Extended Warranty
Co. S sells televisions for $900 and offers a three year extended warranty for $90. During 2017
300 televisions and 270 warranties contracts for cash. Estimated warranty costs--$20 parts and
$40 labor. Warranty revenue recognized on a straight line basis. 2017 warranty costs= $2,000 for
parts and $4,000 for labor.
(a)
(b)
Cash
294,300
Sales Revenue (300 X $900) ..............................................
270,000
Unearned Warranty Revenue (270 X $90) .............................
24,300
Current Liabilities:
Unearned Warranty Revenue ($24,300/3) .........................
$ 8,100
Long-term Liabilities:
Unearned Warranty Revenue
($24,300 X 2/3) ...............................................................
(c)
Unearned Warranty Revenue .........................................................
$16,200
8,100
Warranty Revenue ..............................................................
Warranty Expense ..........................................................................
8,100
6,000
Inventory ............................................................................
2,000
Salaries and Wages Payable ...............................................
4,000
(d)
Current Liabilities:
Unearned Warranty Revenue .............................................
$ 8,100
Long-term Liabilities:
Unearned Warranty Revenue .............................................
$ 8,100
Compensated Absences
Co. X began operations on Jan. 1, 2016. It employs 9 individuals who work 8 hours a day and
paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually.
Vacation days are taken the year after earned. Sick days taken when earned; unused sick days
accumulate.
Hourly rate—2016-$10; 2017-$11
Vacation Days used—2016-0; 2017—9
Sick days used-2016—4; 2017—5
(a)
2016
To accrue expense and liability for vacations
Salaries and Wages Expense ...................................................
7,200
Salaries and Wages Payable ........................................
7,200 (1)
To accrue the expense and liability for sick pay
Salaries and Wages Expense ...................................................
Salaries and Wages Payable ........................................
To record payment for compensated time when used by employees
4,320 (2)
4,320
Salaries and Wages Payable ....................................................
2,880 (3)
Cash .............................................................................
2,880
2017
To accrue the expense and liability for vacations
Salaries and Wages Expense ...................................................
7,920
Salaries and Wages Payable ........................................
7,920 (4)
To accrue the expense and liability for sick pay
Salaries and Wages Expense ...................................................
4,752
Salaries and Wages Payable ........................................
4,752 (5)
To record vacation time paid
Salaries and Wages Expense ...................................................
Salaries and Wages Payable ....................................................
648
6,480 (6)
Cash .............................................................................
7,128 (7)
To record sick leave paid
Salaries and Wages Expense ...................................................
Salaries and Wages Payable ....................................................
Cash .............................................................................
144
3,816 (8)
3,960 (9)
(1)
9 employees X $10.00/hr. X 8 hrs./day X 10 days
= $7,200
(2)
9 employees X $10.00/hr. X 8 hrs./day X 6 days
= $4,320
(3)
9 employees X $10.00/hr. X 8 hrs./day X 4 days
= $2,880
(4)
9 employees X $11.00/hr. X 8 hrs./day X 10 days
= $7,920
(5)
9 employees X $11.00/hr. X 8 hrs./day X 6 days
= $4,752
(6)
9 employees X $10.00/hr. X 8 hrs./day X 9 days
= $6,480
(7)
9 employees X $11.00/hr. X 8 hrs./day X 9 days
= $7,128
(8)
9 employees X $10.00/hr. X 8 hrs./day X (6–4) days =
9 employees X $11.00/hr. X 8 hrs./day X (5–2) days
(9)
9 employees X $11.00/hr. X 8 hrs./day X 5 days
$1,440
= $2,376
= $3,816
$3,960
Current/ Noncurrent Classification of Debt
On February 10, 2014, after issuance of its financial statements for 2013, Higgins Company
entered into a financing agreement with Cleveland Bank, allowing Higgins Company to
borrow up to $6,000,000 at any time through 2016. Amounts borrowed under the
agreement bear interest at 2% above the bank's prime interest rate and mature two years
from the date of loan. Higgins Company presently has $2,250,000 of notes payable with
Star National Bank maturing March 15, 2014. The company intends to borrow $3,750,000
under the agreement with Cleveland and liquidate the notes payable to Star National Bank.
The agreement with Cleveland also requires Higgins to maintain a working capital level of
$9,000,000 and prohibits the payment of dividends on common stock without prior
approval by Cleveland Bank. From the above information only, the total short-term debt
of Higgins Company as of the December 31, 2013 balance sheet date is $2,250,000.
