Questions
➢ Define current liabilities.
➢ Describe the differences between clearly determinable, estimated, and contingent liabilities. Give one or more examples of each type.
➢ In what instances might a company acquire notes payable?
➢ How is the maturity value of a note calculated?
➢ How is interest on a note calculated?
➢ Explain the difference between employee and employer taxes.
➢ Describe the differences between gross pay and net pay.
Exercises
Exercise E Dunwoody Discount Toys, Inc., sells merchandise in a state that has a 5 per cent sales tax. Rather than record sales taxes collected in a separate account, the company records both the sales revenue and the sales taxes in the Sales account. At the end of the first quarter of operations, when it is time to remit the sales taxes to the state taxing agency, the company has $ 420,000 in the Sales account. Determine the correct amount of sales revenue and the amount of sales tax payable.
Exercise F Assume the following note appeared in the annual report of a company:
In 2009, two small retail customers filed separate suits against the company alleging misrepresentation, breach of contract, conspiracy to violate federal laws, and state antitrust violations arising out of their purchase of retail grocery stores through the company from a third party. Damages sought range up to $ 10 million in each suit for actual and treble damages and punitive damages of $ 2 million in one suit and $ 10 million in the other. The company is vigorously defending the actions and management believes there will be no adverse financial effect.
What kind of liability is being reported? Why is it classified this way? Do you think it is possible to calculate a dollar amount for this obligation? How much would the company have to pay if it lost the suit and had to pay the full amount?
Exercise G Determine the maturity date for each of the following notes:
| Issue Date | Life | |
| 2010 January 13 | 30 | days |
| 2010 January 31 | 90 | days |
| 2010 June 4 | 1 | year |
| 2010 December 2 | 1 | month |
Exercise H Crawford, Inc., gave a $ 20,000, 120-day, 12 per cent note to Dunston, Inc., in exchange for merchandise. Crawford uses periodic inventory procedure. Prepare journal entries to record the issuance of the note and the entries needed at maturity for Dunston, Inc., assuming payment is made by Crawford at maturity.
Exercise I Based on the facts in the previous exercise, prepare the entries that Dunston, Inc., would make at the maturity date, assuming Crawford defaults.
Exercise J John Wood is negotiating a bank loan for his company, Wood, Inc., of $ 16,000 for 90 days. The bank’s current interest rate is 10 per cent. Prepare Wood’s entries to record the loan under each of the following assumptions:
- Wood signs a note for $ 16,000. Interest is deducted in calculating the proceeds turned over to him.
- Wood signs a note for $ 16,000 and receives that amount. Interest is to be paid at maturity.
Exercise K Based on the previous exercise, prepare the entry or entries that would be made at the maturity date for each alternative, assuming the loan is paid before the end of the accounting period.
Problems
Problem C Ruiz Company sells merchandise in a state that has a 5 per cent sales tax. On 2010 January 2, Ruiz sold goods with a sales price of $ 80,000 on credit. Sales taxes collected are recorded in a separate account. Assume that sales for the entire month were $ 900,000. On 2010 January 31, the company remitted the sales taxes collected to the state taxing agency.
- Prepare the general journal entries to record the January 2 sales revenue. Also prepare the entry to show the remittance of the taxes on January 31.
- Now assume that the merchandise sold on January 2 also is subject to federal excise taxes of 12 per cent. The federal excise taxes collected are remitted to the proper agency on January 31. Show the entries on January 2 and January 31.
Problem D Honest Tim’s Auto Company sells used cars and warrants all parts for one year. The average price per car is $ 10,000, and the company sold 900 in 2009. The company expects 30 per cent of the cars to develop defective parts within one year of sale. The estimated average cost of warranty repairs per defective car is $ 600. By the end of the year, 80 cars sold that year had been returned and repaired under warranty. On 2010 January 4, a customer returned a car purchased in 2009 for repairs under warranty. The repairs were made on January 8. The cost of the repairs included parts, $ 400, and labor, $ 210.
- Calculate the amount of the estimated product warranty payable.
- Prepare the entry to record the estimated product warranty payable on 2009 December 31.
- Prepare the entry to record the repairs made on 2010 January 8.
Alternate problems
Alternate problem C Beacham Hardware, Inc., sells merchandise in a state that has a 6 per cent sales tax. On 2010 July 1, it sold goods with a sales price of $ 20,000 on credit. Sales taxes collected are recorded in a separate account. Assume that sales for the entire month were $ 400,000. On 2010 July 31, the company remitted the sales taxes collected to the state taxing agency.
- Prepare the general journal entries to record the July 1 sales revenue and sales tax payable. Also prepare the entry to show the remittance of the taxes on July 31.
- Now assume that the merchandise sold also is subject to federal excise taxes of 10 per cent in addition to the 6 per cent sales tax. The company remitted the federal excise taxes collected to the proper agency on July 31. Show the entries on July 1 and July 31.
Alternate problem D Quick Wheels, Inc., sells racing bicycles and warrants all parts for one year. The average price per bicycle is $ 560, and the company sold 4,000 in 2009. The company expects 20 per cent of the bicycles to develop defective parts within one year of sale. The estimated average cost of warranty repairs per defective bicycle is $ 40. By the end of the year, 500 bicycles sold that year had been returned and repaired under warranty. On 2010 January 2, a customer returned a bicycle purchased in 2009 for repairs under warranty. The repairs were made on January 3. The cost of the repairs included parts, $ 25, and labor, $ 15.
- Calculate the amount of the estimated product warranty payable.
- Prepare the entry to record the estimated product warranty payable on 2009 December 31.
- Prepare the entry to record the repairs made on 2010 January 3.