KiesIA 13e EBS Ch13 2nd PDF

CHAPTER 13
SOLUTIONS TO B EXERCISES
E13-1B (1015 minutes)
(a) Current liability.

(b) Current liabilities or long-term liabilities as a deduction from face
value of note.
(c) Current liability.
(d) Footnote disclosure.
(e) Separate presentation in either current or long-term liability section.
(f) Current liability.
(g) Footnote disclosure (assume not probable and/or not reasonably
estimable).
(h) Current liability.
(i) Current liability.
(j) Current liability or long-term liability depending on term of warranty.
(k) Current liability.
(l) Current or noncurrent liability depending upon the time involved.
(m) Current liability.
(n) Current liability.
(o) Current liability (unless right of offset exists).
(p) Current liability.
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Exercise B Solutions (For Instructor Use Only) 13-1
(a) Sept. 1 Purchases....................................................... 125,000

Accounts Payable ............................. 125,000
Oct. 1 Accounts Payable ........................................ 125,000

Notes Payable..................................... 125,000
Oct. 1 Cash.................................................................. 125,000

Discount on Notes Payable ...................... 17,000
Notes Payable..................................... 142,000
(b) Dec. 31 Interest Expense........................................... 3,750

Interest Payable
($125,000 X 12% X 3/12) ............... 3,750
Dec. 31 Interest Expense........................................... 4,250

Discount on Notes Payable
($17,000 X 3/12)............................... 4,250
(c) 1. Note payable $125,000

Interest payable 3,750
$128,750
2. Note payable $142,000

Less: Discount ($17,000 $4,250) 12,750
$129,250
13-2 Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Exercise B Solutions (For Instructor Use Only)
HERNANDEZ COMPANY
Balance Sheet (partial)
December 31, 2010
Current liabilities:
Notes payable (Note 1)................................................................... $ 500,000
Long-term debt:
Notes payable refinanced in February 2011 (Note 1)........... 2,500,000
Note 1.
Short-term debt refinanced. As of December 31, 2010, the company had
notes payable totaling $3,000,000 due on February 2, 2011. These notes
were refinanced on their due date to the extent of $2,500,000 received
from the issuance of common stock on January 21, 2011. The balance
of $500,000 was liquidated using current assets.
OR
Notes payable (Note 1)................................................................... $ 500,000
Long-term debt:
Short-term debt expected to be refinanced (Note 1)............ 2,500,000
(Same Note 1 as above.)
GIBSON COMPANY
Balance Sheet (partial)
December 31, 2010
Notes payable (Note 1) .............................................................. $8,840,000
Long-term debt:
Notes payable expected to be refinanced in 2011
(Note 1) ........................................................................................ 9,360,000
Note 1.
Under a financing agreement with Blue Lagoon State Bank the Company
may borrow up to 60% of the gross amount of its accounts receivable at
an interest cost of 1% above the prime rate. The Company intends to
issue notes maturing in 2015 to replace $9,360,000 of short-term, 15%,
notes due in 2011. Because the amount that can be borrowed may range
from $9,360,000 to $12,480,000, only $9,360,000 of the $18,200,000 of
currently maturing debt has been reclassified as long-term debt.
(a) To accrue the expense and liability To record payment for compensated
Year for compensated absences: time when used by employees:
2009 Wages Expense 17,280 Sick Pay Wages
Vacation Wages Payable 4,320(3)
Payable 10,800 (1) Cash 4,320
Sick Pay Wages
Payable 6,480 (2)
2010 Wages Expense 20,736 Wages Expense 2,376

Vacation Wages Vacation Wages
Payable 12,960 (4) Payable 9,720(6)
Sick Pay Wages Sick Pay Wages
Payable 7,776 (5) Payable 6,048(7)
Cash 18,144(8)
(1) 9 employees X $15/hr. X 8 hrs./day X 10 days = $10,800

