chapter 11 current liabilities and payroll
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CHAPTER 11 CURRENT LIABILITIES AND PAYROLL QUESTION INFORMATION Number EO11-1 EO11-2 EO11-3 EO11-4 EO11-5 EO11-6 EO11-7 EO11-8 EO11-9 EO11-10 EO11-11 EO11-12 EO11-13 EO11-14 PE11-1A Objective 11-1 11-1 11-2 11-2 11-2 11-2 11-3 11-3 11-3 11-4 11-4 11-5 11-5 11-5 11-1 PE11-1B 11-1 PE11-2A 11-2 PE11-2B 11-2 PE11-3A 11-2 PE11-3B 11-2 PE11-4A 11-3 PE11-4B 11-3 PE11-5A 11-3 PE11-5B 11-3 PE11-6A 11-4 PE11-6B 11-4 PE11-7A 11-5 PE11-7B 11-5 Ex11-1 Ex11-2 11-1 11-1 Ex11-3 11-1 Ex11-4 11-1 Description Calculate proceeds from notes payable Calculate proceeds from notes payable Calculate federal income tax withholding Calculate federal income tax withholding Calculate employee net pay Calculate employee net pay Journalize period payroll Journalize period payroll Journalize period payroll Journalize period payroll Journalize vacation pay and pension benefits Journalize vacation pay and pension benefits Journalize estimated warranty liability Journalize estimated warranty liability Current liabilities Entries for discounting notes payable Evaluate alternative notes Entries for notes payable Difficulty Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Easy Time 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min 5 min AACSB Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic AICPA FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy Easy 10 min 15 min Analytic Analytic FN-Measurement FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement 633 SS GL Number Ex11-5 Objective 11-1 Ex11-6 11-1 Ex11-7 11-1 Ex11-8 Ex11-9 Ex11-10 Ex11-11 Ex11-12 Ex11-13 Ex11-14 11-2 11-2 11-2, 11-3 11-3 11-3 11-3 11-3 Ex11-15 11-3 Ex11-16 Ex11-17 Ex11-18 Ex11-19 11-3 11-4 11-4 11-4 Ex11-20 11-5 Ex11-21 11-5 Ex11-22 Ex11-23 Ex11-24 Pr11-1A Pr11-2A 11-5 FAI FAI 11-1, 11-5 11-2, 11-3 Pr11-3A 11-2, 11-3 Pr11-4A Pr11-5A 11-2, 11-3 11-2, 11-3 Pr11-6A Pr11-1B Pr11-2B 11-2, 11-3, 11-4 11-1, 11-5 11-2, 11-3 Pr11-3B 11-2, 11-3 Pr11-4B Pr11-5B 11-2, 11-3 11-2, 11-3 Pr11-6B 11-2 ,11-3, 11-4 11-1, 112, 11-3, 11-4,11-5 Comp Problem 3 SA11-1 11-3 SA11-2 11-4 Description Entries for discounted notes payable Fixed asset purchases with note Current portion of long-term debt Calculate payroll Calculate payroll Summary payroll data Payroll tax entries Payroll tax entries Payroll tax entries Payroll internal control procedures Internal control procedures Payroll procedures Accrued vacation pay Pension plan entries Defined benefit pension plan Accrued product warranty Accrued product warranty Contingent liabilities Quick ratio Quick ratio Liability transactions Entries for payroll and payroll taxes Wage and tax statement data and employer FICA Payroll register Payroll register Difficulty Easy Time 10 min AACSB Analytic AICPA FN-Measurement Moderate 15 min Analytic FN-Measurement Easy 10 min Analytic FN-Measurement Easy Moderate Moderate Easy Easy Easy Easy 10 min 15 min 15 min 10 min 10 min 10 min 10 min Analytic Analytic Analytic Analytic Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Moderate 15 min Analytic FN-Measurement Easy Easy Easy Easy 5 min 5 min 10 min 5 min Analytic Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement FN-Measurement Easy 10 min Analytic FN-Measurement Easy 5 min Analytic FN-Measurement Moderate Easy Easy Moderate Moderate 15 min 10 min 10 min 45 min 1 hr Analytic Analytic Analytic Analytic Analytic FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement Difficult 1 1/4 hr Analytic FN-Measurement Exl Moderate Difficult Analytic Analytic FN-Measurement FN-Measurement Exl Payroll accounts and year-end entries Liability transactions Entries for payroll and payroll taxes Wage and tax statement data and employer FICA Payroll register Payroll register Difficult 1 hr 1 1/4 hr 2 hr Analytic FN-Measurement KA Moderate Moderate 45 min 1 hr Analytic Analytic FN-Measurement FN-Measurement KA KA Difficult 1 1/4 hr Analytic FN-Measurement Exl Moderate Difficult Analytic Analytic FN-Measurement FN-Measurement Exl Payroll accounts and year-end entries Journal entries, bank reconciliation, adjusting entries, balance sheet Ethics and professional conduct Recognizing pension expense Difficult 1 hr 1 1/4 hr 2 hr Analytic FN-Measurement KA Difficult 3 hr Analytic FN-Measurement KA Easy 15 min Ethics BB-Industry Easy 15 min Analytic FN-Measurement 634 SS GL KA KA Number SA11-3 Objective 11-3 SA11-4 11-2 SA11-5 SA11-6 11-3 11-5 Description Executive bonuses and accounting methods Ethics and professional conduct Payroll forms Contingent liabilities Difficulty Easy Time 15 min AACSB Analytic AICPA FN-Measurement Easy 15 min Ethics BB-Industry Moderate Moderate 30 min 30 min Analytic Analytic FN-Measurement FN-Measurement 635 SS GL EYE OPENERS 9. a. If employees’ attendance records are kept and their preparation supervised in such a manner as to prevent errors and abuses, then one can be assured that wages paid are based on hours actually worked. The use of “In” and “Out” cards, whereby employees indicate by punching a time clock their time of arrival and departure, is especially useful. Employee identification cards or badges can be very helpful in giving additional assurance. Employee identification cards and badges can also contain bar codes that can be used by electronic scanners to account for employee time and control access to authorized locations. b. The requirement that the addition of names on the payroll be supported by written authorizations from the Personnel Department can help ensure that payroll checks are not being issued to fictitious persons. Endorsements on payroll checks can be compared with other samples of employees’ signatures. Many businesses directly deposit payroll checks to employee bank accounts, thereby eliminating the need for endorsement and check disbursement controls. 10. If the vacation payment is probable and can be reasonably estimated, the vacation pay expense should be recorded during the period in which the vacation privilege is earned. 11. Employee life expectancies, expected employee retirement dates, employee turnover, employee compensation levels, and investment income on pension contributions are factors that influence the future pension obligation of an employer. 12. To match revenues and expenses properly, the liability to cover product warranties should be recorded in the period during which the sale of the product is made. 13. When the defective product is repaired, the repair costs would be recorded by debiting Product Warranty Payable and crediting Cash, Supplies, or another appropriate account. 14. Yes. Since the $5,000 is payable within one year, Company A should present it as a current liability at September 30. 1. A discounted note payable has no stated interest rate, but provides interest by discounting the note proceeds. The discount, which is the difference between the proceeds and the face of the note, is the interest and is accounted for as such. 2. a. Income or withholding taxes, social security, and Medicare b. Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare Tax Payable. 3. There is a ceiling on (c) the social security portion of the FICA tax and (d) the federal unemployment compensation tax. 4. The deductions from employee earnings are for amounts owed (liabilities) to others for such items as federal taxes, state and local income taxes, and contributions to pension plans. 5. Yes. Unemployment compensation taxes are paid by the employer on the first $7,000 of annual earnings for each employee. Therefore, hiring two employees, each earning $12,500 per year, would require the payment of twice the unemployment tax than if only one employee, earning $25,000, was hired. 6. 1. a 2. c 3. c 4. b 5. b 7. The use of special payroll checks relieves the treasurer or other executives of the task of signing a large number of regular checks each payday. Another advantage of this system is that reconciling the regular bank statement is simplified. The paid payroll checks are returned by the bank separately from regular checks and are accompanied by a statement of the special bank account. Any balance shown on the bank’s statement will correspond to the sum of the payroll checks outstanding because the amount of each deposit is exactly the same as the total amount of checks drawn. 8. a. Input data that remain relatively unchanged from period to period (and therefore do not need to be reintroduced into the system frequently) are called constants. b. Input data that differ from period to period are called variables. 