LLH9e Ch09 SolutionsManual FINAL

Chapter 9
Reporting and Interpreting Liabilities
ANSWERS TO QUESTIONS
1. Liabilities are probable future sacrifices of economic benefits that arise from past
transactions. A current liability is a short-term liability that will be paid in cash (or other current
assets) within the current operating cycle or one year, whichever is longer. All other liabilities are
defined as long-term liabilities.
2. The balance sheet is the primary source available to external parties for determining the
number, type, and amounts of liabilities of a company.
3. Companies typically list obligations to pay suppliers in the near future on their balance
sheets as accounts payable.
4. The accounts payable turnover ratio measures how quickly management pays suppliers. It
is computed by dividing cost of goods sold for a period by average accounts payable for the
period.
5. An accrued liability is an expense that was incurred before the end of the current period
but has not been paid. An example is wages incurred during the last few days of the accounting
period but not paid to employees because no payroll checks were issued before the end of the
accounting period.
6. A note payable is a written promise to pay a stated sum at one or more specified dates in
the future. A company must reclassify its long-term debt as a current liability when the debt will
be paid with cash (or other current asset) within the next year.
7. $4,000 x 12% x 9/12 = $360.
8. Deferred revenues (also called unearned revenues) reflect cash a company has collected
in advance of providing customers goods or services. Because the company owes customers
goods or services in the future, deferred revenues are a liability.
9. A contingent liability is a potential liability that has arisen as the result of a past
event. Examples of contingent liabilities are lawsuits and warranties. A contingent
liability is only reported on the balance sheet if (1) it is probable that the company
will incur a future economic sacrifice, and (2) the amount of the sacrifice can be
reasonably estimated. If either of these conditions is not met, the contingent liability
is typically disclosed in the footnotes. If the future economic sacrifice is judged to be
remote, however, the company is not required to disclose the contingent liability at
all.
Financial Accounting, 9/e 9-1

© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
10. Working capital is a measure of a company’s ability to cover its current obligations. It is
defined as the dollar difference between current assets and current liabilities.
11. A capital lease resembles the financing and outright purchase of an asset. As a result,
when a company signs a capital lease, it recognizes both a lease asset and a lease liability on its
balance sheet.
12. The time value of money is another way to describe interest. Time value of money refers
to the fact that a dollar received today is worth more than a dollar to be received at any later date
because of interest.
13. $8,000 x 0.38554 = $3,084. The present value factor (0.38554) is obtained from Table
E.1, Appendix E number of periods = 10; interest rate = 10%.
14. An annuity is a series of periodic cash receipts or payments that are equal in amount each
interest period.
15. Present Value Factors

Concept i = 5% i = 10% i = 14%
n =4 n =7 n = 10
PV of $1 0.82270 0.51316 0.26974
PV of annuity of $1 3.54595 4.86842 5.21612
16. $8,000 x 3.99271 = $31,942.
ANSWERS TO MULTIPLE CHOICE
1. c) 2. e) 3. d) 4. c) 5. c)
6. a) 7. c) 8. b) 9. b) 10. d)
9-2 Solutions Manual

Authors’ Recommended Solution Time
(Time in minutes)
Alternate Cases and

Mini-exercises Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time
1 5 1 30 1 35 1 45 1 30
2 5 2 20 2 45 2 20 2 30
3 10 3 20 3 20 3 25 3 30
4 10 4 30 4 25 4 20 4 20
5 5 5 20 5 20 5 25 5 45
6 5 6 20 6 25 6 40 6 *
7 5 7 20 7 20 7 30
8 5 8 20 8 15 8 30
9 10 9 20 9 25
10 10 10 15 10 25
11 10 11 10 11 40
12 10 12 10 12 30
13 20 13 35
14 15 14 30
15 15
16 20
17 20
18 15
19 15
20 15
21 20
22 20
23 15
24 20
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.

MINI-EXERCISES
M9-1
Liquidity is the ability to pay current obligations. Item numbers two and three will both increase
liquidity because they both increase current assets, which is typically what a company uses to
pay its current obligations (liabilities). Item numbers one, four, and five do not improve liquidity
because they either reduce current assets or signal that current assets (inventory) may not be
useful in satisfying current obligations.
M9-2
The accounts payable turnover ratio is:
Cost of Goods Sold / Average Accounts payable
This year’s accounts payable turnover ratio is therefore:
$720,000 / $240,000* = 3.0
*($250,000 + $230,000) / 2 = $240,000
This implies that Nelson collects its average accounts payable balance three times a year, or
approximately every 122 days (365 days / 3.0).
M9–3
Last year: $600,000  .11 1/12 = $5,500
Current year:$600,000  .11  2/12 = $11,000
M9–4
October 1
Cash (+A)........................................................................ 290,000
Note payable (+L)........................................................ 290,000
December 31
Interest expense (+E, -SE).............................................. 7,250*
Interest payable (+L).................................................... 7,250
*$290,000 x .10 x 3/12 = $7,250

