)
Interest
Expense
(1,250)*
*$25,000 10% 6/12 = $1,250
2. Line of credit:
$50,000 9% 10/12 =
$200,000 9% 4/12 =
8% Note:
$12,000 8% 2/12 =
LO 3
$3,750
6,000
160
$9,910
PROBLEM 9-2 EFFECTS OF PANERA BREADS CURRENT LIABILITIES ON

1. Adjustments to reconcile net income to net cash provided by operating activities:

Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accounts payable
Increase in accrued expenses
Increase in deferred revenue
xxx
1,378
21,159
208
2. Panera Bread must have access to cash or other assets that can be converted to
cash, in amounts sufficient to pay its current liabilities. Paneras current ratio would
be useful in assessing its liquidity. However, Panera would be expected to have
some amount of inventory on hand. Therefore, its quick ratio would be a more
conservative measure of its ability to pay its bills on time.
9-24
LO 3
PROBLEM 9-3 EFFECTS OF WENDYS INTERNATIONAL CHANGES IN CURRENT

ASSETS AND LIABILITIES ON STATEMENT OF CASH FLOWS
1. Operating Activities Section of Cash Flow Statement:

Net income
cash provided by operating activities:
Increase in salaries and wages payable
Decrease in taxes payable
Decrease in insurance payable
Decrease in other liabilities
Decrease in advertising fund restricted liabilities
Decrease in current liabilities of discontinued operations
$ xxx,xxx
1,125
12,458
(14,846)
(794)
(1,880)
(7,083)
(262,565)
2. The change in current maturities of long-term debt during the year is not included as
an adjustment above because it is not directly related to Wendys operating
activities.
LO 4
PROBLEM 9-4 WARRANTIES
1. XX defective units $150 per unit = $12,600

XX defective units = $12,600/$150 per unit
defective units = 84
2. 600 units sold XX% = 84 defective units
XX% = 84 defective units/600 units sold = 14% of sales
3. If the actual amount of warranty costs incurred during 2009 is significantly higher
than the estimated liability recorded for warranty costs at the end of 2008, Clearview
should review its method for determining the accrual for warranty costs. Clearview
should ensure that its estimates of the number of defective television sets sold and
the average costs for replacement parts and labor are reasonable. Most likely, one
or more of those estimates were too low.
9-25
PROBLEM 9-5 WARRANTIES
LO 4
1. Warranty Expense
To record current years estimated warranty cost.
BALANCE SHEET
Assets
5,400
INCOME STATEMENT
Liabilities
Estimated
Liability for
Warranties
5,400

Warranty Expense
(5,400)
5,400
$1,500 120 3% = $5,400
2. Estimated Liability for Warranties

Inventory
To record actual warranty repairs.
4,950
4,950
BALANCE SHEET
Assets
Inventory
LO 5
=
(4,950)
Liabilities
Estimated
Liability for
Warranties
INCOME STATEMENT
(4,950)
PROBLEM 9-6 COMPARISON OF SIMPLE AND COMPOUND INTEREST
1. 2008
Dec. 31
Interest Expense
Interest Payable
To record accrued interest on 8% note for 2007.
BALANCE SHEET
Assets
12/31
Liabilities
Interest Payable
1,000
1,000
INCOME STATEMENT
1,000*
Interest Expense
(1,000)
*$25,000 8% 1/2 = $1,000
2009
Dec. 31
Interest Expense
Interest Payable
To record accrued interest on 8% note for 2008.
BALANCE SHEET
Assets
12/31
Liabilities
Interest Payable
*$25,000 8% 1 = $2,000
2,000
2,000
INCOME STATEMENT
2,000*
Interest Expense
(2,000)
9-26
PROBLEM 9-6 (Continued)
2010
Interest Payable
Note Payable
Cash
To record repayment of note plus interest.
BALANCE SHEET
Assets
6/30 Cash
(29,000)
Liabilities
Note Payable
Interest Payable
1,000
3,000
25,000
29,000
INCOME STATEMENT

(25,000)
(3,000)*
Interest Expense
(1,000)**
*$1,000 + $2,000 = $3,000

**$25,000 8% 1/2 = $1,000
2. 2008
Dec. 31
Interest Expense
Interest Payable
To record accrued interest for 2008.
BALANCE SHEET
Assets
12/31
Liabilities
Interest Payable
1,000
1,000
INCOME STATEMENT