636 PRACTICE EXERCISES PE 11–1A a. $120,000. b. $117,600. [$120,000 – ($120,000 × 90/360 × 8%)] PE 11–1B a. $50,000. b. $49,750. [$50,000 – ($50,000 × 30/360 × 6%)] PE 11–2A Total wage payment One allowance (provided by IRS) Multiplied by allowances claimed on Form W-4 Amount subject to withholding $ 1,680.00 $63.00 × 3 Initial withholding from wage bracket in Exhibit 3 Plus additional withholding: 28% of excess over $1,409 Federal income tax withholding 189.00 $ 1,491.00 $ 275.55 22.96* $ 298.51 *($1,491 – $1,409) × 28%. PE 11–2B Total wage payment One allowance (provided by IRS) Multiplied by allowances claimed on Form W-4 Amount subject to withholding Initial withholding from wage bracket in Exhibit 3 Plus additional withholding: 15% of excess over $192 Federal income tax withholding *($537 – $192) × 15%. 637 $ 600.00 $63.00 × 1 63.00 $ 537.00 $ 14.10 51.75* $ 65.85 PE 11–3A Total wage payment Less: Federal income tax withholding Earnings subject to social security tax ($100,000 – $99,000) Social security tax rate Social security tax Medicare tax ($1,680 × 1.5%) Net pay $ 1,680.00 298.51 $1,000.00 × 6% 60.00 25.20 $ 1,296.29 PE 11–3B Total wage payment Less: Federal income tax withholding Earnings subject to social security tax Social security tax rate Social security tax Medicare tax ($600 × 1.5%) Net pay $ 600.00 65.85 600.00 × 6% 36.00 9.00 $ 489.15 PE 11–4A Salaries Expense.......................................................... Social Security Tax Payable .................................. Medicare Tax Payable............................................. Employees Federal Income Tax Payable .............. Salaries Payable ..................................................... 21,000 1,260 315 3,822 15,603 PE 11–4B Salaries Expense.......................................................... Social Security Tax Payable .................................. Medicare Tax payable ............................................. Employees Federal Income Tax Payable .............. Retirement Savings Deductions Payable ............. Salaries Payable ..................................................... 638 450,000 25,650 6,750 89,100 27,000 301,500 PE 11–5A Payroll Tax Expense ............................................... Social Security Tax Payable ............................. Medicare Tax Payable........................................ State Unemployment Tax Payable .................... Federal Unemployment Tax Payable ................ 1,980.48 1,260.00 315.00 353.16* 52.32** *$6,540 × 5.4% **$6,540 × 0.8% PE 11–5B Payroll Tax Expense ............................................... Social Security Tax Payable ............................. Medicare Tax Payable........................................ State Unemployment Tax Payable .................... Federal Unemployment Tax Payable ................ 33,178.10 25,650.00 6,750.00 677.70* 100.40** *$12,550 × 5.4% **$12,550 × 0.8% PE 11–6A a. b. Vacation Pay Expense ............................................ Vacation Pay Payable ........................................ Vacation pay accrued for the period. 17,500 17,500 Pension Expense .................................................... 12,600 Cash .................................................................... To record pension contribution, 7% × $180,000. 12,600 PE 11–6B a. b. Vacation Pay Expense ............................................ Vacation Pay Payable ........................................ Vacation pay accrued for the period. 52,300 Pension Expense .................................................... Cash .................................................................... Unfunded Pension Liability ............................... To record pension cost and funding. 123,000 639 52,300 100,000 23,000 PE 11–7A a. Mar. 31 Product Warranty Expense ................................ Product Warranty Payable ............................ To record warranty expense for March, 4.5% × $870,000. 39,150 Product Warranty Payable ................................. Supplies ......................................................... Wages Payable .............................................. 520 39,150 b. Oct. 4 420 100 PE 11–7B a. June 30 Product Warranty Expense ................................ Product Warranty Payable ............................ To record warranty expense for June, 5% × $480,000. 24,000 Product Warranty Payable ................................. Cash................................................................ 90 24,000 b. Aug. 16 640 90 EXERCISES Ex. 11–1 Current liabilities: Federal income taxes payable ........................................................... Advances on magazine subscriptions .............................................. Total current liabilities ........................................................................ $ 49,000* 299,250** $ 348,250 *$140,000 × 35% **11,400 × $35 × 9/12 = $299,250 The nine months of unfilled subscriptions are a current liability because Rock On received payment prior to providing the magazines. Ex. 11–2 a. 1. Merchandise Inventory ............................................ Interest Expense ...................................................... Notes Payable ..................................................... 246,875 3,125* 2. Notes Payable ........................................................... Cash ..................................................................... 250,000 b. 1. Notes Receivable ..................................................... Sales .................................................................... Interest Revenue ................................................. 250,000 2. Cash .......................................................................... Notes Receivable ................................................ 250,000 *$250,000 × 5% × 90/360 641 250,000 250,000 246,875 3,125* 250,000 Ex. 11–3 a. $120,000 × 6% × 90/360 = $1,800 for each alternative. b. (1) $120,000 simple-interest note: $120,000 proceeds (2) $120,000 discounted note: $120,000 – $1,800 interest = $118,200 proceeds c. Alternative (1) is more favorable to the borrower. This can be verified by comparing the effective interest rates for each loan as follows: Situation (1): 6% effective interest rate ($1,800 × 360/90) / $120,000 = 6% Situation (2): 6.09% effective interest rate ($1,800 × 360/90) / $118,200 = 6.09% The effective interest rate is higher for the second loan because the creditor lent only $118,200 in return for $1,800 interest over 90 days. In the simpleinterest loan, the creditor must lend $120,000 for 90 days to earn the same $1,800 interest. Ex. 11–4 a. Accounts Payable .......................................................... Notes Payable ........................................................... b. Notes Payable ................................................................ Interest Expense ............................................................ Cash .......................................................................... 15,000 15,000 15,000 175* 15,175 *$15,000 × 7% × 60/360 = $175 Ex. 11–5 a. Accounts Payable .......................................................... Interest Expense ............................................................ Notes Payable ........................................................... 78,400 1,600* 80,000 *$80,000 × 8% × 90/360 b. Notes Payable ................................................................ Cash .......................................................................... 642 80,000 80,000 Ex. 11–6 a. June 30 b. Dec. 31 c. June 30 Building ......................................................... Land .............................................................. Note Payable ........................................... Cash ......................................................... 690,000 250,000 Note Payable ................................................. Interest Expense ($700,000 × 8% × 1/2) ...... Cash ......................................................... 35,000 28,000 Note Payable ................................................. Interest Expense ($665,000 × 8% × 1/2) ...... Cash ......................................................... 35,000 26,600 700,000 240,000 63,000 61,600 Ex. 11–7 a. $10,714,000, or the amount disclosed as the current portion of long-term debt. b. The current liabilities increased by $714,000 ($10,714,000 – $10,000,000). c. $64,286,000 ($75,000,000 – $10,714,000) Ex. 11–8 a. Regular pay (40 hrs. × $22) ......................................... Overtime pay (10 hrs. × $33) ...................................... Gross pay..................................................................... $ 880 330 $1,210 b. Gross pay..................................................................... Less: Social security tax (6.0% × $1,210) ................ Medicare tax (1.5% × $1,210) .......................... Federal withholding ........................................ Net pay ......................................................................... $1,210.00 643 $ 72.60 18.15 236.00 326.75 $ 883.25 Ex. 11–9 Consultant Computer Programmer Administrator $ 880.00 165.00 $1,045.00 $ Regular earnings ................................. Overtime earnings ............................... Gross pay............................................. $2,400.00 $2,400.00 $1,600.00 480.00 $2,080.00 Less: Social security tax .................... Medicare tax .............................. Federal income tax withheld4 .. 0.001 36.00 535.39 $ 571.39 $1,828.61 84.002 31.20 463.43 $ 578.63 $1,501.37 Net pay ................................................. $ $ 62.703 15.68 137.30 $ 215.68 $ 829.32 1Gross pay exceeds $100,000, so there is no social security tax withheld. – $98,600) × 6%] = $84.00 3$1,045 × 6% = $62.70 4The federal income tax withheld is determined from applying the calculation procedure associated with Exhibit 3 in the chapter, as follows: 2[($100,000 Withholding supporting calculations: Gross weekly pay ................................... Number of withholding allowances ...... Multiplied by: Value of one allowance .. Amount to be deducted ......................... Amount subject to withholding ............. Initial withholding from wage bracket in Exhibit 3 ......................................... Plus: Bracket percentage over bracket excess .................................. Amount withheld .................................... Consultant Computer Programmer Administrator $2,400.00 1 × $63.00 $ 63.00 $2,337.00 $2,080.00 0 × $63.00 $ 0.00 $2,080.00 $1,045.00 3 × $63.00 $ 189.00 $ 856.00 $ 275.55 $ 275.55 $ 259.845 $ 535.39 187.886 $ 463.43 59.007 $ 137.30 × ($2,337 – $1,409) × ($2,080 – $1,409) 725% × ($856 – $620) 528% 628% 644 78.30 Ex. 11–10 a. Summary: (1) $220,520; (3) $260,000; (8) $2,485; (12) $61,900 Details: Net amount paid .................................................... Total deductions .................................................... (3) Total earnings ........................................................ Overtime ................................................................. (1) Regular ................................................................... $184,000 76,000 $260,000 39,480 $220,520 Total deductions .................................................... Social security tax ................................................. Medicare tax ........................................................... Income tax withheld .............................................. Medical insurance ................................................. Union dues ............................................................. $ 15,250 3,900 46,590 7,775 Total earnings ........................................................ Factory wages ....................................................... Office salaries ........................................................ (12) Sales salaries......................................................... $138,900 59,200 (8) $ 76,000 $260,000 b. Factory Wages Expense ............................................... Sales Salaries Expense................................................. Office Salaries Expense ................................................ Social Security Tax Payable .................................... Medicare Tax Payable .............................................. Employees Income Tax Payable ............................. Medical Insurance Payable ..................................... Union Dues Payable ................................................. Salaries Payable ....................................................... 138,900 61,900 59,200 c. 184,000 Salaries Payable ............................................................ Cash .......................................................................... 73,515 $ 2,485 198,100 $ 61,900 15,250 3,900 46,590 7,775 2,485 184,000 184,000 d. The amount of social security tax withheld, $15,250, is $350 less than 6.0% of the total earnings of $260,000. This indicates that the cumulative earnings of some employees exceed $100,000. Therefore, it is unlikely that this payroll was paid during the first few weeks of the calendar year. 645 Ex. 11–11 a. b. Social security tax (6% × $350,000) ........................................ Medicare tax (1.5% × $420,000) ............................................... State unemployment (4.3% × $14,000) .................................... Federal unemployment (0.8% × $14,000) ................................ Payroll Tax Expense .................................................... Social Security Tax Payable .................................. Medicare Tax Payable............................................. State Unemployment Tax Payable ......................... Federal Unemployment Tax Payable ..................... $21,000 6,300 602 112 $28,014 28,014 21,000 6,300 602 112 Ex. 11–12 a. b. Salaries Expense.......................................................... Social Security Tax Payable .................................. Medicare Tax Payable............................................. Employees Federal Income Tax Payable .............. Salaries Payable ..................................................... 690,000 Payroll Tax Expense .................................................... Social Security Tax Payable .................................. Medicare Tax Payable............................................. State Unemployment Tax Payable ......................... Federal Unemployment Tax Payable ..................... 44,610 *5.2% × $26,000 **0.8% × $26,000 646 32,700 10,350 138,700 508,250 32,700 10,350 1,352* 208** Ex. 11–13 a. b. Wages Expense ............................................................ 356,000 Social Security Tax Payable .................................. Medicare Tax Payable............................................. Employees Federal Income Tax Payable .............. Wages Payable ........................................................ To record unfunded pension cost for the quarter. Payroll Tax Expense .................................................... Social Security Tax Payable .................................. Medicare Tax Payable............................................. State Unemployment Tax Payable ......................... Federal Unemployment Tax Payable ..................... 17,100 5,340 66,900 266,660 23,556 17,100 5,340 972* 144** *5.4% × $18,000 **0.8% × $18,000 Ex. 11–14 Nashville Sounds does have an internal control procedure that should detect the payroll error. Before funds are transferred from the regular bank account to the payroll account, the owner authorizes a voucher for the total amount of the week's payroll. The owner should catch the error, since the extra 360 hours will cause the weekly payroll to be substantially higher than usual. Ex. 11–15 a. Inappropriate. Each employee should record his or her own time out for lunch. Under the current procedures, one employee could clock in several employees who are still out to lunch. The company would be paying employees for more time than they actually worked. b. Inappropriate. Payroll should be informed when any employee is terminated. A supervisor or other individual could continue to clock in and out for the terminated employee and collect the extra paycheck. c. Appropriate. All changes to the payroll system, including wage rate increases, should be authorized by someone outside the Payroll Department. d. Appropriate. The use of a special payroll account assists in preventing fraud and makes it easier to reconcile the company's bank accounts. e. Inappropriate. Access to the check-signing machine should be restricted. 647 Ex. 11–16 Super Sales Stores Inc. should not compute and report payroll taxes according to its fiscal year. Rather, employers are required to compute and report all payroll taxes on the calendar-year basis, regardless of the fiscal year they may use for financial reporting purposes. Thus, social security and FUTA maximum earnings limitations apply to the calendar-year payroll. Ex. 11–17 Vacation Pay Expense .................................................. Vacation Pay Payable .............................................. Vacation pay accrued for January, $54,960 × 1/12. 4,580 4,580 Ex. 11–18 a. Dec. 31 b. Jan. 15 Pension Expense ......................................... Unfunded Pension Liability.................... To record quarterly pension cost. 87,500 Unfunded Pension Liability ......................... Cash ......................................................... 