M9–5
Last year: Buzz does not have to record or disclose the liability because
management judged the probability of having to pay to be remote.
This year: Buzz must report a liability of $200,000 on its balance sheet. Up
until the judge decided against Buzz, the lawsuit was a contingent liability. Once
the judge ruled against Buzz, the contingent liability became a legal obligation
and must be reported on the balance sheet.
M9–6 Current assets = $120,000 ($360,000 - $240,000)
Current liabilities = $90,000 ($360,000 - $94,000 - $176,000)
Working Capital = $30,000 ($120,000 - $90,000)
M9–7
Effect on Working Capital
a. Remain the same
b. Decrease
c. Remain the same
d. Remain the same
M9-8
StarGaze will not enter a journal entry upon signing the operating lease. When StarGaze
pays the lessor $800 cash at the end of the first month it will enter the following journal
entry:
Rent expense (+E, -SE)........................................................... 800

Cash (-A).............................................................................. 800

M9–9.
$500,000  0.46319 = $231,595
M9–10.
$15,000  6.14457 = $92,169
M9–11
Amount Present Value Factor Present value
$118,000 x N/A = $118,000
$129,000 x 0.95238 = 122,857
$27,500 x 5.07569 = 139,581
Total $380,438
M9–12
$50,000  0.89000 = $44,500
The journal entry to record the purchase of the equipment and the signing of the note is:
Equipment (+A)........................................................................ 44,500

Note payable (+L)................................................................. 44,500
EXERCISES

E9–1
Req. 1
(a) Current assets ($530,000 - $362,000)............................ $168,000
Current liabilities:
Accounts payable........................................................ $56,000
Income taxes payable.................................................. 14,000
Liability for withholding taxes....................................... 3,000
Rent revenue collected in advance............................. 7,000
Wages payable............................................................ 7,000
Property taxes payable................................................ 3,000
Note payable, 10% (due in 6 months)......................... 12,000
Interest payable........................................................... 400 (102,400)
Working capital (current assets – current liabilities)....... $ 65,600
Working capital is critical for the efficient operation of a business. The working
capital accounts are actively managed to achieve a balance between a company’s
short-term obligations and the resources needed to satisfy those obligations. If a
business has too little working capital, it runs the risk of not being able to meet its
obligations. If it has too much working capital, it runs the risk of tying up resources
in unproductive assets.
Req. 2
No. If the contingent liabilities are reported in the notes then they would not affect
working capital.
E9–2
Req. 1
March 31
Salary and wage expense (+E, -SE)........................................ 200,000
Liability for income taxes withheld-employees (+L)............. 40,000
Liability for insurance premiums withheld-employees (+L). . 1,000
FICA taxes payable-employees (+L).................................... 15,000
Cash (-A).............................................................................. 144,000
Payroll for March including employee deductions.
Req. 2

March 31
Payroll tax expense (+E, -SE).................................................. 15,000
FICA taxes payable-employer (+L)....................................... 15,000
Employer payroll taxes on March payroll.
Req. 3
Liability for income taxes withheld-employees (-L).................. 40,000
Liability for insurance premiums withheld-employees (-L)....... 1,000
FICA taxes payable-employees (-L)......................................... 15,000
FICA taxes payable-employer (-L)........................................... 15,000
Cash (-A).............................................................................. 71,000
Remittance of payroll taxes and deductions for March payroll.

E9–3
Req. 1
The total labor cost to the company was $86,000 + $6,000 = $92,000. The $6,000 is
the employer’s portion of the FICA payroll tax. The employees’ take-home pay was
$70,000; that is, the total of salaries and wages less the deductions paid by the
employees (i.e., $86,000 – $10,000 – $6,000).
Req. 2
Balance sheet liabilities:
Liability for income taxes withheld........................................................... $ 10,000
FICA taxes payable ($6,000 + $6,000).................................................... 12,000
Total...................................................................................................... $22,000
Req. 3
The junior accountant is only seeing a piece of the total compensation puzzle. Since employers
pay some taxes, like FICA taxes, as a percent of employees’ salaries the five percent raise will
actually cost the company more than five percent. .

E9–4
Req. 1
November 1
Cash (+A)........................................................................ 4,800,000
Note payable (+L)........................................................ 4,800,000
Borrowed on 6-month, 8%, note payable.
Req. 2
December 31 (end of the accounting period):

Adjusting entry for 2 months’ accrued interest
*$4,800,000 x .08 x 2/12 = $64,000).
Req. 3
April 30 (maturity date):

Note payable (-L)............................................................. 4,800,000
Interest payable (per above) (-L)..................................... 64,000
Cash (-A)...................................................................... 4,992,000
Paid note plus interest at maturity.
*$4,800,000 x .08 x 4/12 = $128,000
Req. 4
It is doubtful that long-term borrowing would be appropriate in this situation. After the
Christmas season, Neiman Marcus will collect cash from its credit sales. At this point, it does
not need borrowed funds. It would be costly to pay interest on a loan that was not needed. It
might be possible to borrow for a longer term at a lower interest rate and invest idle cash to
offset the interest charges. Neiman Marcus should explore this possibility with its bank but in
most cases it would be better to borrow on a short-term basis to meet short-term needs.

