12.7: Practice Questions

Multiple Choice

1.

LO 12.1Which of the following is not considered a current liability?

1. Accounts Payable
2. Unearned Revenue
3. the component of a twenty-year note payable due in year 20
4. current portion of a noncurrent note payable

2.

LO 12.1A company regularly purchases materials from a manufacturer on credit. Payments for these purchases occur within the company’s operating cycle. They do not include interest and are established with an invoice outlining purchase details, credit terms, and shipping charges. Which current liability situation does this best describe?

1. sales tax payable
2. accounts payable
3. unearned revenue
4. income taxes payable

3.

LO 12.1The following is selected financial data from Block Industries:

How much does Block Industries have in current liabilities?

1. $19,800
2. $18,300
3. $12,300
4. $25,800

4.

LO 12.1A ski company takes out a $400,000 loan from a bank. The bank requires eight equal repayments of the loan principal, paid annually. Assume no interest is paid or accumulated on the loan until the final repayment. How much of the loan principal is considered a current portion of a noncurrent note payable in year 3?

1. $50,000
2. $150,000
3. $100,000
4. $250,000

5.

LO 12.2Nido Co. has a standing agreement with a supplier for purchasing car parts. The terms of the agreement are 3/15, n/30 from the invoice date of September 1. The company makes a purchase on September 1 for $5,000 and pays the amount due on September 13. What amount does Nido Co. pay in cash on September 13?

1. $5,000
2. $4,850
3. $150
4. $4,250

6.

LO 12.2A client pays cash in advance for a magazine subscription to Living Daily. Living Daily has yet to provide the magazine to the client. What accounts would Living Daily use to recognize this advance payment?

1. unearned subscription revenue, cash
2. cash, subscription revenue
3. subscription revenue, unearned subscription revenue
4. unearned subscription revenue, subscription revenue, cash

7.

LO 12.2Lime Co. incurs a $4,000 note with equal principal installment payments due for the next eight years. What is the amount of the current portion of the noncurrent note payable due in the second year?

1. $800
2. $1,000
3. $500
4. nothing, since this is a noncurrent note payable

8.

LO 12.3Which of the following best describes a contingent liability that is likely to occur but cannot be reasonably estimated?

1. reasonably possible
2. probable and estimable
3. probable and inestimable
4. remote

9.

LO 12.3Blake Department Store sells television sets with one-year warranties that cover repair and replacement of television parts. In the month of June, Blake sells forty television sets with a per unit cost of $500. If Blake estimates warranty fulfillment at 10% of sales, what would be the warranty liability reported in June?

1. $1,000
2. $2,000
3. $500
4. $20,000

10.

LO 12.3What accounts are used to record a contingent warranty liability that is probable and estimable but has yet to be fulfilled?

1. warranty liability and cash
2. warranty expense and cash
3. warranty liability and warranty expense, cash
4. warranty expense and warranty liability

11.

LO 12.3Which of the following best describes a contingent liability that is unlikely to occur?

1. remote
2. probable and estimable
3. reasonably possible
4. probable and inestimable

12.

LO 12.4Which of the following accounts are used when a short-term note payable with 5% interest is honored (paid)?

1. short-term notes payable, cash
2. short-term notes payable, cash, interest expense
3. interest expense, cash
4. short-term notes payable, interest expense, interest payable

13.

LO 12.4Which of the following is not a characteristic of a short-term note payable?

1. Payment is due in less than a year.
2. It bears interest.
3. It can result from an accounts payable conversion.
4. It is reported on the balance sheet under noncurrent liabilities.

14.

LO 12.4Sunlight Growers borrows $250,000 from a bank at a 4% annual interest rate. The loan is due in three months. At the end of the three months, the company pays the amount due in full. How much did the company remit to the bank?

1. $250,000
2. $10,000
3. $252,500
4. $2,500

15.

LO 12.4Marathon Peanuts converts a $130,000 account payable into a short-term note payable, with an annual interest rate of 6%, and payable in four months. How much interest will Marathon Peanuts owe at the end of four months?

1. $2,600
2. $7,800
3. $137,800
4. $132,600

16.

LO 12.5An employee earns $8,000 in the first pay period. The FICA Social Security Tax rate is 6.2%, and the FICA Medicare tax rate is 1.45%. What is the employee’s FICA taxes responsibility?

1. $535.50
2. $612
3. None, only the employer pays FICA taxes
4. $597.50
5. $550

17.

LO 12.5Which of the following is considered an employer payroll tax?

1. FICA Medicare
2. FUTA
3. SUTA
4. A and B only
5. B and C only
6. A, B, and C

18.

LO 12.5Employees at Rayon Enterprises earn one day a month of vacation compensation (twelve days total each year). Vacation compensation is paid at an hourly rate of $45, based on an eight-hour work day. Rayon’s first pay period is January. It is now April 30, how much vacation liability has accumulated if the company has four employees and no vacation compensation has been paid?

