ACCT1101 – Introduction to Financial Accounting

Tutorial Suggested solutions – Chapter 9

Discussion questions - suggested answers

(M10-4, M13-8, E9-4, E9-7, P9-16, P9-2, P9-9, P9-11)

M10–4.

The formula for the times interest earned ratio is:

Times Interest Earned = Net Income + Interest Expense + Income Tax
Interest Expense

For Oak this results in a times interest earned ratio of:

14.29 = $117,180 + $12,600 + $50,220
$12,600

M13–8.

Times Interest Earned =

(Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense

Times Interest Earned = ($52,000 + $12,000 + $13,000) ÷ $12,000

Times Interest Earned = 6.42

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):

Interest expense (+E, -SE) ............................................. 64,000*
Interest payable (+L)................................................... 64,000
Adjusting entry for 2 months’ accrued interest.
*$4,800,000 x .08 x 2/12 = $64,000

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 9
Req. 3

April 30 (maturity date):

Note payable (-L) ........................................................... 4,800,000
Interest payable (per above) (-L) .................................... 64,000
Interest expense (+E, -SE) ............................................. 128,000*
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, Nordstrom 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. However, it might be possible to borrow for a longer term at a lower interest
rate and invest idle cash to offset the interest charges. Nordstrom 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.

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 9

E9–7.
Req. 1
To compute the average number of days that a company’s accounts payable are
outstanding, first 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
Second, divide the accounts payable turnover ratio into 365 days to get the average
number of days that accounts payable are outstanding:
365 days / 5.85 = 62.4 days
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 months. 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.

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 $2,030,408.

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 9
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
Note payable, short term (+L) ..................................... 35,000

June 3:
Inventory (+A) ................................................................ 17,420
Accounts payable (+L) ................................................ 17,420

July 5:
Accounts payable (-L) .................................................... 17,420
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

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 9
P9–2. (continued)

Req. 2

December 31:
Interest expense (+E, -SE). ............................................ 2,100
Interest payable (+L)................................................... 2,100

($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 from accrued wages

or the adjusting entries

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 9
P9–9.

1. Disclose in footnotes—Loss is probable, but amount cannot be reliably

estimated.

2. Not reported---the probability of incurring a loss is remote.

3. Report liability---Amount can be estimated and loss is probable.

4. Disclose in footnotes---Loss is probable, but amount cannot be reliably

estimated.

5. Report liability--- Amount is known and loss is probable.

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