1,000
Interest Expense
(1,000)
*$25,000 8% 1/2 = $1,000
2009
Dec. 31
Interest Expense
Interest Payable
To record accrued interest for 2009.
BALANCE SHEET
Assets
12/31
Liabilities
Interest Payable
2,122
2,122
INCOME STATEMENT

2,122
First 6 months: ($25,000 + $1,000) 8% 1/2 year =

Second 6 months: ($26,000 + $1,040) 8% 1/2 year =
Total
Interest Expense
$
$
(2,122)
1,040
1,082
2,122
9-27
2010
Interest Payable
Note Payable
Cash
To record repayment of note plus interest.
Assets
29,247
Liabilities
3,122
25,000
BALANCE SHEET
Assets
6/30 Cash
(29,247)
29,247
+
Owners Equity
1,125
INCOME STATEMENT
Liabilities
Note Payable
Interest Payable
1,125
3,122
25,000

(25,000)
(3,122)*
Interest Expense
(1,125)**
*$1,000 + $2,122 = $3,122

**($27,040 + $1,082) 8% 1/2 year = $1,125
3. Interest recognized in b. ($1,000 + $2,000 + $1,000)

Interest recognized in a. ($1,000 + $2,122 + $1,125)
Additional interest with compounding at 8%
LO 6
Year
2008
2009
2010
2011
2012
LO 6
$4,000
4,247
$ 247
PROBLEM 9-7 INVESTMENT WITH VARYING INTEREST RATE
Principal at
Beginning of Year
$1,000
1,040
1,092
1,158
1,239
Interest
Factor
1.04
1.05
1.06
1.07
1.08
Accumulated
at End of Period
$1,040
1,092
1,158
1,239
1,338
PROBLEM 9-8 COMPARISON OF ALTERNATIVES
a. $180,000 1.0 = $180,000

b. $196,200 0.926 (present value of $1 for n = 1, i = 8%) = $181,681
c. $220,500 0.857 (present value of $1 for n = 2, i = 8%) = $188,969
d. $55,000 3.312 (present value of annuity of $1 for n = 4, i = 8%) = $182,160
Option a. is the least cost alternative.
9-28
MULTICONCEPT PROBLEMS
LO 2,5
PROBLEM 9-9 INTEREST IN ADVANCE VERSUS INTEREST PAID WHEN LOAN IS

DUE
1. a. $103,200
b. $103,200/(100% 14%) = $120,000
2. a. $103,200 14% = $14,448; $14,448/$103,200 = 14%
b. ($120,000 $103,200)/$103,200 = 16.28%
3. a. 2008
July 1
Cash
Note Payable
To record issuance of note.
BALANCE SHEET
Assets
Cash
103,200
Liabilities
Note Payable

103,200
BALANCE SHEET
=
Liabilities
Interest Payable
103,200
INCOME STATEMENT
Dec. 31 Interest Expense

Interest Payable
To record the accrual of interest.
Assets
103,200
7,224
7,224
INCOME STATEMENT

7,224*
Interest Expense
(7,224)
*$103,200 14% 6/12 = $7,224
2009
July 1
Note Payable
Interest Expense
Interest Payable
Cash
To record payment of interest and principal
BALANCE SHEET
Assets
Cash
(117,648)
Liabilities
Note Payable
Interest
Payable
103,200
7,224
7,224
117,648
INCOME STATEMENT

(103,200)
(7,224)
Interest Expense
(7,224)
9-29
b. 2008
July 1
Cash
Note Payable
BALANCE SHEET
Assets
Cash
103,200

120,000
(16,800)
Dec. 31 Interest Expense

To record interest for the year.
BALANCE SHEET
Assets
8,400
8,400
INCOME STATEMENT
Liabilities
Discount on
Note Payable
120,000
INCOME STATEMENT
Liabilities
Note Payable
Discount on
Note Payable
103,200
16,800

Interest Expense
(8,400)
(8,400)*
*$16,800 1/2 = $8,400
2009
July 1
Interest Expense
Note Payable
Cash
To record payment of the note.
BALANCE SHEET
Assets
Cash
(120,000)
8,400
120,000
INCOME STATEMENT
Liabilities
Note Payable
Discount on
Note Payable
8,400
120,000

(120,000)
Interest Expense
(8,400)
(8,400)
4. a. Note payable
b. Note payable
Less: Discount on note payable
$103,200
$120,000
16,800
$103,200
9-30
LO 1,4
PROBLEM 9-10 CONTINGENT LIABILITIES
1. Items a, d, e: The liability is probable and an estimate is available.