(7) 9 employees X $15/hr. X 8 hrs./day X (6 4) days = $2,160
9 employees X $18/hr. X 8 hrs./day X (5 2) days = + 3,888 = $6,048
9 employees X $18/hr. X 8 hrs./day X 5 days = + 6,480 = $18,144
Note: Vacation days and sick days are paid at the employees current wage.
E13-5B (Continued)
(b) Accrued liability at year-end:
2009 2010
Vacation Sick Pay Vacation Sick Pay
Wages Wages Wages Wages
Payable Payable Payable Payable
Jan. 1 balance $ 0 $ 0 $10,800 $2,160
+ accrued 10,800 6,480 12,960 7,776
paid (0) (4,320) (9,720) (6,048)
Dec. 31 balance $10,800 (1) $2,160 (2) $14,040 (3) $3,888 (4)
(2) 9 employees X $15/hr. X 8 hrs./day X (6 4) days = $2,160
(3) 9 employees X $15/hr. X 8 hrs./day X (10 9) days = $ 1,080

9 employees X $18/hr. X 8 hrs./day X 10 days = +12,960
$14,040
(4) 9 employees X $18/hr. X 8 hrs./day X (6 + 6 4 5) days $3,888
(a) 2010
To accrue the expense and liability for vacations
Wages Expense ............................................. 11,520 (1)

Vacation Wages Payable.................. 11,520
To record sick leave paid

Wages Expense ............................................. 4,320 (2)
Cash ........................................................ 4,320
To record vacation time paid

No entry, since no vacation days were used.
2011
To accrue the expense and liability for vacations
Wages Expense ............................................. 13,320 (3)

Vacation Wages Payable.................. 13,320
To record sick leave paid

Wages Expense ............................................. 6,480 (4)
Cash ........................................................ 6,480
To record vacation time paid

Wages Expense ............................................. 1,296
Vacation Wages Payable ............................ 10,368 (5)
Cash ........................................................ 11,664 (6)
(1) 9 employees X $14.00/hr. X 8 hrs./day X 10 days = $11,520
E13-6B (Continued)
(b) Accrued liability at year-end:

2010 2011
Jan. 1 balance $ 0 $ 11,520
+ accrued 11,520 13,320
paid (0) (10,368)
Dec. 31 balance $11,520(1) $14,472(2)
(2) 9 employees X $14.00/hr. X 8 hrs./day X 1 day = $ 1,152

9 employees X $16.50/hr. X 8 hrs./day X 10 days = 13,320
$14,472
E13-7B (57 minutes)
June 30
Revenue from Sales..................................................................... 35,556
Sales Tax Payable.............................................................. 35,556
Computation:
Sales plus sales tax ($300,000 + $180,000) $480,000
Sales exclusive of tax ($480,000 1.08) 444,444
Sales tax $ 35,556
Wages and Salaries Expense ................................................... 960,000

Withholding Taxes Payable............................................ 180,000
FICA Taxes Payable* ........................................................ 59,800
Union Dues Payable.......................................................... 18,000
Cash ....................................................................................... 702,200
*($960,000 $220,000) X 7.65% = $56,610
$220,000 X 1.45% = $3,190; $56,610 + $3,190 = $59,800
E13-8B (Continued)
Payroll Tax Expense .................................................................... 63,000

FICA Taxes Payable........................................................... 59,800
(See previous computation)
Federal Unemployment Tax Payable ........................... 1,280
($960,000 $800,000) X .8%
State Unemployment Tax Payable................................ 1,920
$160,000 X (3.5% 2.3%)
(a) Computation of taxes

Warehouse
Wages $206,000
Social security taxes (FICA) 15,759 (7.65% X $206,000)
Federal unemployment taxes 480 (0.8% X $60,000)
State unemployment taxes 1,500 (2.5% X $60,000)
Total Cost $223,739
Sales
Wages $184,000
Social security taxes (FICA) 12,216*
Federal unemployment taxes 40 (0.8% X $5,000)
State unemployment taxes 125 (2.5% X $5,000)
Total Cost $196,381
*$154,000 X 7.65% = $11,781; $30,000 X 1.45% = $435;