E9–5
Req.1
Date Assets Liabilities Stockholders’ Equity
November 1 Cash + Note Payable + Not Affected
December 31 Not Affected Interest Payable + Interest Expense –
April 30 Cash – Note Payable – Interest Expense –
Interest Payable –
E9–6
Req. 1
Stockholders’
Date Assets Liabilities Equity
January 10 Inventory + Accounts Payable + Not Affected
March 1 Cash + Note Payable + Not Affected
Req. 2
August 31 Cash Paid: $47,250*
*$45,000 principal plus $2,250 of interest ($45,000 x .10 x 6/12)
Req. 3
Transaction (a) has no impact on cash flows because there is neither an inflow nor
an outflow of cash. Transaction (b) results in an inflow of cash from the bank. The
August 31 payment is an outflow of cash. (Note to instructor: If you have
emphasized the Statement of Cash Flows, you should discuss the specific nature
of these cash flows. The repayment of principal is a cash flow from financing
activities and the payment of interest expense is a component of cash flows from
operating activities.)

E9–7
Req. 1
To compute the average number of days that a company’s accounts payable are
outstanding you first have to compute the accounts payable turnover ratio:
Accounts payable turnover ratio = Cost of goods sold / Average accounts payable
5.85 = 117m / 20m*
*(23m + 17m) / 2 = 20m
Once you have the accounts payable turnover ratio, you divide it into 365 days to get
the average number of days that accounts payable are outstanding:
365 days / 5.85 = 62.4
This means that it takes Skullcandy, on average, just over 62 days to pay its suppliers.
Req. 2
On average, Skullcandy’s competitor takes one month to pay suppliers. Skullcandy
takes two. Suppliers like to receive cash earlier rather than later, so all else equal,
suppliers will likely offer better terms to Skullcandy’s competitor. In deciding when to
pay suppliers, Skullcandy will evaluate the potential for better terms against the benefit
of holding onto cash longer.
E 9-8
Req. 1
At signing:
Cash (+A)........................................................................ 2,000,000
Note payable (+L)........................................................ 2,000,000
Signed a nine-month note with an interest rate of 8%
Req. 2
At maturity:
Note payable (-L)............................................................. 2,000,000*
Cash (-A)...................................................................... 2,120,000
Paid off note plus nine months of accrued interest
*$2,000,000 x .08 x 9/12 = $120,000).

E 9-9
Req. 1
The lawsuits are contingent liabilities. Accounting guidance on contingent liabilities

suggest Jones should do the following for each lawsuit:
1. Disclose this lawsuit in its footnotes as management judged the possibility of

Jones losing the lawsuit as “reasonably possible.”
2. Report this lawsuit as a contingent liability on its balance sheet as management

judged the possibility of Jones losing the lawsuit as “probable.”
3. Do not report this lawsuit in the financial statements or footnotes as management

judged the possibility of Jones losing the lawsuit as “remote.”
E9-10
Total assets = $1,200,000
Noncurrent liabilities + Stockholders equity = $780,000
Therefore, current liabilities = $420,000 ($1,200,000 - $780,000)
Working capital = $750,000 – $420,000 = $330,000
E9–11
The note does not give us sufficient information to reach a definitive conclusion but
there are several factors that should be discussed. No obligation for future
payments is recorded if the lease is short term, but the note indicates that the
leases are long term and are designed to provide long-term occupancy rights. The
critical issue is whether the leases meet one of the criteria to be classified as a
capital lease in which case the present value of the lease payments would be
recorded as a liability. We find that students enjoy talking about why McDonald’s
buys some properties but leases others and how the accounting treatments differ.

E9–12
The question of whether a lease will be recorded as a liability depends on

the specific facts and circumstances associated with the lease. If the lease is structured so
that it is treated as an operating lease for accounting purposes then the company would
not record a liability. If the lease is structured so that it is treated as capital lease, then the
company would recognize a liability on its balance sheet. The assistant is correct in the
sense that assets could be acquired under a lease and, if the transaction is structured in the
proper manner, no liability would be recorded.
In class, we like to use this question to explore two issues: (1) Should
managers structure transactions to meet the business needs of the company or to comply
with rules associated with a preferred accounting treatment, and (2) Do users of financial
statements react to the manner in which a transaction is reported or to the underlying
economic reality of the transaction?
E9–13
Req. 1
$60,000 x 0.75131 = $45,079
Req. 2
$10,000 x 2.48685 = $24,869
The present value of the three installments is less than paying the $28,000 immediately.
Req. 3
$90,000 x 0.51316 = $46,184
Req. 4
$40,000 x 6.14457 = $245,783