87,500 87,500 87,500 Ex. 11–19 The $2,096 million unfunded pension liability is the approximate amount of the pension obligation that exceeds the value of the accumulated net assets of the pension plan. Apparently, Procter & Gamble has underfunded its plan relative to the actuarial obligation that has accrued over time. This can occur when the company contributes less to the plan than the annual pension cost. The obligation grows yearly by the amount of the periodic pension cost. Thus, the periodic pension cost is an actuarial measure of the amount of pension earned by employees during the year. The annual pension cost is determined by making actuarial assumptions about employee life expectancies, employee turnover, expected compensation levels, and interest. 648 Ex. 11–20 a. Product Warranty Expense ........................................... Product Warranty Payable ....................................... To record warranty expense for January, 2% × $85,000. 1,700 b. Product Warranty Payable ............................................ Supplies .................................................................... Wages Payable ......................................................... 345 1,700 210 135 Ex. 11–21 a. The warranty liability represents estimated outstanding automobile warranty claims. Of these claims, $12,953 million is estimated to be due during 2006, while the remainder ($7,359 million) is expected to be paid after 2006. The distinction between short-term and long-term liabilities is important to creditors in order to accurately evaluate the near-term cash demands on the business, relative to the quick current assets and other longer-term demands. b. Product Warranty Expense ........................... 10,502,000,000 Product Warranty Payable ....................... 10,502,000,000 $21,810 + X – $12,000 = $20,312 X = $20,312 – $21,810 + $12,000 X = $10,502 million Ex. 11–22 a. Damage Awards and Fines ........................................... EPA Fines Payable ................................................... Litigation Claims Payable ........................................ 710,000 560,000 150,000 Note to Instructors: The “damage awards and fines” would be disclosed on the income statement under “Other expenses.” b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $560,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $150,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. 649 Ex. 11–23 a. Quick Ratio = Quick Assets Current Liabilitie s December 31, 2007: $205,000 $245,000 = 1.20 $375,000 December 31, 2008: $140,000 $250,000 = 1.0 $390,000 b. The quick ratio decreased between the two balance sheet dates. The major reason is a significant increase in inventory. Cash also declined, possibly to purchase the inventory. As a result, quick assets actually declined, while the current liabilities increased. The quick ratio for December 31, 2008, is not yet at an alarming level. However, the trend suggests that the firm’s current asset (working capital) management should be watched closely. 650 Ex. 11–24 a. Apple Computer, Inc. Dell Inc. 2.63 0.83 Quick Ratio Quick Ratio = Quick Assets Current Liabilitie s Apple Computer, Inc.: Quick Ratio = $10,300 $165 $979 = 2.63 $3,484 Dell Inc.: Quick Ratio = $17,706 $576 $3,983 = 0.83 $15,927 b. It is clear that Apple Computer’s short-term liquidity is stronger than Dell’s. Apple’s quick ratio is 217% [(2.63 – 0.83) / 0.83] higher. Apple has a much stronger relative cash and short-term investment position than does Dell. Apple’s cash and short-term investments are over 80% of total current assets (237% of current liabilities), compared to Dell’s 51% of total current assets (57% of current liabilities). In addition, Dell’s relative accounts payable position is larger than Apple’s, indicating the possibility that Dell has longer supplier payment terms than does Apple. A quick ratio of 2.63 for Apple suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.83 for Dell indicates an efficient but tight quick asset management policy. 651 PROBLEMS Prob. 11–1A 1. Apr. 7 Cash ...................................................................... Notes Payable ................................................. 36,000 May 10 Equipment............................................................. Interest Expense ($125,000 × 120/360 × 6%) ...... Notes Payable ................................................. 122,500 2,500 June 6 Notes Payable ....................................................... Interest Expense ($36,000 × 60/360 × 8%) .......... Notes Payable ................................................. Cash ................................................................. 36,000 480 July 6 Notes Payable ....................................................... Interest Expense ($36,000 × 30/360 × 9%) .......... Cash ................................................................. 36,000 270 Aug. 3 Merchandise Inventory ........................................ Accounts Payable—Hamilton Co. ................. 15,000 Sept. 2 Accounts Payable—Hamilton Co. ....................... Notes Payable ................................................. 15,000 7 Notes Payable ....................................................... Cash ................................................................. 125,000 1 Notes Payable ....................................................... Interest Expense ($15,000 × 60/360 × 6%) .......... Cash ................................................................. 15,000 150 15 Store Equipment .................................................. Notes Payable ................................................. Cash ................................................................. 150,000 Dec. 15 Notes Payable ....................................................... Interest Expense ($13,500 × 8% × 30/360) .......... Cash ................................................................. 13,500 90 21 Litigation Loss...................................................... Litigation Claims Payable .............................. 30,000 Nov. 652 36,000 125,000 36,000 480 36,270 15,000 15,000 125,000 15,150 94,500 55,500 13,590 30,000 Prob. 11–1A 2. Concluded a. Product Warranty Expense ..................................... Product Warranty Payable ................................. Warranty expense for the current year. b. Interest Expense ...................................................... Interest Payable .................................................. Interest on notes, $13,500 × 8% × 46/360 × 6. 653 8,400 8,400 828 828 Prob. 11–2A 1. a. Dec. 30 Sales Salaries Expense ............................... Warehouse Salaries Expense ..................... Office Salaries Expense .............................. Employees Income Tax Payable ............ Social Security Tax Payable .................. Medicare Tax Payable ............................ Bond Deductions Payable ...................... Group Insurance Payable....................... Salaries Payable ..................................... 320,000 84,500 155,500 b. Dec. 30 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 37,650 1$15,000 2$15,000 28,560 8,400 5701 1202 × 3.8% × 0.8% 2. a. Dec. 30 Sales Salaries Expense ............................... Warehouse Salaries Expense ..................... Office Salaries Expense .............................. Employees Income Tax Payable ............ Social Security Tax Payable .................. Medicare Tax Payable ............................ Bond Deductions Payable ...................... Group Insurance Payable....................... Salaries Payable ..................................... 3$560,000 4$560,000 b. Jan. 109,760 28,560 8,400 16,400 24,690 372,190 6$560,000 109,760 33,6003 8,4004 16,400 24,690 367,150 × 6% × 1.5% 4 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 5$560,000 320,000 84,500 155,500 × 3.8% × 0.8% 654 67,760 33,600 8,400 21,2805 4,4806 Prob. 11–3A 1. Employee Gross Earnings** Federal Income Tax Withheld Social Security Tax Withheld Medicare Tax Withheld Arnold Charles Gillam Nelson Quinn Ramirez Wu $ 44,800 103,200 50,000 45,600 6,600 27,200 105,800 $ 9,856 24,768 9,500 8,208 1,221 4,760 26,450 $ 2,688 6,000* 3,000 2,736 396 1,632 6,000* $22,452 $ 672 1,548 750 684 99 408 1,587 $5,748 *$100,000 maximum × 6% **The gross earnings are determined by multiplying the monthly earnings by the number of months of employment based upon the date of hire. 2. a. Social security tax paid by employer ...................................... $22,452.00 b. Medicare tax paid by employer ............................................... 5,748.00 c. Earnings subject to unemployment compensation tax, $9,000 for all employees except Quinn, who has only $6,600 in gross earnings. Thus, total earnings subject to SUTA and FUTA are $60,600 [(6 × $9,000) + $6,600]. State unemployment compensation tax: $60,600 × 3.8% ..... 2,302.80 d. Federal unemployment compensation tax: $60,600 × 0.8% . 484.80 e. Total payroll tax expense ......................................................... $30,987.60 655 Prob. 11–4A 1. 