2. Item c: The liability is reasonably possible, but an estimate is not available.
Item b is not recorded or disclosed, because it is a contingent asset.
LO 6,7
PROBLEM 9-11 TIME VALUE OF MONEY CONCEPTS
1. $9,750 5.895 (future value of $1 for n = 17, i = 11%) = $57,476

2. $42,487/$21,600 = 1.967; future value of $1 for n = 10, i = 7%
3. $15,000/1.714 (future value of $1 for n = 7, i = 8%) = $8,751
OR: $15,000 0.583 (present value of $1 for n = 7, i = 8%) = $8,745. Slight
difference due to rounding.
4. $15,026/$5,800 = 2.591; future value of $1 for i = 10%, n = 10 years
LO 6,7
PROBLEM 9-12 COMPARISON OF ALTERNATIVES
a. $15,000 1.360 (future value of $1 for n = 4, i = 8%) = $20,400

b. $2,250 9.214 (future value of annuity of $1 for n = 8, i = 4%) = $20,731.50
c. $4,350 4.506 (future value of annuity of $1 for n = 4, i = 8%) = $19,601.10
Alternative b. is preferable.
9-31
ALTERNATE PROBLEMS
PROBLEM 9-1A NOTES AND INTEREST
LO 2
1. a. Jan. 1
Cash
Note Payable
BALANCE SHEET
Assets
Cash
=
35,000
Liabilities
Note Payable
35,000
35,000
INCOME STATEMENT

35,000
b. Jan. 10. Only a memorandum entry would be made.

c. Feb. 1 Equipment
Notes Payable
To record non-interest-bearing note.
BALANCE SHEET
Assets
Feb. 1 Equipment
Liabilities
Note Payable
Discount on
Note Payable
26,320
26,320
1,680
28,000
INCOME STATEMENT

28,000
(1,680)*
*$28,000 12% 1/2 = $1,680
d. Mar. 1 Cash
Loan Payable
To record line of credit borrowing.
BALANCE SHEET
Assets
Mar. 1 Cash
210,000
Liabilities
Loan Payable

210,000
BALANCE SHEET
June 1 Cash (143,150)
Liabilities
Loan Payable
*$140,000 9% 3/12 = $3,150
210,000
INCOME STATEMENT
e. June 1 Loan Payable

Interest Expense
Cash
To record partial payment of line of credit.
Assets
210,000
140,000
3,150
143,150
INCOME STATEMENT

(140,000)
Interest
Expense
(3,150)*
9-32
PROBLEM 9-1A (Continued)
f. June 30 Interest Expense

Interest Payable
3,850
3,850
BALANCE SHEET
Assets
June 30
INCOME STATEMENT
Liabilities
Interest Payable
$35,000 0.10 6/12

$70,000 0.09 4/12
$
$
3,850
BALANCE SHEET
=
June 30
(3,850)
1,750
2,100
3,850

To record accrued interest on
non-interest-bearing note.
Assets
Interest Expense
Liabilities
Discount on
Notes Payable
1,400
1,400
INCOME STATEMENT
Interest Expense
(1,400)
(1,400)*
*$1,680 5/6 = $1,400
g. Aug. 1 Note Payable

Interest Expense
Cash
Repaid non-interest-bearing note.
BALANCE SHEET
Assets
Cash
(28,000)
Liabilities
Notes Payable
Discount on
Notes Payable
INCOME STATEMENT
(28,000)
Cash
280,000
Liabilities
Loan Payable
Interest Expense
(280)
280
BALANCE SHEET
=
28,000
280
h. Sept. 1 Cash
Loan Payable
Borrowed on line of credit.
Assets
28,000
280
280,000
280,000
INCOME STATEMENT

280,000
9-33
PROBLEM 9-1A (Concluded)
i. Nov. 1 Accounts Payable

Note Payable
To record 8% note payable in payment
of account.
BALANCE SHEET
Assets
Liabilities
Notes Payable
Accounts
Payable

