# Soln7-07 - Problem Solutions – Chapter 7 215 PROBLEM...

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Unformatted text preview: Problem Solutions – Chapter 7 215 PROBLEM SOLUTIONS 7-1 Accounts Payable – Purchase Discounts 1. The annualized rate is: [0.03 ÷ (1.0 – 0.03)] x [365 days ÷ 15 days] = [0.03 ÷ 0.97] x [24.3333] = .7526 2. The cost of borrowing is 20% x \$150,000 = \$30,000 . The additional costs incurred on the \$150,000 of accounts payable is 75.26% x \$150,000 = \$112,890 in lost discounts, so the company would be \$82,890 better off (\$112,890 – \$30,000) by borrowing at 20% for a year. 7-2 Accounts Payable – Purchase Discounts Vendor A: [0.01 ÷ (1.0 – 0.01)] x [365 days ÷ 20 days] = 18.4% Vendor B: [0.02 ÷ (1.0 – 0.02)] x [365 days ÷ 10 days] = 74.5% Vendor C: [0.01 ÷ (1.0 – 0.01)] x [365 days ÷ 15 days] = 24.6% Vendor D: [0.02 ÷ (1.0 – 0.02)] x [365 days ÷ 30 days] = 24.8% Vendor E: [0.03 ÷ (1.0 – 0.03)] x [365 days ÷ 20 days] = 56.4% The order in descending annual interest rates is B, E, D, C, A. 7-3 Note Payable – Short-term 5/1/07 Cash 48,000 Note Payable 48,000 12/31/07 Interest Expense* 2,880 Interest Payable 2,880 *\$48,000 x 9% x 8/12 2/28/08 Note Payable 48,000 Interest Payable 2,880 Interest Expense** 720 Cash 51,600 **\$48,000 x 9% x 2/12 Remember, the 9% is an annual interest rate. INTRODUCTION TO FINANCIAL REPORTING AND ANALYSIS – 4 TH EDITION 216 7-4 Warranty Liability Estimation 1. The warranty expense for 2007 was \$706 and for 2006 it was \$675. See the T- account analysis below. 2. The year-end balance in the Estimated Warranty Liability was \$1,892 at the end of 2007 and \$2,135 at the end of 2006. See the T-account analysis below. Estimated Warranty Liability 2,249 Balance at end of 2005 (given) Claims in 2006 789 675 Expense [.005 x \$135,073 sales] 2,135 Balance at end of 2006 Claims in 2007 949 706 Expense [.005 x \$141,230 sales] 1,892 Balance at end of 2007 3. The journal entries are as follows: 2006 2007 Accounts Debit Credit Debit Credit Estimated Warranty Liability 789 949 Cash 789 949 (to pay dealers for actual warranty claims of customers during year) Warranty Expense 675 706 Estimated Warranty Liability 675 706 (to record estimated warranty expense at 0.5% of sales for year) 4. The liability balance should be more than the actual warranty expense for the most recent 2.5 years (assuming the estimated expense is reasonably accurate). In rising sales periods, you would also expect the amount of warranty expense to be greater than the claims from the past years sales. Here, 2.5 times the claims in 2007 (\$949) is \$2,372 which is greater than the actual liability balance of \$1,892. Also, the amount of expense for 2006 and for 2007 seems too low relative to the recent claim history. 5. The Estimated Warranty Liability account seems too low. The claims are exceeding the estimated expense, and this is reducing the liability balance each year. While the 2007 year end balance is more than 2.5 times the 2007 (estimated) expense, it is well below 2.5 times the claims filed in 2005. Problem Solutions – Chapter 7 217 7-5...
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## This note was uploaded on 04/04/2008 for the course ACC 271 taught by Professor Klem during the Winter '08 term at University of Michigan.

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Soln7-07 - Problem Solutions – Chapter 7 215 PROBLEM...

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