1. $1,440
2. $4,320
3. $5,760
4. $7,200

19.

LO 12.5An employee and employer cost-share health insurance. If the employee covers three-fourths of the cost and the employer covers the rest, what would be the employee’s responsibility if the total premium was $825?

1. $618.75
2. $206.25
3. $412.50
4. $275

Exercise Set A

EA1.

LO 12.1Campus Flights takes out a bank loan in the amount of $200,500 on March 1. The terms of the loan include a repayment of principal in ten equal installments, paid annually from March 1. The annual interest rate on the loan is 8%, recognized on December 31. (Round answers to the nearest whole dollar if needed.)

1. Compute the interest recognized as of December 31 in year 1 rounded to the whole dollar.
2. Compute the principal due in year 1.

EA2.

LO 12.1Consider the following accounts and determine if the account is a current liability, a noncurrent liability, or neither.

1. cash
2. federal income tax payable this year
3. long-term note payable
4. current portion of a long-term note payable
5. note payable due in four years
6. interest expense
7. state income tax

EA3.

LO 12.1Lamplight Plus sells lamps to consumers. The company contracts with a supplier who provides them with lamp fixtures. There is an agreement that Lamplight Plus is not required to provide cash payment immediately and instead will provide payment within thirty days of the invoice date.

Additional information:

• Lamplight purchases thirty light fixtures for $20 each on August 1, invoice date August 1, with no discount terms
• Lamplight returns ten light fixtures (receiving a credit amount for the total purchase price per fixture of $20 each) on August 3.
• Lamplight purchases an additional fifteen light fixtures for $15 each on August 19, invoice date August 19, with no discount terms.
• Lamplight pays $100 toward its account on August 22.

What amount does Lamplight Plus still owe to the supplier on August 30? What account is used to recognize this outstanding amount?

EA4.

LO 12.2Review the following transactions and prepare any necessary journal entries for Olinda Pet Supplies.

1. On March 2, Olinda Pet Supplies receives advance cash payment from a customer for forty dog food dishes (from their Dish inventory), costing $25 each. Olinda had yet to supply the dog food bowls as of March 2.
2. On April 4, Olinda provides all of the dog food bowls to the customer.

EA5.

LO 12.2Review the following transactions and prepare any necessary journal entries for Tolbert Enterprises.

1. On April 7, Tolbert Enterprises contracts with a supplier to purchase 300 water bottles for their merchandise inventory, on credit, for $10 each. Credit terms are 2/10, n/60 from the invoice date of April 7.
2. On April 15, Tolbert pays the amount due in cash to the supplier.

EA6.

LO 12.2Elegant Electronics sells a cellular phone on September 2 for $450. On September 6, Elegant sells another cellular phone for $500. Sales tax is computed at 3.5% of the total sale. Prepare journal entries for each sale, including sales tax, and the remittance of all sales tax to the tax board on October 23.

EA7.

LO 12.2Homeland Plus specializes in home goods and accessories. In order for the company to expand its business, the company takes out a long-term loan in the amount of $650,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 8.5%. Each year on December 31, the company pays down the principal balance by $80,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year.

1. Determine the outstanding principal balance on December 31 of the first year that is computed for interest.
2. Compute the interest accrued on December 31 of the first year.
3. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.

EA8.

LO 12.2Bhakti Games is a chain of board game stores. Record entries for the following transactions related to Bhakti’s purchase of inventory.

1. On October 5, Bhakti purchases and receives inventory from XYZ Entertainment for $5,000 with credit terms of 2/10 net 30.
2. On October 7, Bhakti returns $1,000 worth of the inventory purchased from XYZ.
3. Bhakti makes payment in full on its purchase from XYZ on October 14.

EA9.

LO 12.3Following is the unadjusted trial balance for Sun Energy Co. on December 31, 2017.

You are also given the following supplemental information: A pending lawsuit, claiming $2,700 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. Sun Energy Co. believes a customer may win a lawsuit for $3,500 in damages, but the outcome is only reasonably possible to occur. Sun Energy calculated warranty expense estimates of $210.

1. Using the unadjusted trial balance and supplemental information for Sun Energy Co., construct an income statement for the year ended December 31, 2017. Pay particular attention to expenses resulting from contingencies.
2. Construct a balance sheet, for December 31, 2017, from the given unadjusted trial balance, supplemental information, and income statement for Sun Energy Co., paying particular attention to contingent liabilities.
3. Prepare any necessary contingent liability note disclosures for Sun Energy Co. Only give one to three sentences for each contingency note disclosure.

EA10.