$11,781 + $435 = $12,216
Administrative
Wages $51,000
Social security taxes (FICA) 2,352*
Federal unemployment taxes 0
State unemployment taxes 0
Total Cost $53,352
*$26,000 X 7.65% = $1,989; $25,000 X 1.45% = $363;

$1,989 + $363 = $2,352
E13-9B (Continued)
Schedule
Total Warehouse Sales Administrative

Wages $441,000 $206,000 $184,000 $51,000
FICA 30,327 15,759 12,216 2,352
Federal U.C. 520 480 40 0
State U.C. 1,625 1,500 125 0
Total Cost $473,472 $223,739 $196,381 $53,352
(b)
Warehouse Payroll:
Wages and Salaries Expense ..................................... 206,000
Withholding Taxes Payable .............................. 28,000
FICA Taxes Payable ............................................ 15,759
Cash.......................................................................... 162,241
Payroll Tax Expense ...................................................... 17,739

Federal Unemployment Tax Payable............. 480
State Unemployment Tax Payable ................. 1,500
Sales Payroll:
Cash.......................................................................... 140,784

Federal Unemployment Tax Payable............. 40
State Unemployment Tax Payable ................. 125
Administrative Payroll:
Cash.......................................................................... 39,648

(a) Cash (400 X $3,000) ...................................................... 1,200,000

Sales........................................................................ 1,200,000
Warranty Expense ......................................................... 24,000

Cash ........................................................................ 24,000
Warranty Expense ($132,000 $24,000) ................ 108,000

Estimated Liability Under Warranties .......... 108,000
(b) Cash ................................................................................... 1,200,000

Sales........................................................................ 1,200,000

Cash ........................................................................ 24,000
(a) Cash ................................................................................... 2,400,000

Sales (600 X $4,000) ........................................... 2,400,000

Cash ........................................................................ 30,000

Estimated Liability Under Warranties
($150,000 $30,000) ....................................... 120,000
(b) Cash ................................................................................... 2,400,000

Sales........................................................................ 2,200,000
Unearned Warranty Revenue.......................... 200,000

Cash ........................................................................ 30,000
Unearned Warranty Revenue..................................... 40,000

Warranty Revenue
[$200,000 X ($30,000/$150,000)].................. 40,000
Inventory of Premiums (10,000 X $0.50) .......................... 5,000

Cash .................................................................................. 5,000
Cash (55,000 X $3.75) ............................................................. 206,250

Sales.................................................................................. 206,250
Premium Expense ................................................................... 2,800

Inventory of Premiums [(28,000 5) X $0.50]...... 2,800
Premium Expense ................................................................... 500*

Estimated Liability for Premiums ............................ 500
*[(55,000 X 60%) 28,000] 5 X $0.50 = $500
1. The FASB pronouncements require that, when some amount within

the range appears at the time to be a better estimate than any other
amount within the range, that amount is accrued. When no amount
within the range is a better estimate than any other amount, the dollar
amount at the low end of the range is accrued, and the dollar amount
of the high end of the range is disclosed. In this case, therefore,
Santiago Inc. would report a liability of $225,000 at December 31, 2010.
2. The loss should be accrued. Given that the loss is covered by

insurance, except for the $125,000 deductible, only the $125,000
should be accrued.
3. This is a gain contingency because the amount to be received will be

in excess of the book value of the plant. Gain contingencies are not
recorded and are disclosed only when the probabilities are high that
a gain contingency will become reality.
(a) Depot ................................................................................. 2,400,000

Cash ........................................................................ 2,400,000
Depot ................................................................................. 167,516

Asset Retirement Obligation........................... 167,516
(b) Depreciation Expense.................................................. 240,000

Accumulated Depreciation .............................. 240,000
Depreciation Expense.................................................. 16,752