E9–14
Present value of unequal payments:
$20,000 x 0.90909 = $18,182
30,000 x 0.82645 = 24,794
50,000 x 0.75131 = 37,566
$80,542
E9–15
Present value of investment:
Annuity: $15,000 x 5.97130 = $89,570
Single amount: $150,000 x 0.58201 = 87,302
$176,872
E9–16
Present value of cash payments:
Single amount: $1,000,000 x 0.55839......................... $ 558,390

Annuity: $200,000 x 7.36009....................................... 1,472,018
Present value............................................................... $2,030,408
Jenkins would report a long-term liability on its balance sheet of $2,030,508.
E9–17
Present value of cash payments:
Single amount: $10,000 x 0.67297.............................. $ 6,730

Annuity: $500 x 16.35143............................................ 8,176
Present value............................................................... $14,906

The two deals are equivalent as they both have the same present value.
E9–18
Present value of annuity: $20,000 x 4.86842 = $97,368
Because the present value of the annuity is less than the immediate cash
payment of $100,000, you should select the immediate cash payment.
E9–19
Present value of future amount: $1,000,000 x 0.50187 = $501,870
Because the client already has $300,000 in the account, she needs to deposit an
additional $201,870.
E9–20
Present value of annuity: $20,000 x 3.23972 = $64,794
E9–21
Req. 1
Year 1 Year 2
Income taxes payable $250,000 $290,000
Increase in deferred tax liability 54,000 58,000
Income tax expense $304,000 $348,000
Req. 2.
Tax expense is based on income reported on the income statement while the cash paid for taxes is
based on income reported on the tax return. Because different rules govern the preparation of
the two statements, the tax expense and cash paid for taxes are almost always different.

E9–22
Req. 1
Income tax payable:
Income tax expense $580,000

Less: increase in deferred taxes 108,000
Income taxes payable $472,000
Req. 2
Companies keep different records because there are separate rules governing
the determination of tax expense (computed by following GAAP) and the amount
of taxes owed to the IRS (computed via the Internal Revenue Code).
E9–23
Req. 1
$58,800 x 1.36049 = $79,997
Req. 2
Savings account (+A)...................................................... 58,800
Cash (-A)...................................................................... 58,800
Req. 3
$79,997 – $58,800 = $21,197 (total interest earned over the four years)
Req. 4
End of Year
Year 1 Year 2
Savings account (+A).............................. 4,704 5,080
Interest revenue (+R, +SE).................. 4,704 5,080
Computations:
Year 1: $58,800 x .08 = $4,704.
Year 2: ($58,800 + $4,704) x .08 = $5,080.

E9–24
Req. 1
End of Year 1
Savings account (+A)...................................................... 2,000
Cash (-A)...................................................................... 2,000
Req. 2
$2,000 x 15.19293 = $30,386 (balance in account)
Req. 3
$30,386 - ($2,000 x 10) = $10,386 (total interest earned on 10 deposits)
Req. 4
Interest for Year 2: $2,000 x .09 = $180
Interest for Year 3: ($2,000 + $2,000 + $180) x .09 = $376
Req. 5
End of Year
Year 2 Year 3
Savings account (+A)..............................
2,180 2,376
Cash (-A).............................................. 2,000 2,000
Interest revenue (+R, +SE)................. 180 376

PROBLEMS
P9–1
Req. 1
January 15:
Inventory (+A).................................................................. 26,500
Cash (-A)...................................................................... 26,500
April 1:
Cash (+A)........................................................................ 700,000
Note payable, short term (+L)...................................... 700,000
June 14:
Cash (+A)........................................................................ 15,000
Deferred revenue (+L)................................................. 15,000
July 15:
Deferred revenue (-L)...................................................... 3,750
Service revenue (+R, +SE).......................................... 3,750
December 12:
Electric expense (+E, -SE).............................................. 27,860
Electric payable (+L).................................................... 27,860
December 31:
Wage expense (+E, -SE)................................................. 15,000
Wages payable (+L)..................................................... 15,000
Req. 2
December 31:
Interest expense (+E, -SE).............................................. 31,500
($700,000 x .06 x 9/12 = $31,500).

P9–2
Req. 1
January 8:
Inventory (+A).................................................................. 14,860
Accounts payable (+L)................................................. 14,860
January 17:
Accounts payable (-L)...................................................... 14,860
Cash (-A)...................................................................... 14,860
April 1:
Cash (+A)........................................................................ 35,000
June 3:
Inventory (+A).................................................................. 17,420
July 5:
Cash (-A)...................................................................... 17,420
August 1:
Cash (+A)........................................................................ 6,000
Deferred rent revenue (+L).......................................... 6,000
December 20:
Cash (+A)........................................................................ 100
Deposit on trailer (+L).................................................. 100
December 31:
Wage expense (+E, -SE)................................................. 9,500
Wages payable (+L)..................................................... 9,500