LO 12.4Barkers Baked Goods purchases dog treats from a supplier on February 2 at a quantity of 6,000 treats at $1 per treat. Terms of the purchase are 2/10, n/30. Barkers pays half the amount due in cash on February 28 but cannot pay the remaining balance due in four days. The supplier renegotiates the terms on March 4 and allows Barkers to convert its purchase payment into a short-term note, with an annual interest rate of 6%, payable in 9 months.

Show the entries for the initial purchase, the partial payment, and the conversion.

EA11.

LO 12.4Use information from Exercise 12.10. Compute the interest expense due when Barkers honors the note. Show the journal entry to recognize payment of the short-term note on December 4.

EA12.

LO 12.4Scrimiger Paints wants to upgrade its machinery and on September 20 takes out a loan from the bank in the amount of $500,000. The terms of the loan are 2.9% annual interest rate and payable in 8 months. Interest is due in equal payments each month.

Compute the interest expense due each month. Show the journal entry to recognize the interest payment on October 20, and the entry for payment of the short-term note and final interest payment on May 20. Round to the nearest cent if required.

EA13.

LO 12.5Following are payroll deductions for Mars Co. Classify each payroll deduction as either a voluntary or involuntary deduction. Record a (V) for voluntary and an (I) for involuntary.

Payroll Deductions

Payroll Deduction	Voluntary (V) or Involuntary (I)?
FICA Social Security Tax
Vacation pay
401(k) retirement plan contribution
Charitable contributions
Federal Unemployment Tax (FUTA)
Health insurance plan contribution
FICA Medicare Tax
State Unemployment Tax (SUTA)

Table12.3

EA14.

LO 12.5Toren Inc. employs one person to run its solar management company. The employee’s gross income for the month of May is $6,000. Payroll for the month of May is as follows: FICA Social Security tax rate at 6.2%, FICA Medicare tax rate at 1.45%, federal income tax of $400, state income tax of $75, health-care insurance premium of $200, and union dues of $50. The employee is responsible for covering 30% of his or her health insurance premium.

1. Record the journal entry to recognize employee payroll for the month of May, dated May 31, 2017.
2. Record remittance of the employee’s salary with cash on June 1.

EA15.

LO 12.5In Exercise 12.14, you prepared the journal entries for the employee of Toren Inc. You have now been given the following additional information:

• May is the first pay period for this employee. FUTA taxes are 0.6% and SUTA taxes are 5.4% of the first $7,000 paid to the employee. FICA Social Security and FICA Medicare match employee deductions. The employer is responsible for 70% of the health insurance premium.

Using the information from Exercise 12.14 and the additional information provided:

1. Record the employer payroll for the month of May, dated May 31, 2017.
2. Record the payment in cash of all employer liabilities only on June 1.

EA16.

LO 12.5An employee and employer cost-share pension plan contributions and health insurance premium payments. If the employee covers 35% of the pension plan contribution and 25% of the health insurance premium, what would be the employee’s total benefits responsibility if the total pension contribution was $900, and the health insurance premium was $375?

Include the journal entry representing the payroll benefits accumulation for the employer in the month of February.

Exercise Set B

EB1.

LO 12.1Everglades Consultants takes out a loan in the amount of $375,000 on April 1. The terms of the loan include a repayment of principal in eight, equal installments, paid annually from the April 1 date. The annual interest rate on the loan is 5%, recognized on December 31. (Round answers to the nearest cent, if needed.)

1. Compute the interest recognized as of December 31 in year 1.
2. Compute the principal due in year 1.

EB2.

LO 12.1Match each of the following accounts with the appropriate transaction or description.

A. Sales Tax Payable	i. A customer pays in advance for services
B. Income Taxes Payable	ii. A risk incentive rate for a loan
C. Current portion of a long-term note payable	iii. State withholding from an employee’s paycheck
D. Interest Payable	iv. The portion of a note due within the operating period
E. Accounts Payable	v. A credit line between a purchaser and a supplier
F. Unearned Revenue	vi. Extra tax collected on the sale of a product

EB3.

LO 12.1Pianos Unlimited sells pianos to customers. The company contracts with a supplier who provides it with replacement piano keys. There is an agreement that Pianos Unlimited is not required to provide cash payment immediately, and instead will provide payment within thirty days of the invoice date.

Additional information:

• Pianos Unlimited purchases 400 piano keys for $7 each on September 1, invoice date September 1, with discount terms 2/10, n/30.
• Pianos Unlimited returns 150 piano keys (receiving a credit amount for the total purchase price per key of $7 each) on September 8.
• The company purchases an additional 230 keys for $5 each on September 15, invoice date September 15, with no discount terms.
• The company pays 50% of the total amount due to the supplier on September 24.

What amount does Pianos Unlimited still owe to the supplier on September 30? What account is used to recognize this outstanding amount?

EB4.

LO 12.2Review the following transactions and prepare any necessary journal entries for Bernard Law Offices.