Accumulated Depreciation .............................. 16,752*
Interest Expense ............................................................ 10,051

Asset Retirement Obligation........................... 10,051**
*$167,516/10
**$167,516 X .06
(c) Asset Retirement Obligation ..................................... 300,000

Loss on ARO Settlement............................................. 20,000
Cash ........................................................................ 320,000
1. Liability for stamp redemptions, 12/31/09.............................. $6,000,000

Cost of redemptions redeemed in 2010.................................. (3,000,000)
3,000,000
Cost of redemptions to be redeemed in 2011
(9,800,000 X 60%) ...................................................................... 5,880,000
Liability for stamp redemptions, 12/31/10.............................. $8,880,000
2. Total coupons issued ................................................................... $500,000

Redemption rate ............................................................................. X 30%
To be redeemed .............................................................................. 150,000
Handling charges ($150,000 X 10%) ........................................ 15,000
Total cost .......................................................................................... $165,000
Total cost .......................................................................................... $165,000

Total payments to retailers ......................................................... (115,000)
Liability for unredeemed coupons ........................................... $ 50,000
E13-15B (Continued)
3. Boxes................................................................................................. 1,000,000
Redemption rate............................................................................. X 40%
Total redeemable ........................................................................... 400,000
Coupons to be redeemed (400,000 100,000) ..................... 300,000

Cost ($5.20 $2.00)....................................................................... X $3.20
Liability for unredeemed coupons........................................... $960,000
# Assets Liabilities Owners Equity Net Income

1. NE I D D
2. I I I I
3. NE I D D
4. I I NE NE
5. NE I D D
6. NE I D D
7. NE NE NE NE
8. NE I D D
9. D D NE NE
10. NE I D D
11. NE D I I
12. I I NE NE
13. D NE D D
14. NE I D D
15. I I NE NE
16. D I D D
17. NE I D D
18. I I I I
Current assets $105,000

(a) Current ratio = = = 2.63
Current liabilities $40,000
The current ratio measures the short-term ability of the company to

meet its currently maturing obligations.
(b) Cash + Marketable securities + Receivables $57,500

Acid-test ratio = = = 1.44
Current liabilities $40,000
The acid-test ratio also measures the short-term ability of the company
to meet its current maturing obligations. However, it eliminates assets
that might be slow-moving, such as inventories and prepaid expenses.
Total liabilities $110,000

(c) Debt to total assets = = = 51.16%
Total assets $215,000
This ratio provides the creditors with some idea of the companys
ability to withstand losses without impairing the interest of creditors.
Net income $12,500

(d) Rate of return on assets = = = 5.81%
Average total assets $215,000
This ratio measures the return the company is earning on its average
total assets and provides one indication related to the profitability of
the company.
$521,000
(a) 1. Current ratio = = 1.88
$277,000
$8,000 + $151,000 + $50,000

2. Acid-test ratio = = 0.75
$277,000
3. Accounts receivable turnover =

$112,000 + $151,000 = 19.8 times (or approximately
$2,608,000
2 every 18 days)
4. Inventory turnover =
$1,673,000
2 every 62 days)
5. Rate of return on assets =

$865,000 + $981,000
$328,000 = 35.54%
2
6. Profit margin on sales =

$328,000 $2,608,000 = 12.58%
(b) Financial ratios should be evaluated in terms of industry peculiarities

and prevailing business conditions. Although industry and general
business conditions are unknown in this case, the company appears
to have a relatively strong current position. The main concern from a
short-term perspective is the apparently low inventory turnover. The
rate of return on assets and profit margin on sales are extremely good
and indicate that the company is employing its assets advantageously.
(a) 1. $440,000 $273,000 = 1.61 times

2. $1,960,000
2 44 days).
3. $2,800,000 $155,000 = 18.06 times (or approximately 20 days).
4. $334,000 72,000 = $4.64
5. $334,000 $2,800,000 = 11.9%
6. $334,000 $643,000 = 51.9%
(b) 1. No effect on current ratio, if already included in the allowance

for doubtful accounts.
2. Weaken current ratio by reducing current assets.
3. Improve current ratio by reducing current assets and current

liabilities by a like amount.
4. No effect on current ratio.
5. Weaken current ratio by increasing current liabilities.
6. No effect on current ratio.