Req. 2
December 31:
($35,000 x .08 x 9/12 = $2,100).
December 31:
Deferred rent revenue (-L)............................................... 5,000
Rent revenue (+R, +SE).............................................. 5,000
($6,000 x 5/6 = $5,000)
Req. 3
Balance Sheet, December 31

Current Liabilities
Note payable, short term............................................. $35,000
Deposit on trailer.......................................................... 100
Wages payable............................................................ 9,500
Interest payable........................................................... 2,100
Deferred rent revenue ................................................. 1,000
Total.......................................................................... $47,700
Req. 4
Transaction Effect
January 8 No effect
January 17 Decrease
April 1 No effect on operating cash

flows (this is a financing
activity)
June 3 No effect
July 5 Decrease
August 1 Increase
December 20 Increase
December 31 No effects for either entry

P9–3
Req. 1
Date Assets Liabilities Stockholders’ Equity
January 8 Inventory + Accounts Payable + No effect
January 17 Cash – Accounts Payable – No effect
April 1 Cash + Note Payable + No effect
June 3 Inventory + Accounts Payable + No effect
July 5 Cash – Accounts Payable – No effect
August 1 Cash + Deferred Rent Revenue + No effect
December 20 Cash + Deposit + No effect
December 31 No effect Wages Payable + Wage Expense -
December 31 No effect Interest Payable + Interest Expense -
December 31 No effect Deferred Rent Revenue - Rent Revenue +
P9–4
Req. 1
(a) December 31
Wage expense (+E, -SE)................................................. 4,000
Wages payable (+L)..................................................... 4,000
(b) January 6
Wages payable (-L)......................................................... 4,000
Cash (-A)...................................................................... 4,000
Req. 2
(a) December 10
Cash (+A)........................................................................ 2,400
Deferred rent revenue (+L).......................................... 2,400
Collection of rent revenue in advance.
(b) December 31
Deferred rent revenue (-L)............................................... 1,600
Rent revenue (+R, +SE).............................................. 1,600
($2,400 x 20/30 days = $1,600)
Req. 3
Balance sheet at December 31

Current Liabilities:
Wages payable............................................................ 4,000
Deferred rent revenue.................................................. 800

Req. 4
Accrual-based accounting is more useful to financial analysts because it records revenues

when they are earned and expenses when they are incurred, regardless of when the related cash is
received or paid. This does not imply that cash flows are not important, just that accrual
accounting tends to be more timely in the reporting of revenues and expenses.
P9–5
Req. 1
Date Assets Liabilities Stockholders’

Equity
(a) December 31 No effect Wages Payable + Wages Expense -
(b) January 6 Cash - Wages Payable - No effect
(c) December 10 Cash + Deferred Rent Revenue + No effect
(d) December 31 No impact Deferred Rent Revenue - Rent Revenue +

P9–6
1. December 31
Warranty expense (+E, -SE)........................................... 500,000,000
Warranty payable (+L)................................................. 500,000,000
Total effect of various warranty transactions during the year:

Warranty payable (-L)...................................................... 400,000,000
Cash (-A)...................................................................... 400,000,000
2. Collection of cash for tickets sold in advance:

Cash (+A)........................................................................ 90,000,000
Deferred revenue (+L)................................................. 90,000,000
Recognition of revenue associated with unused tickets in the current year:

Deferred revenue (-L)...................................................... 5,000,000
Revenue (+R, +SE)...................................................... 5,000,000
P9–7
Req. 1
5.91 = 1,146m / 194m*
*(174m + 214m) / 2 = 194m
365 days / 5.91 = 61.8
This means that it takes Columbia, on average, just under 62 days to pay its suppliers.
Req. 2
On average, Columbia’s competitors take longer to pay suppliers than Columbia does
(72 days versus 62 days). Suppliers like to receive cash earlier rather than later, so all
else equal, suppliers are likely to be happier dealing with Columbia than any of its
competitors who take longer to pay. In deciding when to pay suppliers, Columbia will
evaluate the potential for better terms against the benefit of holding onto cash longer.

P9–8
The current liability classification is based on the expectation that the company will pay
the liabilities during the subsequent year. Analysts are interested in this classification
because it provides important information about the use of future cash flows. If
management has the intent and the ability to refinance a short-term liability, then it will
not result in a cash outflow in the following year. In this circumstance, it is appropriate to
reclassify the debt as long term.
Because management has the ability and intent to refinance the borrowings on a long-
term basis working capital should be based on the reclassification. One thing to note is
that as a financial analyst you would want to use caution when comparing working
capital for the current year (after reclassification) with the number for the previous year
(before reclassification).
P9–9
Req. 1 Not reported---company is unable to estimate the amount of any potential loss.
Req. 2 Not reported---the probability of incurring a loss is remote.
Req. 3 Report liability---Amount can be estimated and loss is probable.
Req. 4 Disclose in footnotes---Loss is probable, but amount cannot be reliably estimated.
Req. 5 Report liability--- Amount is known and loss is probable.
P9–10
a. Remain the same
b. Decrease
c. Remain the same
d. Remain the same (because it is a financing activity)
e. Remain the same
f. Decrease
g. Remain the same
h. Remain the same (because it is a financing activity)
i. Increase
P9–11