2008 Dec. 2. Dec. 3. Dec. 12 Sales Salaries Expense ............................... Office Salaries Expense .............................. Delivery Salaries Expense ........................... Social Security Tax Payable .................. Medicare Tax Payable ............................ Employees Income Tax Payable ............ Medical Insurance Payable .................... Salaries Payable ..................................... 3,666.50 2,600.00 1,959.00 12 Salaries Payable ........................................... Cash ......................................................... 5,737.32 12 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 664.92 493.53 123.39 1,402.06 469.20 5,737.32 5,737.32 493.53 123.39 38.40* 9.60** *$1,200 × 3.2% **$1,200 × 0.8% 4. Dec. 15 Employees Income Tax Payable ................. Social Security Tax Payable ........................ Medicare Tax Payable .................................. Cash ......................................................... 656 1,402.06 987.06 246.78 2,635.90 Prob. 11–5A 1. PAYROLL FOR WEEK ENDING December 7, 2008 EARNINGS Name Total Hours Regular A 38 608 B 44 1,000 C 46 1,200 D 40 E 30 Overtime 608 36.48 9.12 109.44 150 1,150 69.00 17.25 241.50 270 1,470 88.20 22.05 480 480 28.80 300 300 F G 41 960 36 H I 2. Total DEDUCTIONS Social Federal U.S. Security Medicare Income Savings Tax Tax Tax Bonds Total Net Amount Ck. No. ACCOUNTS DEBITED Sales Office Salaries Salaries Expense Expense 155.04 452.96 981 608 20.00 347.75 802.25 982 1,150 338.10 20.00 468.35 1,001.65 983 1,470 7.20 81.60 35.00 152.60 327.40 984 480 18.00 4.50 36.00 10.00 68.50 231.50 985 300 1,100 66.00 16.50 242.00 324.50 775.50 986 996 59.76 14.94 199.20 273.90 722.10 987 33.00 550.00 90.00 673.00 1,527.00 988 14.04 187.20 10.00 267.40 668.60 989 138.60 1,985.04 185.00 2,731.04 2,200 48 PAID 720 216 936 56.16 5,268 672 9,240 422.40 Sales Salaries Expense................................................. Office Salaries Expense ................................................ Social Security Tax Payable .................................... Medicare Tax Payable .............................................. Employees Federal Income Tax Payable ............... Bond Deductions Payable ....................................... Salaries Payable ....................................................... 657 5,940.00 3,300.00 422.40 138.60 1,985.04 185.00 6,508.96 6,508.96 1,100 996 2,200 936 5,940 3,300 Prob. 11–6A 1. Dec. 1 Medical Insurance Payable ................................. Cash ................................................................. 2,400 2 Social Security Tax Payable ................................ Medicare Tax Payable .......................................... Employees Federal Income Tax Payable ........... Cash ................................................................. 5,888 1,550 9,555 3 Bond Deductions Payable ................................... Cash ................................................................. 2,000 14 Sales Salaries Expense ....................................... Officers Salaries Expense ................................... Office Salaries Expense ...................................... Social Security Tax Payable .......................... Medicare Tax Payable .................................... Employees Federal Income Tax Payable ...... Employees State Income Tax Payable .......... Bond Deductions Payable .............................. Medical Insurance Payable ............................ Salaries Payable ............................................. 31,000 14,800 5,600 14 Salaries Payable ................................................... Cash ................................................................. 34,940 14 Payroll Tax Expense ............................................ Social Security Tax Payable .......................... Medicare Tax Payable .................................... State Unemployment Tax Payable................. Federal Unemployment Tax Payable ............. 3,903 17 Social Security Tax Payable ................................ Medicare Tax Payable .......................................... Employees Federal Income Tax Payable ........... Cash ................................................................. 5,654 1,542 9,149 658 2,400 16,993 2,000 2,827 771 9,149 2,313 1,000 400 34,940 34,940 2,827 771 250 55 16,345 Prob. 11–6A Continued Dec. 28 Sales Salaries Expense ....................................... Officers Salaries Expense ................................... Office Salaries Expense ...................................... Social Security Tax Payable .......................... Medicare Tax Payable .................................... Employees Federal Income Tax Payable ...... Employees State Income Tax Payable .......... Bond Deductions Payable .............................. Salaries Payable ............................................. 31,500 15,000 5,500 28 Salaries Payable ................................................... Cash ................................................................. 35,816 28 Payroll Tax Expense ............................................ Social Security Tax Payable .......................... Medicare Tax Payable .................................... State Unemployment Tax Payable................. Federal Unemployment Tax Payable ............. 3,738 30 Employees State Income Tax Payable ............... Cash ................................................................. 13,950 30 Bond Deductions Payable ................................... Cash ................................................................. 2,000 31 Pension Expense ................................................. Cash ................................................................. Unfunded Pension Liability............................ 65,000 Dec. 31 Sales Salaries Expense ....................................... Officers Salaries Expense ................................... Office Salaries Expense ...................................... Salaries Payable ............................................. Accrued wages for the period. 3,150 1,500 550 31 Vacation Pay Expense ......................................... Vacation Pay Payable ..................................... Vacation pay accrued for the period. 13,200 2,808 780 9,256 2,340 1,000 35,816 35,816 2,808 780 120 30 13,950 2,000 55,700 9,300 2. 659 5,200 13,200 Prob. 11–1B 1. Feb. 15 Merchandise Inventory ........................................ Accounts Payable—Ranier Co....................... 120,000 Mar. 17 Accounts Payable—Ranier Co. ........................... Notes Payable ................................................. 120,000 Apr. 16 Notes Payable ....................................................... Interest Expense ($120,000 × 30/360 × 5%) ........ Cash ................................................................. 120,000 500 July 15 Cash ...................................................................... Notes Payable ................................................. 180,000 25 Tools ..................................................................... Interest Expense ($135,000 × 120/360 × 7%) ...... Notes Payable ................................................. 131,850 3,150 Oct. 13 Notes Payable ....................................................... Interest Expense ($180,000 × 90/360 × 6%) ........ Notes Payable ................................................. Cash ................................................................. 180,000 2,700 Nov. 12 Notes Payable ....................................................... Interest Expense ($180,000 × 30/360 × 9%) ........ Cash ................................................................. 180,000 1,350 22 Notes Payable ....................................................... Cash ................................................................. 135,000 1 Office Equipment ................................................. Notes Payable ................................................. Cash ................................................................. 40,000 17 Litigation Loss...................................................... Litigation Claims Payable .............................. 56,000 31 Notes Payable ....................................................... Interest Expense ($3,000 × 6% × 30/360) ............ Cash ................................................................. 3,000 15 Dec. 660 120,000 120,000 120,500 180,000 135,000 180,000 2,700 181,350 135,000 30,000 10,000 56,000 3,015 Prob. 11–1B 2. Concluded a. Product Warranty Expense ..................................... Product Warranty Payable ................................. Warranty expense for the current year. 21,410 b. Interest Expense ...................................................... Interest Payable .................................................. Interest on notes, $3,000 × 6% × 30/360 × 9. 