1. On June 1, Bernard Law Offices receives an advance cash payment of $4,500 from a client for three months of legal services.
2. On July 31, Bernard recognizes legal services provided.

EB5.

LO 12.2Review the following transactions and prepare any necessary journal entries for Lands Inc.

1. On December 10, Lands Inc. contracts with a supplier to purchase 450 plants for its merchandise inventory, on credit, for $12.50 each. Credit terms are 4/15, n/30 from the invoice date of December 10.
2. On December 28, Lands pays the amount due in cash to the supplier.

EB6.

LO 12.2Monster Drinks sells twenty-four cases of beverages on October 18 for $120 per case. On October 25, Monster sells another thirty-five cases for $140 per case. Sales tax is computed at 4% of the total sale. Prepare journal entries for each sale, including sales tax, and the remittance of all sales tax to the tax board on November 5.

EB7.

LO 12.2McMasters Inc. specializes in BBQ accessories. In order for the company to expand its business, they take out a long-term loan in the amount of $800,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 9%. Each year on December 31, the company pays down the principal balance by $50,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year.

1. Determine the outstanding principal balance on December 31 of the first year that is computed for interest.
2. Compute the interest accrued on December 31 of the first year.
3. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.

EB8.

LO 12.3Following is the unadjusted trial balance for Pens Unlimited on December 31, 2017.

You are also given the following supplemental information: A pending lawsuit, claiming $4,200 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. Pens Unlimited believes a customer may win a lawsuit for $5,000 in damages, but the outcome is only reasonably possible to occur. Pens Unlimited records warranty estimates on the basis of 2% of annual sales revenue.

1. Using the unadjusted trial balance and supplemental information for Pens Unlimited, construct an income statement for the year ended December 31, 2017. Pay particular attention to expenses resulting from contingencies.
2. Construct a balance sheet, for December 31, 2017, from the given unadjusted trial balance, supplemental information, and income statement for Pens Unlimited. Pay particular attention to contingent liabilities.
3. Prepare any necessary contingent liability note disclosures for Pens Unlimited. Only give one to three sentences for each contingency note disclosure.

EB9.

LO 12.4Airplanes Unlimited purchases airplane parts from a supplier on March 19 at a quantity of 4,800 parts at $12.50 per part. Terms of the purchase are 3/10, n/30. Airplanes pays one-third of the amount due in cash on March 30 but cannot pay the remaining balance due. The supplier renegotiates the terms on April 18 and allows Airplanes to convert its purchase payment into a short-term note, with an annual interest rate of 9%, payable in six months.

Show the entries for the initial purchase, the partial payment, and the conversion.

EB10.

LO 12.4Use information from Exercise 12.9. Compute the interest expense due when Airplanes Unlimited honors the note. Show the journal entry to recognize payment of the short-term note on October 18.

EB11.

LO 12.4Whole Leaves wants to upgrade their equipment, and on January 24 the company takes out a loan from the bank in the amount of $310,000. The terms of the loan are 6.5% annual interest rate, payable in three months. Interest is due in equal payments each month.

Compute the interest expense due each month. Show the journal entry to recognize the interest payment on February 24, and the entry for payment of the short-term note and final interest payment on April 24. Round to the nearest cent if required.

EB12.

LO 12.5Reference Figure 12.15 and use the following information to complete the requirements.

1. Determine the federal income tax withholdings amount per monthly pay period for each employee.
2. Record the employee payroll entry (all employees) for the month of January assuming FICA Social Security is 6.2%, FICA Medicare is 1.45%, and state income tax is equal to 3% of gross income. (Round to the nearest cent if necessary.)

EB13.

LO 12.5Marc & Associates employs Janet Evanovich at its law firm. Her gross income for June is $7,500. Payroll for the month of June follows: federal income tax of $650, state income tax of $60, local income tax of $30, FICA Social Security tax rate at 6.2%, FICA Medicare tax rate at 1.45%, health-care insurance premium of $300, donations to a charity of $50, and pension plan contribution of $200. The employee is responsible for covering 40% of his or her health insurance premium.

1. Record the journal entry to recognize employee payroll for the month of June; dated June 30, 2017.
2. Record remittance of the employee’s salary with cash on July 1.

EB14.

LO 12.5In Exercise 12.13, you prepared the journal entries for Janet Evanovich, an employee of Marc & Associates. You have now been given the following additional information: June is the first pay period for this employee. FUTA taxes are 0.6% and SUTA taxes are 5.4% of the first $7,000 paid to the employee. FICA Social Security and FICA Medicare match employee deductions. The employer is responsible for 60% of the health insurance premium. The employer matches 50% of employee pension plan contributions.

Using the information from Exercise 12.13 and the additional information provided:

1. Record the employer payroll for the month of June, dated June 30, 2017.
2. Record the payment in cash of all employer liabilities only on July 1.