On December 31, 2014, Isle Co. has $4,000,000 of short-term notes payable due on February 14,
2015. On January 10, 2013, Isle arranged a line of credit with Beach Bank which allows Isle to
borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2,
2015, Isle borrowed $2,400,000 from Beach Bank and used $1,000,000 additional cash to liquidate
$3,400,000 of the short-term notes payable. The amount of the short-term notes payable that
should be reported as current liabilities on the December 31, 2014 balance sheet which is issued
on March 5, 2015 is: $4,000,000 - $2,400,000 = $1,600,000
Use the following information for next two questions
Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the
sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded
in the Sales Revenue account during May was $251,450.
The amount of sales taxes (to the nearest dollar) for May is: 251,450/1.07 = 235,000; $251,450 - $235,000
= 16,450
The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is16,450 x .98
= 16,121
Sales revenue………….16,450
Cash……………………………………..............16,121
Revenue from collection of taxes …….. 329
Valley, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides
that the retail sales tax collected during the month must be remitted to the state during the
following month. If the amount collected is remitted to the state on or before the twentieth of
the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2014, Valley
remitted $135,800 tax to the state tax division for March 2014 retail sales. What was Valley's
March 2012 retail sales subject to sales tax? .05S x .97 = 135,800; 135,800/.0485 = 2,800,000
.
Jump Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the
sale of 85,000 shares of common stock. If the stock is sold for $20 per share subsequent to the
balance sheet date, but before the balance sheet is issued, what amount of short-term debt could
be excluded from current liabilities? 8,500 x 20 = 2,500,000 - 1,700,000 =800,000 Current Liability
and1,700,000 noncurrent
In 2014, Pollard Corporation began selling a new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the estimated warranty costs
related to dollar sales are as follows:
First year of warranty
3%
Second year of warranty
5%
Sales and actual warranty expenditures for 2014 and 2015 are presented below:
2014
Sales
Actual warranty expenditures
2015
$500,000
$700,000
30,000
50,000
What is the estimated warranty liability at the end of 2015?(assume the accrual method)
2014
Warranty expense………30,000
Parts Inventory…………………..25,000
Salaries payable……………………5,000
Warranty expense (40,000-30,000)……..10,000
Est. Warranty Liability………………………………………10,000
500,000 x .08 = 40,000 – 30,000 = 10,000 beg liability 2015 + 700,000 x .08 – 50,000 = 16,000
Flavor Food Company distributes to consumers coupons which may be presented (on or before a stated
expiration date) to grocers for discounts on certain products of Flavor. The grocers are
reimbursed when they send the coupons to Flavor. In Flavor's experience, 50% of such coupons
are redeemed, and generally one month elapses between the date a grocer receives a coupon
from a consumer and the date Flavor receives it. During 2014 Flavor issued two separate series
of coupons as follows:
Consumer
Amount Disbursed
Total Value
Expiration Date
as of 12/31/14
1/1/14
$500,000
6/30/14
$236,000
7/1/14
720,000
12/31/14
300,000
Issued On
The only journal entry recorded to date is: debit to coupon expense and credit to cash of $715,000. The
December 31, 2014 balance sheet should include a liability for unredeemed coupons of: $720,000
x .5 = 360,000 – 300,000 = 60,000
During 2014, Eaton Co. introduced a new product carrying a two-year warranty against defects.
The estimated warranty costs related to dollar sales are 2% within 12 months following sale and
3% in the second 12 months following sale. Sales and actual warranty expenditures for the years
ended December 31, 2014 and 2015 are as follows:
Actual Warranty
Sales
Expenditures
2014
$ 800,000
$12,000
2015
1,000,000
35,000
$1,800,000
$47,000
At December 31, 2015, $1,800,000 x .05 = 90,000 – 47,000 = 43,000
In March 2015, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By
May 2015, no claims had yet been asserted against Kirk. However, Kirk's management and legal
counsel concluded that it was reasonably possible that Kirk would be held responsible for
negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk's
$5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk's
December 31, 2014 financial statements, for which the auditor's fieldwork was completed in April
2015, how should this casualty be reported? As a note disclosing a possible liability of $400,000.
Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes.
No single amount within the range is a better estimate than any other amount. The loss accrual
should be: the minimum of the range.