135 661 21,410 135 Prob. 11–2B 1. a. Dec. 30 Sales Salaries Expense ............................... Warehouse Salaries Expense ..................... Office Salaries Expense .............................. Employees Income Tax Payable ............ Social Security Tax Payable .................. Medicare Tax Payable ............................ Bond Deductions Payable ...................... Group Insurance Payable....................... Salaries Payable ..................................... 162,400 54,200 83,400 b. Dec. 30 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 21,450 1$15,000 2$15,000 16,200 4,500 6301 1202 × 4.2% × 0.8% 2. a. Dec. 30 Sales Salaries Expense ............................... Warehouse Salaries Expense ..................... Office Salaries Expense .............................. Employees Income Tax Payable ............ Social Security Tax Payable .................. Medicare Tax Payable ............................ Bond Deductions Payable ...................... Group Insurance Payable....................... Salaries Payable ..................................... 3$300,000 4$300,000 b. Jan. 52,800 16,200 4,500 6,500 5,600 214,400 6$300,000 52,800 18,0003 4,5004 6,500 5,600 212,600 × 6% × 1.5% 5 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 5$300,000 162,400 54,200 83,400 × 4.2% × 0.8% 662 37,500 18,000 4,500 12,6005 2,4006 Prob. 11–3B 1. Employee Gross Earnings Federal Income Tax Withheld Social Security Tax Withheld Medicare Tax Withheld Alvarez Collins Felix Lydall Penn Song Walker $110,400 5,000 36,000 24,200 105,600 40,800 21,000 $27,600 750 5,760 4,356 25,344 7,344 2,520 $ 6,000* 300 2,160 1,452 6,000* 2,448 1,260 $19,620 $1,656 75 540 363 1,584 612 315 $5,145 *$100,000 maximum × 6% 2. a. Social security tax paid by employer ........................................... $19,620 b. Medicare tax paid by employer ..................................................... 5,145 c. Earnings subject to unemployment compensation tax, $7,000 for all employees except Collins, who has only $5,000 in gross earnings. Thus, total earnings subject to SUTA and FUTA are $47,000 [(6 × $7,000) + $5,000]. State unemployment compensation tax: $47,000 × 4.8% ........... 2,256 d. Federal unemployment compensation tax: $47,000 × 0.8% ....... 376 e. Total payroll tax expense .............................................................. $27,397 663 Prob. 11–4B 1. 2008 Dec. 2. Dec. 3. Dec. 12 Sales Salaries Expense ............................... Office Salaries Expense .............................. Delivery Salaries Expense ........................... Social Security Tax Payable .................. Medicare Tax Payable ............................ Employees Income Tax Payable ............ Medical Insurance Payable .................... Salaries Payable ..................................... 3,666.50 2,600.00 1,959.00 12 Salaries Payable ........................................... Cash ......................................................... 5,737.32 12 Payroll Tax Expense .................................... Social Security Tax Payable .................. Medicare Tax Payable ............................ State Unemployment Tax Payable......... Federal Unemployment Tax Payable..... 654.32 493.53 123.39 1,402.06 469.20 5,737.32 5,737.32 493.53 123.39 30.60* 6.80** *$850 × 3.6% **$850 × 0.8% 4. Dec. 15 Employees Income Tax Payable ................. Social Security Tax Payable ........................ Medicare Tax Payable .................................. Cash ......................................................... 664 1,402.06 987.06 246.78 2,635.90 Prob. 11–5B 1. PAYROLL FOR WEEK ENDING December 7, 2008 EARNINGS Name Total Hours M 52 Regular Overtime 1,440 648 N O 38 608 P 44 740 Q 40 800 111 R 2,088 125.28 31.32 480.24 1,200 72.00 18.00 258.00 608 36.48 9.12 115.52 851 51.06 12.77 178.71 800 48.00 12.00 168.00 15 36.00 576.00 100 2,400 S 32 704 T 46 1,120 U 40 720 6,132 2. Total DEDUCTIONS Social Federal U.S. Security Medicare Income Savings Tax Tax Tax Bonds 252 1,011 704 42.24 10.56 105.60 1,372 82.32 20.58 301.84 720 43.20 10.80 10,743 500.58 161.15 Sales Salaries Expense................................................. Office Salaries Expense ................................................ Social Security Tax Payable .................................... Medicare Tax Payable .............................................. Employees Federal Income Tax Payable ............... Bond Deductions Payable ....................................... Salaries Payable ....................................................... 665 50 25 PAID Total Net Amount Ck. No. 686.84 1,401.16 826 ACCOUNTS DEBITED Sales Office Salaries Salaries Expense Expense 2,088 348.00 852.00 825 1,200 186.12 421.88 824 608 242.54 608.46 823 851 243.00 557.00 822 800 712.00 1,688.00 820 2,400 158.40 545.60 819 704 40 444.74 927.26 818 1,372 144.00 20 218.00 502.00 821 720 2,327.91 250 3,239.64 7,503.36 7,143.00 3,600.00 500.58 161.15 2,327.91 250.00 7,503.36 7,143 3,600 Prob. 11–6B 1. Dec. 2 Bond Deductions Payable ................................... Cash ................................................................. 3,000 3 Social Security Tax Payable ................................ Medicare Tax Payable .......................................... Employees Federal Income Tax Payable ........... Cash ................................................................. 8,032 2,114 13,035 14 Operations Salaries Expense.............................. Officers Salaries Expense ................................... Office Salaries Expense ...................................... Social Security Tax Payable .......................... Medicare Tax Payable .................................... Employees Federal Income Tax Payable ...... Employees State Income Tax Payable .......... Bond Deductions Payable .............................. Medical Insurance Payable ............................ Salaries Payable ............................................. 38,500 25,500 6,200 14 Salaries Payable ................................................... Cash ................................................................. 44,061 14 Payroll Tax Expense ............................................ Social Security Tax Payable .......................... Medicare Tax Payable .................................... State Unemployment Tax Payable................. Federal Unemployment Tax Payable ............. 5,358 17 Social Security Tax Payable ................................ Medicare Tax Payable .......................................... Employees Federal Income Tax Payable ........... Cash ................................................................. 7,862 2,106 12,496 18 Medical Insurance Payable ................................. Cash ................................................................. 24,000 666 3,000 23,181 3,931 1,053 12,496 3,159 1,500 4,000 44,061 44,061 3,931 1,053 290 84 22,464 24,000 Prob. 11–6B Continued Dec. 28 Operations Salaries Expense .............................. Officers Salaries Expense ................................... Office Salaries Expense ...................................... Social Security Tax Payable .......................... Medicare Tax Payable .................................... Employees Federal Income Tax Payable ...... Employees State Income Tax Payable .......... Bond Deductions Payable .............................. Salaries Payable ............................................. 39,000 26,000 6,400 28 Salaries Payable ................................................... Cash ................................................................. 49,051 28 Payroll Tax Expense ............................................ Social Security Tax Payable .......................... Medicare Tax Payable .................................... State Unemployment Tax Payable................. Federal Unemployment Tax Payable ............. 5,120 30 Bond Deductions Payable ................................... Cash ................................................................. 3,000 30 Employees State Income Tax Payable ............... Cash ................................................................. 19,054 31 Pension Expense ................................................. Cash ................................................................. Unfunded Pension Liability............................ 45,000 Dec. 31 Operations Salaries Expense .............................. Officers Salaries Expense ................................... Office Salaries Expense ...................................... Salaries Payable ............................................. Accrued wages for the period. 3,900 2,600 640 31 Vacation Pay Expense ......................................... Vacation Pay Payable ..................................... Vacation pay accrued for the period. 