EB15.

LO 12.5An employee and employer cost-share 401(k) plan contributions, health insurance premium payments, and charitable donations. The employer also provides annual vacation compensation equal to ten days of pay at a rate of $30 per hour, eight-hour work day. The employee makes a gross wage of $3,000 monthly. The employee decides to use five days of vacation during the current pay period. Employees cover 30% of the 401(k) plan contribution and 30% of the health insurance premium. The employee also donates 1% of gross pay to a charitable organization.

1. What would be the employee’s total benefits responsibility if the total 401(k) contribution is $700 and the health insurance premium is $260?
2. Include the journal entry representing the payroll benefits accumulation for the employer in the month of March, if the employer matches the employee’s charitable donation of 1%.

Problem Set A

PA1.

LO 12.1Consider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year).

1. A business sets up a line of credit with a supplier. The company purchases $10,000 worth of equipment on credit. Terms of purchase are 5/10, n/30.
2. A customer purchases a watering hose for $25. The sales tax rate is 5%.
3. Customers pay in advance for season tickets to a soccer game. There are fourteen customers, each paying $250 per season ticket. Each customer purchased two season tickets.
4. A company issues 2,000 shares of its common stock with a price per share of $15.

PA2.

LO 12.1Stork Enterprises delivers care packages for special occasions. They charge $45 for a small package, and $80 for a large package. The sales tax rate is 6%. During the month of May, Stork delivers 38 small packages and 22 large packages.

1. What is the total tax charged to the customer per small package? What is the overall charge per small package?
2. What is the total tax charged to the customer per large package? What is the overall charge per large package?
3. How much sales tax liability does Stork Enterprises have for the month of May?
4. What account is used to recognize this tax situation for the month of May?
5. When Stork remits payment to the sales tax governing body, what happens to the sales tax liability?

PA3.

LO 12.2Review the following transactions, and prepare any necessary journal entries for Renovation Goods.

1. On May 12, Renovation Goods purchases 750 square feet of flooring (Flooring Inventory) at $3.00 per square foot from a supplier, on credit. Terms of the purchase are 2/10, n/30 from the invoice date of May 12.
2. On May 15, Renovation Goods purchases 200 measuring tapes (Tape Inventory) at $5.75 per tape from a supplier, on credit. Terms of the purchase are 4/15, n/60 from the invoice date of May 15.
3. On May 22, Renovation Goods pays cash for the amount due to the flooring supplier from the May 12 transaction.
4. On June 3, Renovation Goods pays cash for the amount due to the tape supplier from the May 15 transaction.

PA4.

LO 12.2Review the following transactions, and prepare any necessary journal entries for Juniper Landscaping Services.

1. On November 5, Juniper receives advance cash payment from a customer for landscaping services in the amount of $3,500. Juniper had yet to provide landscaping services as of November 5.
2. On December 11, Juniper provides all of the landscaping services to the customer from November 5.
3. On December 14, Juniper receives advance payment from another customer for landscaping services in the amount of $4,400. Juniper has yet to provide landscaping services as of December 14.
4. On January 19 of the following year, Juniper provides and recognizes 80% of landscaping services to the customer from December 14.

PA5.

LO 12.2Review the following transactions, and prepare any necessary journal entries.

1. On July 16, Arrow Corp. purchases 200 computers (Equipment) at $500 per computer from a supplier, on credit. Terms of the purchase are 4/10, n/50 from the invoice date of July 16.
2. On August 10, Hondo Inc. receives advance cash payment from a client for legal services in the amount of $9,000. Hondo had yet to provide legal services as of August 10.
3. On September 22, Jack Pies sells thirty pies for $25 cash per pie. The sales tax rate is 8%.
4. On November 8, More Supplies paid a portion of their noncurrent note in the amount of $3,250 cash.

PA6.

LO 12.3Machine Corp. has several pending lawsuits against its company. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability.

1. A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated.
2. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur.
3. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated.
4. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win.

PA7.

LO 12.3Emperor Pool Services provides pool cleaning and maintenance services to residential clients. It offers a one-year warranty on all services. Review each of the transactions, and prepare any necessary journal entries for each situation.

1. March 31: Emperor provides cleaning services for fifteen pools during the month of March at a sales price per pool of $550 cash. Emperor records warranty estimates when sales are recognized and bases warranty estimates on 2% of sales.
2. April 5: A customer files a warranty claim that Emperor honors in the amount of $100 cash.
3. April 13: Another customer, J. Jones, files a warranty claim that Emperor does not honor due to customer negligence.
4. June 8: J. Jones files a lawsuit requesting damages related to the dishonored warranty in the amount of $1,500. Emperor determines that the lawsuit is likely to end in the plaintiff’s favor and the $1,500 is a reasonable estimate for damages.

