Intermediate Accounting II, ACCT 3322
Solutions to Review Questions, Exam #1, Chapters 13 and 14
1. Spencer Company had the following payroll information for the payroll period ended March
31, 2004.
Payroll Information
Gross payroll
FICA wages
FUTA wages
SUTA wages
Federal income tax withheld
Union dues withheld
FICA tax rate
FUTA tax rate
SUTA tax rate
$300,000
200,000
42,000
65,000
45,000
8,000
7.5%
0.8%
3.5%
Prepare the journal entries to record payroll and payroll taxes for the payroll period ended
March 31, 2004.
Account
Debit
Salaries and wages
$300,000
FIT payable
Union dues payable
FICA payable
Cash
To record payroll for the pay period ended March 31, 2004
Analysis of FICA payable:
FICA wages
FICA rate
FICA payable
Credit
$45,000
8,000
15,000
232,000
$200,000
7.5%
$15,000
1
Account
Debit
Credit
Payroll taxes
$17,611
FICA payable
$15,000
FUTA payable
336
SUTA payable
2,275
To record payroll taxes for the pay period ended March 31, 2004
Analysis of FUTA payable:
FUTA wages
FUTA rate
FUTA payable
$42,000
0.8%
Analysis of SUTA payable:
SUTA wages
SUTA rate
SUTA payable
$65,000
3.5%
$336
$2,275
2. Spencer Company borrowed $100,000 at Bank of the West on October 31, 2004. The note
was discounted at 8% and due on August 30, 2005.
a. Prepare the journal entry to record the note on Spencer Company’s books at October 31,
2004.
Date
11/1/04
Account
Debit
$93,333
6,667
Credit
Cash
Discount on notes payable
Notes payable
$100,000
To record the issuance of a 10-month $100,000 note discounted at 8%
Analysis of discount:
Face amount
Annual interest rate
Annual interest
Length of the note
Discount on notes payable
$100,000
8%
8,000
10/12
$6,667
2
b. Calculate the effective rate of interest that Spencer Company paid on the discounted note.
Analysis of effective interest rate:
Discount
Principal
Discount for the short period
Number of months in short period
Monthly interest rate
Annualized (multiply by 12 months)
Annualized effective interest rate
$6,667
$93,333
7.14%
7.14%
10
0.71%
12
8.57%
3. Spencer Company sells pet entertainment centers for $2,500 per unit. The entertainment
centers carry a three warranty covering parts and labor. The company has been in business
for 25 years and has established a stable pattern of warranty expense. On average the
company incurs $50 in labor costs and $25 in parts for each entertainment center sold.
During 2005 the company sold 1,000 entertainment centers and incurred warranty costs of
$80,000 ($55,000 in labor and $25,000 in parts). On January 1, 2005 the balance in the
“Estimated Liability under Warranties” account was $95,000.
a. Prepare the journal entry required to record warrant expense for 2005.
Account
Warranty Expense
Estimated Liability under Warranties
To record warranty expense for 2005
Analysis of warranty expense:
Units sold
Warranty expense per unit
Warranty expense
Debit
$75,000
Credit
$75,000
1,000
$75
$75,000
b. Prepare the journal entry to record warranty costs incurred during the year of 2005.
Account
Estimated Liability under Warranties
Inventory-parts
Labor expense
To record warranty costs incurred during 2005
Debit
$80,000
Credit
$25,000
55,000
3
c. Prepare a t-account analysis of the “Estimate Liability under Warranties” account for
the year of 2005.
T-Account: Estimated Liability under Warranties
Description
Debit
Credit
Beginning balance
$95,000
Warranty expense for 2001
75,000
Warranty costs incurred in 2001
$80,000
Ending balance
$90,000
4. May 1, 2002, Spencer Company issued $2,000,000, 8%, 5-year bonds dated January 1, 2002.
Interest is paid on January 1 and July 1. The bonds were sold to yield 10% interest (the
current market rate of interest). Bond issue costs were $120,000.
a. Calculate the issue price of the bonds
Issue Price of Bonds Payable
Principal
$2,000,000
PV of $1, n=10, i=5%
0.61391
PV of principal
Interest
Face value of bonds
2,000,000
Stated annual interest rate
8%
Annual interest
160,000
Payments per year
2
Annuity
80,000
PVOA, n=10, i=5%
7.72173
PV of annuity
Issue price of bonds
$1,227,820
617,738
$1,845,558
b. Calculate the accrued interest on the date of the sale of the bonds.