12,650 3,856 1,071 12,709 3,213 1,500 49,051 49,051 3,856 1,071 155 38 3,000 19,054 43,000 2,000 2. 667 7,140 12,650 COMPREHENSIVE PROBLEM 3 1. Jan. 2 Petty Cash ............................................................. Cash ................................................................. 1,400 1 Office Supplies ..................................................... Miscellaneous Selling Expense .......................... Miscellaneous Administrative Expense ............. Cash ................................................................. 678 389 245 5 Merchandise Inventory ........................................ Accounts Payable ........................................... 12,000 5 Accounts Payable ................................................ Cash ................................................................. 12,000 10 Cash ...................................................................... Cash Short and Over ........................................... Sales ................................................................ 7,755 20 June 2 Notes Receivable ................................................. Accounts Receivable—Stevens..................... 60,000 Aug. 1 Cash ...................................................................... Notes Receivable ............................................ Interest Revenue ............................................. 60,840 Mar. Apr. May 1,400 1,312 12,000 12,000 7,775 60,000 60,000 840* *$60,000 × 8.4% × 60/360 = $840 3 Cash ...................................................................... Allowance for Doubtful Accounts ....................... Accounts Receivable—Jacobs ...................... 2,300 200 28 Accounts Receivable—Jacobs ........................... Allowance for Doubtful Accounts ................. 200 28 Cash ...................................................................... Accounts Receivable—Jacobs ...................... 200 668 2,500 200 200 Comp. Prob. 3 Continued Sept. 2 Land ...................................................................... Interest Expense .................................................. Notes Payable ................................................. *$250,000 × 8% × 90/360 Oct. 245,000 5,000* 250,000 2 Cash ...................................................................... Notes Receivable ................................................. Accumulated Depreciation—Office Equipment . Loss on Disposal of Fixed Assets ...................... Office Equipment ............................................ 55,000 25,000 10,000 6,000 Nov. 30 Sales Salaries Expense ....................................... Office Salaries Expense ...................................... Employees Federal Income Tax Payable ...... Social Security Tax Payable .......................... Medicare Tax Payable .................................... Salaries Payable ............................................. 58,200 29,600 30 Payroll Tax Expense ............................................ Social Security Tax Payable .......................... Medicare Tax Payable .................................... State Unemployment Tax Payable................. Federal Unemployment Tax Payable............. *$2,000 × 3.8% **$2,000 × 0.8% 6,529 1 Notes Payable ....................................................... Cash ................................................................. 250,000 30 Pension Expense ................................................. Cash ................................................................. Unfunded Pension Liability............................ Pension cost of $65,000 funded at $57,450. 65,000 Dec. 669 96,000 15,804 5,120 1,317 65,559 5,120 1,317 76* 16** 250,000 57,450 7,550 Comp. Prob. 3 Continued 2. HIRATA COMPANY Bank Reconciliation December 31, 2007 Balance according to bank statement .............................. Add deposit in transit, not recorded by bank .................. $123,200 12,450 $135,650 27,450 $108,200 Deduct outstanding checks .............................................. Adjusted balance................................................................ Balance according to company’s records ....................... Deduct: Bank service charges ................................................. Error in recording check ............................................ Adjusted balance................................................................ 3. 4. Miscellaneous Administrative Expense....................... Accounts Payable .......................................................... Cash .......................................................................... $108,680 $280 200 280 200 480 a. Uncollectible Accounts Expense ............................ Allowance for Doubtful Accounts ..................... To record estimated uncollectible accounts, $6,490 + $600. 7,090 b. Cost of Merchandise Sold ....................................... Merchandise Inventory ....................................... To record inventory shrinkage. 1,320 c. Insurance Expense .................................................. Prepaid Insurance ............................................... To record expired insurance. 9,850 d. Office Supplies Expense ......................................... Office Supplies .................................................... To record supplies used during the period. 1,580 670 480 $108,200 7,090 1,320 9,850 1,580 Comp. Prob. 3 Continued e. Depreciation Expense—Buildings .......................... Depreciation Expense—Office Equipment ............ Depreciation Expense—Store Equipment ............. Accumulated Depreciation—Buildings ............. Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment To record depreciation for the period. Computations: Buildings ($380,000 × 2%) .................. Office Equipment [1/4 × 20% × ($90,000 – $14,000)] ....... Store Equipment ($45,000 × 25%) ..... 7,600 3,800 11,250 7,600 3,800 11,250 $ 7,600 3,800 11,250 f. Amortization Expense—Patents ($18,600 / 6) ........ Patents ................................................................. To record patent amortization, $18,600/6 years. 3,100 3,100 g. Depletion Expense ................................................... Accumulated Depletion ...................................... To record depletion, ($185,000/333,000 tons) × 22,500 tons 12,500 h. Vacation Pay Expense ............................................. Vacation Pay Payable ......................................... To record vacation pay for the period. 4,400 i. Product Warranty Expense ..................................... Product Warranty Payable ................................. To record product warranty for the period, $796,000 × 2.5%. 19,900 j. Interest Receivable .................................................. Interest Revenue ................................................. To record interest earned on note receivable, $25,000 × 6% × 90/360. 375 671 12,500 4,400 19,900 375 Comp. Prob. 3 Continued 5. HIRATA COMPANY Balance Sheet December 31, 2007 Assets Current assets: Petty cash ................................................... Cash ............................................................ Notes receivable ........................................ Accounts receivable .................................. Less allowance for doubtful accounts ..... Merchandise inventory—at cost (last-in, first-out) ................................... Interest receivable ..................................... Prepaid insurance ...................................... Office supplies ........................................... Total current assets ............................. $ 1,400 108,200 25,000 $202,300 6,490 195,810 140,600 375 19,700 7,100 $ 498,185 Property, plant, and equipment: Land ....................................... Buildings .................................... Office equipment........................ Store equipment......................... Mineral rights ............................. Total property, plant, and equipment ......................... Cost $245,000 380,000 90,000 45,000 185,000 $945,000 Intangible assets: Patents ........................................................ Total assets ..................................................... 672 Accumulated Depreciation (Depletion) $ 7,600 3,800 11,250 12,500 $35,150 Book Value $245,000 372,400 86,200 33,750 172,500 909,850 15,500 $1,423,535 Comp. Prob. 3 Continued Liabilities Current liabilities: Social security tax payable ....................... Medicare tax payable ................................. Employees federal income tax payable .................................................. State unemployment tax payable .................................................. Federal unemployment tax payable .................................................. Salaries payable ......................................... Accounts payable ...................................... Interest payable.......................................... Product warranty payable ......................... Vacation pay payable ................................ Notes payable (current portion)................ Total current liabilities ......................... Long-term liabilities: Vacation pay payable ................................ Unfunded pension liability ........................ Notes payable............................................. Total long-term liabilities ..................... Total liabilities ................................................. Owner’s Equity J. Goll, capital .................................................. Total liabilities and owner’s equity ................ 673 $ 9,910 2,700 15,887 42 9 90,000 125,300 3,000 19,900 3,000 25,000 $ 294,748 $ 1,400 7,550 75,000 83,950 $ 378,698 1,044,837 $1,423,535 Comp. Prob. 3 6. Concluded The merchandise inventory destroyed was $137,800, determined as follows: Merchandise inventory, January 1 ............................... Purchases, January 1–February 7 ............................... Merchandise available for sale ..................................... Sales, January 1–February 7 ........................................ Less estimated gross profit ($68,000 × 40%) .............. Estimated cost of merchandise sold ........................... Estimated merchandise inventory destroyed ............. 674 $140,600 38,000 $178,600 $ 68,000 27,200 40,800 $137,800 SPECIAL ACTIVITIES SA 11–1 The firm has no implicit or explicit contract to pay any bonus. The bonus is discretionary, even if the firm paid a two-week bonus for 10 straight years. The firm is not behaving unethically for reducing the bonus to one week—regardless of the reason. Dan Lanier, on the other hand, has taken things into his own hands. Sensing that he is being cheated, he tries to rectify the situation to his own advantage by working overtime that isn’t required. This behavior could be considered fraudulent, even though Dan is actually present on the job during the overtime hours. The point is that the overtime is not required by the firm. Dan is incorrect in thinking that his behavior is justified because he did not receive the full two-week bonus. In fact, this behavior would not be justified even if he had a legitimate claim against the company. If he had a claim or grievance against the firm, then it should be handled by other procedural or legal means. SA 11–2 Latiffah’s interpretation of the pension issue is correct. The employee earns the pension during the working years. The pension is part of the employee’s compensation that is deferred until retirement. Thus, Eclipse should record an expense equal to the amount of pension benefit earned by the employee for the period. This gives rise to the rather complex issue of estimating the amount of the pension expense. Greg indicates that the complexity of this calculation makes determining the annual pension expense impossible. This is not so. There are a number of mathematical and statistical approaches (termed “actuarial” approaches) that can reliably estimate the amount of benefits earned by the workforce for a given year. As a side note, Greg’s perspective can be summarized as “pay as you go.” In his interpretation, there is no expense until a pension is paid to the retiree. Failing to account for pension promises when they are earned is not considered sound accounting. 675 SA 11–3 The CEO may have requested the two changes because they would reduce the amount of depreciation expense and increase the amount of reported earnings recorded in a particular year. Thus, the CEO’s bonus would be higher due to the larger reported earnings. Straight-line depreciation recognizes lower depreciation expense in the earlier years of a truck’s life. As long as the company is replacing trucks, straight-line depreciation will result in a lower depreciation expense and hence a higher income number. Adding 50% to the useful lives of trucks (such as increasing the life from six to nine years) would spread the recognition of depreciation expense over a longer life. Thus, depreciation expense would be lower and income higher in any particular year. The CEO may request a change from one generally accepted accounting principle to another. Changing from double-declining-balance to straight-line depreciation is such a change. Though the CEO may be suggesting the change in order to influence the bonus, the change is acceptable, if Rogers Trucking Company’s auditors agree with the change. The increase in the useful lives of the trucks is another matter. The useful lives of trucks should be based on objective analysis. An arbitrary increase in useful lives for all the trucks cannot be supported. Such a change could be viewed as a violation of generally accepted accounting principles. 676 SA 11–4 a. The so-called “underground economy” hides transactions from IRS scrutiny by conducting business with cash (not check or credit card, which leaves an audit trail). The intent in many such transactions is to evade income tax illegally. However, just because a transaction is in cash does not exempt it from taxation. McIntyre also appears to perform landscaping services on a cash basis to evade reporting income while paying employees with cash to avoid paying social security and Medicare payroll taxes. The IRS reports that nearly 86% of the persons convicted of evading employment taxes were sentenced to an average of 17 months in prison and ordered to make restitution to the government for the taxes evaded, plus interest and penalties. b. Connor should respond that he would rather receive a payroll check as a normal employee does. Receiving cash as an employee, rather than a payroll check, subverts the U.S. tax system. That is, such cash payments do not include deductions for payroll taxes, as required by law. That is why, for example, cash tips must be formally reported to the IRS and subjected to payroll tax deductions by the employer. In addition, if Connor followed Jarrod’s advice, Connor not only would be avoiding payroll deductions, but would also be underreporting income. This would subject Connor to potential fines and possible criminal prosecution for underreporting income. 677 Activity 11–5 The purpose of this activity is to familiarize students with retrieving and using IRS forms. Students should be able to find the three required forms without much difficulty. Encourage students to retrieve the forms from the IRS Web site, since this is a useful source for any IRS form or publication that they might need. IRS Web site forms come in .pdf format, which means an Adobe Acrobat Reader is necessary to open and print the file. This software is available as a free plug-in on most Internet browser software. However, some students may need to download a free version in order to open the forms. This is also a useful exercise, since many sophisticated forms on the Web require an Acrobat Reader. The W-2 Form is the Annual Wage and Tax Statement transmitted by the employer to the IRS. The IRS uses this information to reconcile the taxpayer’s reported income and withholding taxes with the taxpayer’s tax return. Copies of the W-2 are provided for the employee’s own records and for submitting with state and federal tax returns. Form 940 is the Employer’s Annual Federal Unemployment Tax Return. The FUTA tax is reported annually, while the 941 payroll taxes are reported quarterly to the IRS. Form 941 is the Employer’s Quarterly Federal Tax Return. This return is used to report federal withholding payroll taxes collected from employees and FICA taxes (both employee and employer portions) for the quarter. SA 11–6 This activity does not require the student to research the contingency notes for the Altria Group. The contingency disclosure is extensive and complicated. Rather, the student should identify Altria Group’s main business, and from this information determine the likely cause of the contingency disclosures. a. Altria Group is a holding company for a number of businesses including Philip Morris and Kraft Foods, Inc. Thus, Altria’s primary business (around 70%) is in the manufacture and distribution of tobacco products. b. The health concerns surrounding tobacco products give rise to numerous lawsuits and legal actions against Altria. The notes to the financial statements include an extensive section describing the scope and status of these actions. As of December 31, 2005, Altria had over 265 cases pending, including seven class actions and 5 health care recovery actions (by state and federal governments). Altria’s Web site provides a section describing some of these actions. 678