PA8.

LO 12.4Serene Company purchases fountains for its inventory from Kirkland Inc. The following transactions take place during the current year.

1. On July 3, the company purchases thirty fountains for $1,200 per fountain, on credit. Terms of the purchase are 2/10, n/30, invoice dated July 3.
2. On August 3, Serene does not pay the amount due and renegotiates with Kirkland. Kirkland agrees to convert the debt owed into a short-term note, with an 8% annual interest rate, payable in two months from August 3.
3. On October 3, Serene Company pays its account in full.

Record the journal entries to recognize the initial purchase, the conversion, and the payment.

PA9.

LO 12.4Mohammed LLC is a growing consulting firm. The following transactions take place during the current year.

1. On June 10, Mohammed borrows $270,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in four months from June 10, and annual interest rate of 5%.
2. On July 9, Mohammed borrows an additional $100,000 with payment due in four months from July 9, and an annual interest rate of 12%.
3. Mohammed pays their accounts in full on October 10 for the June 10 loan, and on November 9 for the July 9 loan.

Record the journal entries to recognize the initial borrowings, and the two payments for Mohammed.

PA10.

LO 12.5Lemur Corp. is going to pay three employees a year-end bonus. The amount of the year-end bonus and the amount of federal income tax withholding are as follows.

Lemur’s payroll deductions include FICA Social Security at 6.2%, FICA Medicare at 1.45%, FUTA at 0.6%, SUTA at 5.4%, federal income tax as previously shown, state income tax at 5% of gross pay, and 401(k) employee contributions at 2% of gross pay.

Record the entry for the employee payroll on December 31.

PA11.

LO 12.5Record the journal entries for each of the following payroll transactions.

Apr. 2	Paid $650 and $340 cash to a federal depository for FICA Social Security and FICA Medicare, respectively
Apr. 4	Paid accumulated employee salaries of $15,220
Apr. 11	Issued checks in the amounts of $480 for federal income tax and $300 for state income tax to an IRS-approved bank
Apr. 14	Paid cash to health insurance carrier for total outstanding health insurance liability of $800
Apr. 22	Remitted cash payments for FUTA and SUTA to federal and state unemployment agencies in the amounts of $130 and $250, respectively

Problem Set B

PB1.

LO 12.1Consider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year).

1. A business depreciates a building with a book value of $12,000, using straight-line depreciation, no salvage value, and a remaining useful life of six years.
2. An organization has a line of credit with a supplier. The company purchases $35,500 worth of inventory on credit. Terms of purchase are 3/20, n/60.
3. An employee earns $1,000 in pay and the employer withholds $46 for federal income tax.
4. A customer pays $4,000 in advance for legal services. The lawyer has previously recognized 30% of the services as revenue. The remainder is outstanding.

PB2.

LO 12.1Perfume Depot sells two different tiers of perfume products to customers. They charge $30 for tier 1 perfume and $100 for tier 2 perfume. The sales tax rate is 4.5%. During the month of October, Perfume Depot sells 75 tier 1 perfumes, and 60 tier 2 perfumes.

1. What is the total tax charged to the customer per tier 1 perfume? What is the overall charge per tier 1 category perfume?
2. What is the total tax charged to the customer per tier 2 perfume? What is the overall charge per tier 2 category perfume?
3. How much sales tax liability does Perfume Depot have for the month of October?
4. What account is used to recognize this tax situation for the month of October?
5. When Perfume Depot remits payment to the sales tax governing body, what happens to the sales tax liability?

PB3.

LO 12.2Review the following transactions, and prepare any necessary journal entries for Sewing Masters Inc.

1. On October 3, Sewing Masters Inc. purchases 800 yards of fabric (Fabric Inventory) at $9.00 per yard from a supplier, on credit. Terms of the purchase are 1/5, n/40 from the invoice date of October 3.
2. On October 8, Sewing Masters Inc. purchases 300 more yards of fabric from the same supplier at an increased price of $9.25 per yard, on credit. Terms of the purchase are 5/10, n/20 from the invoice date of October 8.
3. On October 18, Sewing Masters pays cash for the amount due to the fabric supplier from the October 8 transaction.
4. On October 23, Sewing Masters pays cash for the amount due to the fabric supplier from the October 3 transaction.

PB4.

LO 12.2Review the following transactions and prepare any necessary journal entries for Woodworking Magazine.Woodworking Magazine provides one issue per month to subscribers for a service fee of $240 per year. Assume January 1 is the first day of operations for this company, and no new customers join during the year.

1. On January 1, Woodworking Magazine receives advance cash payment from forty customers for magazine subscription services. Handyman had yet to provide subscription services as of January 1.
2. On April 30, Woodworking recognizes subscription revenues earned.
3. On October 31, Woodworking recognizes subscription revenues earned.
4. On December 31, Woodworking recognizes subscription revenues earned.

