Chapter 11: Q15RQ (page 604)
How is the times-interest-earned ratio calculated, and what does it evaluate?
The times-interest-earned ratio is the ratio between earnings before interest & tax (EBIT) and interest expense.
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Accounting for warranties, vacancies and bonuses
McNight Industries completed the following transactions during 2008:
| Nov.21 | Made sales of \(52,000. McNight estimates that warranty expense is 6% of sales.(Record only the warranty expense.) |
| 30 | Paid \)1,600 to satisfy warranty claims. |
| Dec.31 | Estimated vacation benefits expense to be \(6,000 |
| 31 | McNight expected to pay its employees a 3% bonus on net income after deducting the bonus. Net income for the year is \)52,000 |
Journalize the transactions. Explanations are not required. Round to the nearest dollar.
What is contingent liability? Provide some examples of contingencies.
The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, \(3,000 note on June 1, 2018, and that this was the only note payable for the company.
California Communications | ||
Income Statement | ||
Year Ended July 31, 2018 | ||
Net Sales Revenue | \) 21,800 | |
Cost of Goods Sold | 14,000 | |
Gross Profit | 7,800 | |
Operating Expenses: | ||
Selling Expenses | \( 720 | |
Administrative Expenses | 1,650 | |
Total Operating Expenses | 2,370 | |
Operating Income | 5,430 | |
Other Income and (Expenses): | ||
Interest Expense | ? | |
Total Other Income and (Expenses) | ? | |
Net Income before Income Tax Expense | ? | |
Income Tax Expense | 1,080 | |
Net Income | \) ? |
Requirements
1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.
2. Compute the times-interest-earned ratio for the company. Round to two decimals.
Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be approximately 5% of sales. Assume that the Trail Runner dealer in Colorado Springs made sales totaling \(600,000 during 2018. The company received cash for 20% of the sales and notes receivable forthe remainder. Warranty payments totaled \)10,000 during 2018.
Requirements
Record the sales, warranty expense, and warranty payments for the company.
Ignore cost of goods sold.
On December 31, Weston Company estimates that it will pay its employees a 5% bonus on net income after deducting the bonus. The company reports net income of $64,000 before the calculation of the bonus. The bonus will be paid on January 15 of the next year.Requirements
1. Journalize the December 31 transaction for Weston.
2. Journalize the payment of the bonus on January 15.
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