Req. 1
Present value of debt:
$115,000 x 0.62275 = $71,616
$6,000 x 5.38929 = 32,336
$103,952
Req. 2
Single sum to deposit:
$490,000 x .58201 = $285,185
Interest revenue:
$490,000 - $285,185 = $204,815
Req. 3
Present value of payments:
$75,000 x 0.93458 = $70,094
$112,500 x 0.87344 = 98,262
$150,000 x 0.81630 = 122,445
$290,801
Req. 4
Equal annual payments on note payable:
($170,000 - $34,000)  4.10020 = $33,169
Interest expense:
($33,169 x 5) - $136,000 = $29,845

P9–12
Option 1:
$1,250,000  6.14457 = $7,680,713
Option 2:
$10,000,000 = $10,000,000
Option 3:
$4,000,000 + ($1,000,000  = $9,334,930
5.33493)
Option 2 is the best option because it provides the greatest present value when all
options are discounted and put on equal footing.
P9–13
Req. 1
GAAP Depreciation: $1,000,000 ÷ 20 years = $50,000
Tax Depreciation: $100,000
Book Value of Asset:
Year 1 Year 2
GAAP Tax GAAP Tax
Cost $1,000,000 $1,000,000 $1,000,000 $1,000,000
Accumulated Dep. 50,000 100,000 100,000 200,000
Book Value $ 950,000 $ 900,000 $ 900,000 $ 800,000
Deferred tax liability at end of Year 1:
($950,000 - $900,000) × .34 = $17,000
Deferred tax liability at end of Year 2:
($900,000 - $800,000) × .34 = $34,000

The difference is a liability because the higher depreciation for tax purposes now pushes
off the paying of taxes to the future, resulting in a future tax obligation..
Req. 2: Income tax expense for Year 1:
Taxes payable $400,000
Deferred taxes 17,000
Income tax expense for Year 2:
Taxes payable $625,000
Deferred taxes 17,000 (increase in deferred taxes)
P9–14.
Req. 1
$112,000 x 1.33823 = $149,882 (amount available at end of five years)
$149,882 – $112,000 = $37,882 (total interest earned over the five years)
Req. 2
$9,000 x 11.02847 = $99,256 (balance in account at end of 8th year)
$99,256 - ($9,000 x 8) = $27,256 (total interest earned on 8 deposits)

ALTERNATE PROBLEMS
AP9–1
Req. 1
January 15
Tax expense (+E, -SE).................................................... 125,000
Taxes payable (+L)...................................................... 93,000
Deferred tax liability (+L).............................................. 32,000
January 31
Interest payable (-L)........................................................ 52,000
Cash (-A)...................................................................... 52,000
April 30
Cash (+A)........................................................................ 550,000
Note payable (+L)........................................................ 550,000
June 3
Inventory (+A).................................................................. 75,820
July 5
Cash (-A)...................................................................... 75,820
August 31
Cash (+A)........................................................................ 12,000
Req. 2
December 31
($550,000 x .12 x 8/12)
December 31
Security revenue (+R, +SE)......................................... 8,000
($12,000 x 4/6)
Long-term liability (-L)...................................................... 100,000

Current liability (+L)...................................................... 100,000

Wage expense (+E, -SE)................................................. 85,000
Wages payable (+L)..................................................... 85,000
Req. 3
Balance Sheet:
CURRENT LIABILITIES
Wages Payable $85,000
Taxes Payable 93,000
Deferred Tax Liability 32,000
Interest Payable 44,000
Deferred Revenue 4,000
Note Payable 550,000
Current Portion of Long-term

Debt
100,000
TOTAL CURRENT $908,000

LIABILITIES
Req. 4
Cash from Operating Activities:
January 15 No effect
January 31 Decreased
April 30 No effect (cash inflow is a financing cash

flow)
June 3 No effect
July 5 Decreased
August 31 Increased
All December 31 transactions No effect

AP9–2
Req. 1
Date Assets Liabilities Stockholders’

Equity
January 15 No effect Deferred Tax Liability + Expense –
Taxes Payable +
January 31 Cash – Interest Payable – No effect

April 30 Cash + Note Payable + No effect
June 3 Inventory + Accounts Payable + No effect
July 5 Cash – Accounts Payable – No effect
August 31 Cash + Deferred Revenue + No effect
December 31 No effect Interest Payable + Interest Expense –
December 31 No effect Deferred Revenue - Rent Revenue +
December 31 No effect Long-term Liability – No effect
Current Liability +
December 31 No effect Wages Payable + Wage Expense –