PB5.

LO 12.2Review the following transactions and prepare any necessary journal entries.

1. On January 5, Bunnet Co. purchases 350 aprons (Supplies) at $25 per apron from a supplier, on credit. Terms of the purchase are 3/10, n/30 from the invoice date of January 5.
2. On February 18, Melon Construction receives advance cash payment from a client for construction services in the amount of $20,000. Melon had yet to provide construction services as of February 18.
3. On March 21, Noonan Smoothies sells 875 smoothies for $4 cash per smoothie. The sales tax rate is 6.5%.
4. On June 7, Organic Methods paid a portion of their noncurrent note in the amount of $9,340 cash.

PB6.

LO 12.3Roundhouse Tools has several potential warranty claims as a result of damaged tool kits. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability.

1. Roundhouse Tools has several claims for replacement of another tool kit not listed as one of their damaged tool kits. The honored warranty for these tool kits is not likely but is not remote. It is possible.
2. A pending warranty claim has been received with the projected cost to be $450. Roundhouse Tools believes honoring that warranty claim is likely to occur and that figure is reasonably estimated.
3. Roundhouse Tools believes other potential warranties may have to be honored outside of the warranty period, but this is unlikely to occur.
4. Warranty replacements will cost the company a percentage of sales for the period. This amount allotted for warranty replacements cannot be reasonably estimated but is likely to occur.

PB7.

LO 12.3Shoe Hut sells custom, handmade shoes. It offers a one-year warranty on all shoes for repair or replacement. Review each of the transactions and prepare any necessary journal entries for each situation.

1. May 31: Shoe Hut sells 100 pairs of shoes during the month of May at a sales price per pair of shoes of $240 cash. Shoe Hut records warranty estimates when sales are recognized and bases warranty estimates on 4% of sales.
2. June 2: A customer files a warranty claim that Shoe Hut honors in the amount of $30 for repair to laces. Laces Inventory corresponds to shoelace inventory used for repairs.
3. June 4: Another customer files a warranty claim that Shoe Hut honors. Shoe Hut replaces the damaged shoes at a cost of $200, affecting their Shoe Replacement Inventory account.
4. August 10: Shoe Hut explores the possibility of bankruptcy, given the current economic conditions (recession). It determines the bankruptcy is unlikely to occur (remote).

PB8.

LO 12.4Air Compressors Inc. purchases compressor parts for its inventory from a supplier. The following transactions take place during the current year:

1. On April 5, the company purchases 400 parts for $8.30 per part, on credit. Terms of the purchase are 4/10, n/30, invoice dated April 5.
2. On May 5, Air Compressors does not pay the amount due and renegotiates with the supplier. The supplier agrees to $400 cash immediately as partial payment on note payable due, converting the debt owed into a short-term note, with a 7% annual interest rate, payable in three months from May 5.
3. On August 5, Air Compressors pays its account in full.

Record the journal entries to recognize the initial purchase, the conversion plus cash, and the payment.

PB9.

LO 12.4Pickles R Us is a pickle farm located in the Northeast. The following transactions take place:

1. On November 6, Pickles borrows $820,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in six months from November 6, and annual interest rate of 3%.
2. On December 12, Pickles borrows an additional $200,000 with payment due in three months from December 12, and an annual interest rate of 10%.
3. Pickles pays its accounts in full on March 12, for the December 12 loan, and on May 6 for the November 6 loan.

Record the journal entries to recognize the initial borrowings, and the two payments for Pickles.

PB10.

LO 12.5Use Figure 12.15 to complete the following problem. Roland Inc. employees’ monthly gross pay information and their W-4 Form withholding allowances follow.

Roland’s payroll deductions include FICA Social Security at 6.2%, FICA Medicare at 1.45%, FUTA at 0.6%, SUTA at 5.4%, federal income tax (based on withholdings table) of gross pay, state income tax at 3% of gross pay, and health insurance coverage premiums of $1,000 split 50% employees and 50% employer. Assume each employee files as single, gross income is the same amount each month, October is the first month of business operation for the company, and salaries have yet to be paid.

Record the entry or entries for accumulated employee and employer payroll for the month of October; dated October 31.

PB11.

LO 12.5Use the information from Exercise 12.10 to complete this problem. Record entries for each transaction listed.

Nov. 1	Paid cash to a federal depository for FICA Social Security and FICA Medicare; paid accumulated salaries
Nov. 3	Remitted cash payment for FUTA and SUTA to federal and state unemployment agencies
Nov. 10	Issued a check to an IRS-approved bank for federal and state income taxes
Nov. 12	Paid cash to health insurance carrier for total outstanding health insurance liability

Thought Provokers

TP1.