16,800
(16,800)
BALANCE SHEET
Cash
(38,500)
Liabilities
Notes Payable
Interest Payable
16,800
INCOME STATEMENT
j. Dec. 31 Note Payable

Interest Payable
Interest Expense
Cash
Repaid note plus interest.
Assets
16,800
35,000
1,750
1,750
38,500
INCOME STATEMENT

(35,000)
(1,750)
Interest
Expense
(1,750)*
*$35,000 10% 6/12 = $1,750
2. Line of credit:
($210,000 $140,000) 9% 10/12 =
$280,000 9% 4/12 =
8% Note:
$16,800 8% 2/12 =
$ 5,250
8,400
224
$13,874
9-34
LO 3
PROBLEM 9-2A EFFECTS OF McDONALDS CURRENT LIABILITIES ON ITS


Net income
$ xxx
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in notes payable
(544.0)
156.1
Decrease in income taxes payable
(318.7)
Increase in other taxes payable
18.3
Decrease in accrued interest
(23.4)
Increase in accrued payroll and other liabilities
360.8
Decrease in liabilities of discontinued operations
(107.9)
The changes to current maturities of long-term debt during the year are not included
as adjustments above because they do not directly relate to McDonalds operating
activities. Transactions relating to long-term debt are financing activities.
2. McDonalds must have access to cash, or other assets that can be converted to
cash, in amounts sufficient to pay its current liabilities. McDonalds current ratio
would be useful in assessing its liquidity. However, McDonalds would be expected to
have a large amount of inventory on hand. Therefore, its quick ratio would be a more
conservative measure of its ability to pay its bills on time.
LO 3
PROBLEM 9-3A EFFECTS OF DARDEN RESTAURANTS CHANGES IN CURRENT

ASSETS AND LIABILITIES ON ITS STATEMENT OF CASH FLOWS

Net income
$xxx,xxx
cash provided by operating activities:*
Decrease in accounts payable
(35.2)
Increase in short-term debt
167.4
Decrease in accrued payroll
(14.7)
Increase in accrued income taxes
11.1
Decrease in other accrued taxes
(3.5)
Increase in unearned revenues
9.1
Increase in other current liabilities
21.7
Increase in liabilities of assets held for sale
42.3
2. The changes in the current portion of long-term debt during the year are not included
as adjustments above because they are not directly related to Dardens operating
activities. Transactions involving long-term debt and notes payable are financing
activities.
9-35
PROBLEM 9-4A WARRANTIES
LO 4
1. XX defective units $300 per unit = $25,200

XX defective units = $25,200/$300 per unit
defective units = 84
2. XX% = 84 defective units/600 units sold = 14% of sales
PROBLEM 9-5A WARRANTIES
LO 4
1. Warranty Expense
To record estimated warranty expense.
BALANCE SHEET
Assets
15,360
INCOME STATEMENT
Liabilities
Estimated
Liability for
Warranties
15,360

Warranty
Expense
(15,360)
15,360*
*$3,200 120 4% = $15,360
2. Estimated Liability for Warranties

Inventory
To record actual warranty costs
10,200
10,200
BALANCE SHEET
Assets
Inventory
(10,200)
Liabilities
Estimated
Liability for
Warranties
INCOME STATEMENT
(10,200)
3. Beginning Balance
Add: Warranty estimate
Less: Actual expense
Ending Balance
LO 5
$ 1,100
15,360
(10,200)
$ 6,260
PROBLEM 9-6A COMPARISON OF SIMPLE AND COMPOUND INTEREST
1. Dec. 31, 2008

Dec. 31, 2009
June 30, 2010
Total accrued
$25,000 6% 6/12 =
$25,000 6% 12/12 =
$25,000 6% 6/12 =
$ 750
1,500
750
$3,000
9-36
2. Dec. 31, 2008 $25,000 6% 1/2 =

Dec. 31, 2009:
First 6 months: ($25,000 + $750) 6% 1/2 year =
Second 6 months: ($25,750 + $773) 6% 1/2 year =
Total for 2009
June 30, 20`0
Total accrued
$ 750
$773
796
1,569
($26,523 + $796) 6% 6/12 =
820
$3,139
3. Interest recognized in 2. ($750 + 1,569 + 820)