AP9–3
Req.1
Beginning balance: $1.0 billion
+ amount added this year: +$3.9 billion
-Amount paid out this year: -$4 billion
=Ending balance $0.9 billion
Req. 2
This year: No revenue has been earned this year, so the entire $23 million should
be reported as deferred membership revenue.
Next year: Using an estimated life of 39 months, Bally may report

$589,744 in revenue each month ($23 million ÷ 39) or $7,076,923 for the year. The
balance sheet at the end of next year would report Deferred membership revenue in the
amount of $15,923,077 ($23,000,000 - $7,076,923).
AP9–4
Req. 1
32.57 = 342m / 10.5m*
*(9m + 12m) / 2 = 10.5m
365 days / 32.57 = 11.2
This means that it takes Tootsie Roll, on average, just over 11 days to pay its suppliers.
Req. 2
On average, Tootsie Roll’s competitors take much longer to pay suppliers than Tootsie
Roll does (30 days versus 11 days). Suppliers like to receive cash earlier rather than
later, so all else equal, suppliers are likely to be happier dealing with Tootsie Roll than
any of its competitors who take longer to pay. In deciding when to pay suppliers,
Tootsie Roll will evaluate the potential for better terms against the benefit of holding
onto cash longer.
AP9–5

a. Decrease
b. Decrease
c. Decrease
d. Remain the same (cash inflow is a financing cash flow)
e. Decrease
f. Remain the same
g. Decrease
h. Decrease
i. Remain the same
AP9–6
Req. 1
$2,000,000 X 0.68058 = $1,361,160
$150,000 X 3.99271 = 598,907
$1,960,067
Req. 2
$1,000,000  .46319 = $463,190
The total amount of interest earned = $536,810 ($1,000,000 - $463,190)
Req. 3
($750,000 - $400,000)  3.31213 = $105,672
($105,672 x 4) - $350,000 = $72,688 The total amount of interest

AP9–7
Option 1:
$750,000 = $750,000
Option 2:
$60,000  11.46992 = $688,195
Option 3:
$50,000  7.36009 = $368,005
+ $80,000  7.36009  0.55839 = 328,784

* Life expectancy is 20 years, so the $80,000 payments would
take place from Year 11 to Year 20. The present value of the
$80,000 annuity is $588,807 ($80,000 x 7.36009). This is the
present value ten years in the future, so this amount has to be
discounted back to today to get $328,784 ($588,807 x
0.55839).
Total = $696,789
Option one is the best because it has the highest present value assuming a return of 6 percent.
AP9–8
Req. 1
Fund Accumulation Schedule
Cash Interest earned Fund Fund
Date Payment (prior balance x .09)
Increase Balance
12/31, Year 1 $320,000 $ 320,000 $ 320,000
12/31, Year 2 320,000 $320,000 x .09 = $28,800 348,800 668,800
12/31, Year 3 320,000 668,800 x .09 = 60,192 380,192 1,048,992
Total $960,000 $88,992 $1,048,992

CASES AND PROJECTS
CONTINUING CASE
CON9–1
Req. 1
September 15:
Purchases (+A)................................................................ 125,000
Cash (-A)...................................................................... 125,000
October 1:
Cash (+A)........................................................................ 900,000
October 5:
Cash (+A)........................................................................ 40,000
October 15:
Service revenue (+R, +SE).......................................... 18,000
December 12:
Electric expense (+E, -SE).............................................. 12,000
Electric payable (+L).................................................... 12,000
December 31:
Wage expense (+E, -SE)................................................. 52,000
Wages payable (+L)..................................................... 52,000
Req. 2
December 31:
($900,000 x .05 x 3/12 = $11,250).

FINANCIAL REPORTING AND ANALYSIS CASES
CP9–1
Req. 1 Accrued compensation and payroll taxes are $44,884,000.
Req. 2 American Eagle uses the term “Unredeemed gift cards and gift
certificates.”
Req. 3 Step 1: Compute accounts payable turnover ratio.
10.78 = $2,128,193 / $197,509*
*($191,146 + $203,872) / 2 = $197,509
Step 2: Divide 365 by the accounts payable turnover ratio
365 days / 10.78 = 33.86 days
Req. 4 Long-term liabilities (called non-current in this report) are $98,069,000.
CP9–2
Req. 1 The amount of accrued compensation is $45,007,000.
Req. 2 In footnote 6, Urban Outfitters reports gift certificates and merchandise

credits of $47,943,000 for the most recent year.
Req. 3 Step 1: Compute accounts payable turnover ratio.
14.66 = $2,148,147 / $146,563*
*($156, 090 + $137,036) / 2 = $146,563
Step 2: Divide 365 by the accounts payable turnover ratio
365 days / 14.66 = 24.90 days
Req. 4 There is only one long-term liability, and it is labeled “Deferred rent and
other liabilities. These long-term liabilities add up to $207,032,000.