LO 12.1Research a Major League Baseball team’s season ticket prices. Pick one season ticket price level and answer the following questions:

• What team did you choose, and what are the ticket prices for a season?
• What is the sales tax rate for the purchase of season tickets?
• How many games are included in the season package?
• What are the refund and exchange policies for purchases?
• What are some benefits to the team with customers paying in advance for season tickets?
• Explain in detail the unearned revenue liability created from season ticket sales.
• When does the team recognize this future revenue as earned?
• What effect does the refund or exchange policy have on the unearned revenue account, and the ability of the team to recognize revenue?
• If unearned revenue was split equally among all games (not including playoff games), how much would be recognized per game?
• Explain in detail the sales tax liability created from season ticket sales.
• When does the team collect sales tax?
• What is the final purchase price of the season ticket with sales tax?
• Where does the team recognize the sales tax liability (which statement and account[s])?
• To whom does the team pay the sales tax collected?
• When is sales tax payment required?

TP2.

LO 12.2Review Exercise 12.1. Review current season ticket prices for one Major League Baseball team. Choose one season ticket price area to review.

1. Determine what is recognized as per ticket revenue after each game is played for your chosen season ticket price area. Assume an equal amount is distributed per game. Do not include playoff games or preseason games in your computations. If parking and other amenities are factored into the season ticket price, please continue to include them in your calculations.
2. Determine an average attendance figure for this team during the 2016 season for all seating areas, and per game (assume equal distribution of game attendance), and use this as a projection for future attendance. You may use Ballparks of Baseball http://www.ballparksofbaseball.com/2...rk-attendance/ for attendance figures.
3. Assume that attendance is distributed equally between all season ticket areas. Determine the attendance for your season ticket area for the season and per game.
4. Determine the total unearned ticket revenue amount before the season begins. Assume all season ticket holders paid with cash, in full.
5. Prepare the journal entry to recognize unearned ticket revenue at the beginning of the season for your chosen season ticket area. Assume all seats are filled by season ticket holders. Show any support calculations and documentation used.
6. Prepare the journal entry to recognize ticket revenue earned after the first game is played in your chosen season ticket area.
7. Suppose the team only records revenues every three months (at the end of each month), record the journal entry to recognize the first three months of ticket revenue earned during the season in your chosen season ticket area.

TP3.

LO 12.3Toyota is a car manufacturer that has issued several recalls over the years. One major recall centered on faulty air bags from Takata. A prior recall focused on unintentional pedal acceleration. Research information about the car manufacturer, and one of the two recall situations described. Answer the following questions:

• What are some of the main points discussed in the supplements you researched?
• What negative impact did this recall have on Toyota?
• As a result of the recall, what contingent liabilities were (or could be) created?
• How did Toyota handle the reporting of these contingent liabilities?
• How did Toyota determine the estimated liability amounts?
• Do you agree with Toyota’s treatment assignment for reported liabilities (probable and estimable, probable and inestimable, for example)?
• What note disclosures accompanied the recognized contingent liabilities?
• What long-term effect, if any, did the recall have on Toyota’s financials and reputation?

TP4.

LO 12.4You own a farm and grow seasonal products such as pumpkins, squash, and pine trees. Most of your business revenues are earned during the months of October to December. The rest of your year supports the growing process, where revenues are minimal and expenses are high. In order to cover the expenses from January to September, you consider borrowing a short-term note from a bank for $300,000.

• Research the lending practices of a local bank.
• Determine the interest rate charged for a $300,000 loan.
• What collateral does the bank require to secure the loan?
• Determine your overall payback amount if you were to repay the loan in less than one year. Choose either a payback with periodic payments or all at the end of the loan term, and compare the outcomes.
• After conducting your research, would you consider borrowing the money?
• What positive and negative outcomes accompany borrowing the money?

TP5.

LO 12.5Payroll Comparison Research Paper: Search the Internet for local public K–12 school districts, community colleges, and public universities that publish their employees’ salary (pay) schedules. Also research any available data on employee benefits provided to each of these schools. Review federal and state taxation rates on income, unemployment, Social Security, and Medicare. Write a comprehensive paper addressing the following questions and situations. You must provide scholarly data and source information to support your claims.

• Which schools did you compare?
• How do the salaries compare for each school entity?
• What voluntary benefits were provided by the employer (school district)?
• What involuntary deductions would be taken out of these salaries?
• What would your federal, state, and local income tax rates be if you worked for one of these schools? Hint: Choose one of the salaries from the schedule.
• Create a Form W-4 to determine your tax liability.
• Assume you are the employer for your chosen school. Prepare journal entries to record January’s employee and employer payroll (assume January is the first pay period and you are preparing the entry for one employee). You must record the liabilities from the January 31 payroll, along with the payment of these liabilities on February 1.
• Record any observations you have made at the culmination of your research, and connect these observations to what you’ve learned about current liabilities.