Interest recognized in 1. ($750 + 1,500 + 750)
Additional interest with compounding at 6%
LO 6
Year
2008
2009
2010
2011
2012
LO 6
$3,139
3,000
$ 139
PROBLEM 9-7A INVESTMENT WITH VARYING INTEREST RATE
Principal at
Beginning of Year
$2,000
2,080
2,184
2,315
2,477
Interest
Factor
1.04
1.05
1.06
1.07
1.08
Accumulated
at End of Period
$2,080
2,184
2,315
2,477
2,675
PROBLEM 9-8A COMPARISON OF ALTERNATIVES
a. $270,000 1.0 = $270,000 n = 0, i = 8%

b. $294,300 0.926 (present value of $1 for n = 1, i = 8%) = $272,522
c. $334,750 0.857 (present value of $1 for n = 2, i = 8%) = $286,881
d. $82,500 3.312 (present value of annuity of $1 for n = 4, i = 8%) = $273,240
Option a. is the lowest cost alternative.
9-37
ALTERNATE MULTICONCEPT 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
2. a. $206,400 14% = $28,896; $28,896/$206,400 = 14%
b. ($240,000 $206,400)/$206,400 = 16.28%
3.
a. 2008
July 1
Cash
Note Payable
BALANCE SHEET
Assets
Cash
206,400
Dec. 31
Liabilities
Note Payable

206,400
BALANCE SHEET
=
Liabilities
Interest Payable
206,400
INCOME STATEMENT
Interest Expense
Interest Payable
To record accrual of interest.
Assets
206,400
14,448
14,448
INCOME STATEMENT

14,448*
Interest
Expense
(14,448)
*$206,400 14% 6/12 = $14,448
2009
July 1
Note Payable
Interest Expense
Interest Payable
Cash
To record payment of note plus interest.
BALANCE SHEET
Assets
Cash
(235,296)
Liabilities
Note Payable
Interest
Payable
206,400
14,448
14,448
235,296
INCOME STATEMENT
(206,400)
(14,448)
Interest
Expense
(14,448)
9-38
b. 2008
July 1
Cash
Note payable
To record non-interest-bearing loan.
BALANCE SHEET
Assets
Cash
206,400
Dec. 31

240,000
(33,600)
Interest Expense
To record interest on loan.
BALANCE SHEET
Assets
16,800
16,800
INCOME STATEMENT
Liabilities
Discount on
Note Payable
240,000
INCOME STATEMENT
Liabilities
Note Payable
Discount on
Note Payable
206,400
33,600

16,800*
Interest
Expense
(16,800)
*$33,600 1/2 = $16,800
2009
July 1
Interest Expense
Note Payable
Cash
To record payment of the loan.
BALANCE SHEET
Assets
Cash
(240,000)
16,800
240,000
INCOME STATEMENT
Liabilities
Note Payable
Discount on
Note Payable
16,800
240,000

(240,000)
Interest
Expense
(16,800)
(16,800)
4. a. Note payable
b. Note payable
Less: Discount on note payable
$206,400
$240,000
33,600
$206,400
LO 1,4
9-39
PROBLEM 9-10A CONTINGENT LIABILITIES
1. Items a, d, e: The liability is probable in occurrence, and an estimate is available.

2. Item b: The liability is possible, but an estimate is not available.
Item c is not recorded or disclosed, because it is a contingent asset.
LO 6,7
PROBLEM 9-11A TIME VALUE OF MONEY CONCEPTS

b. $84,974/$43,200 = 1.967; future value of $1 for n = 10, i = 7%
c. $30,000/1.714 = (future value of $1 for n = 7, i = 8%) = $17,503
OR: $30,000 0.583 (present value of $1 for n = 7, i = 8%) = $17,490. Slight
difference due to rounding.
d. $30,052/$11,600 = 2.591; future value of $1 for i = 10%, n = 10 years
LO 6,7
PROBLEM 9-12A COMPARISON OF ALTERNATIVES