CP9–3
Req. 1 365 days / 11.19 = 32.62 days
Req. 2
American Eagle Accounts Payable Turnover (in days):
10.78 = $2,128,193 / $197,509*
365 days / 10.78 = 33.86 days
*($191,146 + $203,872) / 2 = $197,509
Urban Outfitters Accounts Payable Turnover (in days):
14.66 = $2,148,147 / $146,563*
365 days / 14.66 = 24.90 days
*($156, 090 + $137,036) / 2 = $146,563
On average, companies in the industry take just under 33 days to pay suppliers.
American Eagle takes 34 days to pay suppliers. Urban Outfitters takes only 25 days. All
else equal, suppliers prefer to receive cash sooner rather than later and thus likely
prefer selling goods on credit to Urban Outfitter than American Eagle or other
companies in the industry that take longer to pay.
CP9–4
Req. 1
If the monthly payments actually include principal and interest, the price of the
home itself can be found by calculating the present value of the monthly payments:
$4,000 x 51.72556 = $206,902
The actual value of the house is $206,902. The remaining $33,098 ($240,000 -
$206,902) is interest that is “built into” the price of the house.

Req. 2
Just like car dealerships that promise “no interest” loans, the builder is likely using
“zero interest rate mortgage” to capture a buyer’s attention. In almost all cases,
“zero interest” simply means that the interest is either already embedded in the
price of an item, or that interest will accrue while you are not making payments over
some period of time.
CRITICAL THINKING CASES
CP9–5
The lottery jackpot does not have a present value of $10 million. For example, at an interest
rate of five percent, the present value of the $10 million is only $802,426 ($10 million /
12.46221). It is true that in absolute dollar terms the winner will receive $10 million over 20
years, but if the winner could earn a return of five percent on any funds invested, the winner
would be indifferent between the 20 yearly payments and a lump sum payment today of
$802,426.
FINANCIAL REPORTING AND ANALYSIS PROJECT
CP9–6
Questions one through six align with Learning Objectives one through six. Since
individuals and teams will choose different companies and industries, responses
will vary considerably.


LLH9e Ch09 SolutionsManual FINAL

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

LLH9e Ch09 SolutionsManual FINAL

Uploaded by

Copyright:

Available Formats

Chapter 9

Reporting and Interpreting Liabilities

7. $4,000 x 12% x 9/12 = $360.

Financial Accounting, 9/e 9-1

15. Present Value Factors

16. $8,000 x 3.99271 = $31,942.

ANSWERS TO MULTIPLE CHOICE

9-2 Solutions Manual

Alternate Cases and

Financial Accounting, 9/e 9-3

The accounts payable turnover ratio is:

Cost of Goods Sold / Average Accounts payable

This year’s accounts payable turnover ratio is therefore:

$720,000 / $240,000* = 3.0

*($250,000 + $230,000) / 2 = $240,000

Last year: $600,000  .11 1/12 = $5,500

Current year:$600,000  .11  2/12 = $11,000

9-4 Solutions Manual

M9–6 Current assets = $120,000 ($360,000 - $240,000)

Current liabilities = $90,000 ($360,000 - $94,000 - $176,000)

Working Capital = $30,000 ($120,000 - $90,000)

Effect on Working Capital

a. Remain the same

c. Remain the same

d. Remain the same

Rent expense (+E, -SE)........................................................... 800

Financial Accounting, 9/e 9-5

$500,000  0.46319 = $231,595

$15,000  6.14457 = $92,169

Amount Present Value Factor Present value

$118,000 x N/A = $118,000

$129,000 x 0.95238 = 122,857

$27,500 x 5.07569 = 139,581

$50,000  0.89000 = $44,500

Equipment (+A)........................................................................ 44,500

9-6 Solutions Manual

Financial Accounting, 9/e 9-7

9-8 Solutions Manual

December 31 (end of the accounting period):

April 30 (maturity date):

Financial Accounting, 9/e 9-9

Date Assets Liabilities Stockholders’ Equity

November 1 Cash + Note Payable + Not Affected

December 31 Not Affected Interest Payable + Interest Expense –

April 30 Cash – Note Payable – Interest Expense –

January 10 Inventory + Accounts Payable + Not Affected

March 1 Cash + Note Payable + Not Affected

9-10 Solutions Manual

Financial Accounting, 9/e 9-11

The lawsuits are contingent liabilities. Accounting guidance on contingent liabilities

1. Disclose this lawsuit in its footnotes as management judged the possibility of

2. Report this lawsuit as a contingent liability on its balance sheet as management

3. Do not report this lawsuit in the financial statements or footnotes as management

Total assets = $1,200,000

Noncurrent liabilities + Stockholders equity = $780,000

Therefore, current liabilities = $420,000 ($1,200,000 - $780,000)

Working capital = $750,000 – $420,000 = $330,000

9-12 Solutions Manual

The question of whether a lease will be recorded as a liability depends on

Financial Accounting, 9/e 9-13

Present value of unequal payments:

$20,000 x 0.90909 = $18,182

30,000 x 0.82645 = 24,794