KiesIA 13e EBS Ch13 2nd PDF

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CHAPTER 13

E13-1B (1015 minutes)

(a) Current liability.

(a) Sept. 1 Purchases....................................................... 125,000

Oct. 1 Accounts Payable ........................................ 125,000

Oct. 1 Cash.................................................................. 125,000

(b) Dec. 31 Interest Expense........................................... 3,750

Dec. 31 Interest Expense........................................... 4,250

(c) 1. Note payable $125,000

2. Note payable $142,000

(Same Note 1 as above.)

2010 Wages Expense 20,736 Wages Expense 2,376

(1) 9 employees X $15/hr. X 8 hrs./day X 10 days = $10,800

(b) Accrued liability at year-end:

(1) 9 employees X $15/hr. X 8 hrs./day X 10 days = $10,800

(2) 9 employees X $15/hr. X 8 hrs./day X (6 4) days = $2,160

(3) 9 employees X $15/hr. X 8 hrs./day X (10 9) days = $ 1,080

(4) 9 employees X $18/hr. X 8 hrs./day X (6 + 6 4 5) days $3,888

Wages Expense ............................................. 11,520 (1)

To record sick leave paid

To record vacation time paid

Wages Expense ............................................. 13,320 (3)

To record sick leave paid

To record vacation time paid

(1) 9 employees X $14.00/hr. X 8 hrs./day X 10 days = $11,520

(2) 9 employees X $15.00/hr. X 8 hrs./day X 4 days = $4,320

(3) 9 employees X $16.50/hr. X 8 hrs./day X 10 days = $13,320

(4) 9 employees X $18.00/hr. X 8 hrs./day X 5 days = $6,480

(5) 9 employees X $14.00/hr. X 8 hrs./day X 9 days = $10,368

(6) 9 employees X $18.00/hr. X 8 hrs./day X 9 days = $11,664

(b) Accrued liability at year-end:

(1) 9 employees X $14.00/hr. X 8 hrs./day X 10 days = $11,520

(2) 9 employees X $14.00/hr. X 8 hrs./day X 1 day = $ 1,152

E13-7B (57 minutes)

E13-8B (1015 minutes)

Wages and Salaries Expense ................................................... 960,000

Payroll Tax Expense .................................................................... 63,000

E13-9B (1520 minutes)

(a) Computation of taxes

*$154,000 X 7.65% = $11,781; $30,000 X 1.45% = $435;

*$26,000 X 7.65% = $1,989; $25,000 X 1.45% = $363;

Total Warehouse Sales Administrative

Payroll Tax Expense ...................................................... 17,739

Payroll Tax Expense ...................................................... 12,381

Payroll Tax Expense ...................................................... 2,352

(a) Cash (400 X $3,000) ...................................................... 1,200,000

Warranty Expense ......................................................... 24,000

Warranty Expense ($132,000 $24,000) ................ 108,000

(b) Cash ................................................................................... 1,200,000

Warranty Expense ......................................................... 24,000

E13-11B (1520 minutes)

(a) Cash ................................................................................... 2,400,000

Warranty Expense ......................................................... 30,000

Warranty Expense ......................................................... 120,000

(b) Cash ................................................................................... 2,400,000

Warranty Expense ......................................................... 30,000

Unearned Warranty Revenue..................................... 40,000

Inventory of Premiums (10,000 X $0.50) .......................... 5,000

Cash (55,000 X $3.75) ............................................................. 206,250

Premium Expense ................................................................... 2,800

Premium Expense ................................................................... 500*

*[(55,000 X 60%) 28,000] 5 X $0.50 = $500

E13-13B (2030 minutes)