b. $2,400 9.214 (future value of annuity of $1 for n = 8, i = 4%) = $22,114
c. $4,640 4.506 (future value of annuity of $1 for n = 4, i = 8%) = $20,907
Option b. is preferable.
9-40
CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,2
DECISION CASE 9-1 GENERAL MILLS AND KELLOGGS CURRENT LIABILITIES
1. General Mills for 2006 (in millions): current assets $3,176/current liabilities $6,138 =
0.52
For 2005 (in millions): current assets $3,055/current liabilities $4,184 = 0.73
2. Kelloggs for 2006 (in millions): current assets $2,427/current liabilities $4,020 = 0.60
For 2005 (in millions): current assets $2,196/current liabilities $3,162 = 0.69
Both companies have a current ratio of less than 1.0. This means they have more
current liabilities than current assets. However, both companies are well-managed
and have the ability to generate cash to pay their obligations.
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
matters. Both companies have disclosed the lawsuits in the footnotes.
LO 1,2
DECISION CASE 9-2 CARIBOU COFFEES CASH FLOW STATEMENT
1. Current ratio for 2006: 0.93

Current ratio for 2005: 1.36
The company shows the ability to pay its current obligations in both years. A portion
of the current liabilities is in deferred revenue. This amount will not require payment
in the future. During 2005 the company had a very large amount of cash on hand.
This was decreased during 2006 and was the most significant cause of the change
in the current ratio.
2. Deferred revenue is usually referred to as unearned income. It represents money
that has been received in advance and has not been earned as of the balance sheet
date. This amount represents a liability because it will require the company to
provide goods or services in a future period.
LO 3,4
9-41
DECISION CASE 9-3 DARDEN RESTAURANTS CONTINGENT LIABILITIES
1. The company has recorded a liability because they have agreed to settle the
lawsuits and pay an amount to the plaintiffs. A contingent liability should be recorded
if the amount is a material amount and if the likelihood of an unfavorable outcome is
probable and if the amount of the loss can be reasonably estimated. When an
amount is recorded it will decrease the companys net income and increase its
liabilities.
2. In the second lawsuit the company has determined that a loss from the lawsuit is not
probable. In that case, the company should disclose the existence of the lawsuit in
the footnotes, along with an estimated dollar amount of loss. There is a difference
between the treatment of the lawsuits in the first and second paragraphs because
the company has a different assessment of the likelihood of a loss.
LO 4
DECISION CASE 9-4 HEWLETT PACKARDS CONTINGENT LIABILITY
1. The company recorded a contingent liability for their estimate of the amount of the
loss that would be assessed for environmental matters. A company should record
the amounts if they are material and if the likelihood of the loss is probable and can
be reasonably estimated.
2. The effect of the recording of the liability was a decrease in the companys net
income and an increase in their liabilities. In this case, however, the company
indicated that the amount involved was not material to our operations or financial
position.
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
assets 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
liabilities.
9-42
b. Work with creditors to stretch out the payment of liabilities in order to conserve
current assets.
c. Speed the sale of inventory and the collection of cash from customers.
d. Delay the purchase of additional inventory.
Normally, a combination of all the above actions is necessary and should be
recommended. However, the above actions are rather short-term in nature. The firm
must achieve a solid financial base to alleviate similar liquidity problems.
2. Some actions to improve liquidity are referred to as window-dressing. The term
refers 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
assets to pay current liabilities which in many cases will increase the current ratio.
Window-dressing actions are seldom beneficial in the long run. In fact, such actions
do not recognize the other financial needs of the firm and may be detrimental in the
long run.
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) 0.926 = $20,001 (rounded)
b. $2,000 + [$18,000 (1 + 0.02)4] 0.926 = $20,042 (rounded)
c. $21,600 0.926 = $20,002 (rounded)
The present value of $20,000 cash sale is $20,000. When these options are compared,
the option with the highest present value of cash flows, discounted at 8%, is Option b.
Kathy should also consider the financial position of the buyer, because these amounts
are not materially different. Since the buyer is starting a new business, she may be
better off taking the cash up front if it is possible for the buyer to get cash from another
source.
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
requires 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
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conclusion with the same evidence? If students conclude that John should stick with his
decision, then the available courses of action should be examined.
Students should be encouraged to develop the pros and cons of (a) remaining silent
and accepting the 5% figure, (b) approaching the owner and informing him that the
expense is understated, (c) approaching the bank officer and relating his concern. While
Options b and c may appear to be morally correct, students should see the negative
consequences that could result if John did not follow the chain of command. Can an
employee always make decisions that are consistent with personal and team
objectives?
Finally, students should be encouraged to develop innovative compromise solutions.
How could the company prevent similar situations? Could a third party serve as an
arbitrator? What should be the role of the internal and external auditors in this matter?
LO 4
DECISION CASE 9-8 RETAINER FEES AS SALES
The retainer fee should be recorded as sales when the sales are made and charged off
against the retainer. Even if the retainer were nonrefundable, the amount would be
recognized as sales at the time the goods are delivered, on the basis of the going
concern concept. The controller may be eager to show the amount as sales because
the amount may improve net income, since sales would be recorded with no
corresponding expenses. Ratios that involve net income would be improved. Working
capital would be increased because a lower liability amount would be reported.
Correspondingly, the working capital ratios would improve.
REAL WORLD PRACTICE 9.1

The notes indicate the following are included as current liabilities:
Accounts payable
Accrued compensation and related costs
Accrued occupancy costs
Accrued taxes
Short term borrowings
Other accrued expenses
Deferred revenue
Current portion of long-term debt
Accounts payable increased from $220,975,000 to $340,937,000.
9-1

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CHAPTER 9

Current Liabilities, Contingencies,

1. Identify the components of the current liability category of

2. Examine how accruals affect the current liability category.

4. Determine when contingent liabilities should be presented on the

5. Explain the difference between simple and compound interest.

7. Apply the compound interest concepts to some common

3. Show that you understand how changes in current liabilities

*Exercise, problem, or case covers two or more learning outcomes

FINANCIAL ACCOUNTING SOLUTIONS MANUAL

1. Identify the components of the current liability category of

2. Examine how accruals affect the current liability category.

3. Show that you understand how changes in current

6. Calculate amounts using the future value and present value

7. Apply the compound interest concepts to some common

4. Determine when contingent liabilities should be presented on the

*Exercise, problem, or case covers two or more learning outcomes

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY

1. Identify the components of the current liability category of

2. Examine how accruals affect the current liability category.

3. Show that you understand how changes in current liabilities

4. Determine when contingent liabilities should be presented on the

5. Explain the difference between simple and compound interest.

FINANCIAL ACCOUNTING SOLUTIONS MANUAL

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY

10. If interest is compounded quarterly, it should be calculated at one fourth of the

FINANCIAL ACCOUNTING SOLUTIONS MANUAL

BRIEF EXERCISE 9-1 LIQUIDITY

BRIEF EXERCISE 9-2 CREDIT TERMS

BRIEF EXERCISE 9-3 CURRENT LIABILITIES AND CASH FLOW

A decrease in a current liability should appear as a negative amount, or a use of cash,

BRIEF EXERCISE 9-4 CONTINGENT LIABILITIES

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY

BRIEF EXERCISE 9-5 SIMPLE AND COMPOUND INTEREST

BRIEF EXERCISE 9-6 PRESENT VALUE AND FUTURE VALUE

$5,000 3.170 (From Table 9-4 where n = 4, i = 10%) = $15,850

BRIEF EXERCISE 9-7 SOLVING FOR AN INTEREST RATE

$14,275/$5,000 = 2.855 table value

FINANCIAL ACCOUNTING SOLUTIONS MANUAL

EXERCISE 9-1 CURRENT LIABILITIES

The treatment of the items should be as follows:

EXERCISE 9-2 CURRENT LIABILITIES

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY

EXERCISE 9-3 CURRENT LIABILITIES SECTION

EXERCISE 9-4 TRANSACTION ANALYSIS

44,500 Notes Payable

*$44,500 20% = $8,900

+ Stockholders Equity + Revenues Expenses

FINANCIAL ACCOUNTING SOLUTIONS MANUAL

(7,550) Accounts Payable

*200 $25 = $5,000

+ Stockholders Equity + Revenues Expenses

f. Cash (200 $25)

+ Stockholders Equity + Revenues Expenses

+ Stockholders Equity + Revenues Expenses

CHAPTER 9 CURRENT LIABILITIES, CONTINGENCIES, AND THE TIME VALUE OF MONEY

g. Cash ($127,200 90%)

+ Stockholders Equity + Revenues Expenses

*$127,200 90% = $114,480

2. b. Interest Expense ($35,600 8% 8/12)

+ Stockholders Equity + Revenues Expenses

*$35,600 8% 8/12 = $1,898.67