Accrued Interest
Face amount
Stated interest rate
Annual interest
Number of payments during year
Interest per payment
Short period
Accrued Interest
$2,000,000
8%
160,000
2
80,000
4/6
$53,333
4
c. Prepare the journal entry to record the sale of the bonds.
Date
5/1/02
Account
Cash
Discount on bonds payable
Interest expense
Bonds payable
To record the sale of the bonds on May 1, 2002.
Debit
$1,898,891
154,442
Credit
$53,333
2,000,000
d. Prepare the journal entry to record bond issue costs on May 1, 2002.
Date
5/1/02
Account
Debit
$120,000
Bond issue costs
Cash
To record bond issue costs
Credit
$120,000
e. Prepare an amortization table through January 1, 2006.
Date
1/1/02
7/1/02
1/1/03
7/1/03
1/1/04
7/1/04
1/1/05
7/1/05
1/1/06
7/1/06
1/1/07
1/1/07
Payment
$80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
2,000,000
$2,800,000
Interest
Expense
Amortization
of Discount
$92,278
92,892
93,536
94,213
94,924
95,670
96,454
97,276
98,140
99,059
$12,278
12,892
13,536
14,213
14,924
15,670
16,454
17,276
18,140
19,059
$954,442
$154,442
Balance
$1,845,558
1,857,836
1,870,728
1,884,264
1,898,477
1,913,401
1,929,071
1,945,525
1,962,801
1,980,941
2,000,000
0
f. Prepare the journal entry to record the first payment of interest and amortization of
discount.
Date
7/1/02
Account
Debit
$92,278
Credit
Interest expense
Amortization of discount
$12,278
Cash
80,000
To record interest expense, amortization of discount and the payment on July 1, 2002.
5
g. Prepare the journal entry on December 31, 2002 to record the accrual of interest,
amortization of discount and accrual of interest payable.
Date
Account
Debit
Credit
12/31/02 Interest expense
$92,892
Amortization of discount
$12,892
Interest payable
80,000
To record interest expense, amortization of discount and the accrual of interest payable
on December 31, 2002.
h. Prepare the journal entry to record the amortization of bond issue costs for 2002.
Date
Account
Debit
12/31/02 Bond issue expense
$24,000
Bond issue costs
To record the amortization of bond issue costs for 2002.
Analysis of amortization of bond issue costs:
Bond issue costs
Months bonds are outstanding
Monthly amortization
Months in 2002
Bond issue expense
Credit
$24,000
$120,000
60
2,000
12
$24,000
i. On September 1, 2005 Spencer Company retired the bonds at 102. Prepare the journal
entry to record interest expense, amortization of discount and accrued interest payable
through September 1, 2005.
Date
9/1/05
Account
Interest expense
Discount on bonds payable
Accrued interest
Debit
$32,426
Credit
$5,759
26,667
To record interest expense, amortization of discount and accrual of interest through
September 1, 2005.
6
Interest expense:
Interest expense, 1/1/06
Short period
Amortization of discount
$97,276
2/6
Amortization of discount:
Amortization of discount, 1/1/06
Short period
Amortization of discount
$17,276
2/6
Accrued interest:
Interest payment, 1/1/06
Short period
Accrued interest
$80,000
2/6
$32,425
$5,759
$26,667
j. Prepare the journal entry to amortize bond issue costs through September 1, 2005.
Date
9/1/05
Account
Debit
Bond issue expense
$16,000
Bond issue costs
To record amortization of bond issue costs through September 1, 2005
Amortization of bond issue costs:
Annual amortization
Short period
Bond issue expense
Credit
$16,000
$24,000
8/12
$16,000
k. Prepare the journal entry to record the loss on the early retirement of the bonds.
Date
9/1/05
Account
Debit
$2,000,000
26,667
120,716
Bonds payable
Accrued interest
Loss on retirement of bonds
Discount on bonds payable
Bond issue costs
Cash
To record the early retirement of bonds payable on September 1, 2005.
Credit
$48,716
32,000
2,066,667
7
Unamortized discount on bonds payable:
Face amount
Carrying amount, 7/1/05
Short period amortization
Carrying amount, 9/1/05
Unamortized discount
Unamortized bond issue costs:
Bond issue costs
2002 amortization
2003 amortization
2004 amortization
2005 amortization
Amortization through 9/1/05
Bond issue costs
Analysis of cash paid:
Face amount of bonds
Retirement rate
Cost of retired bonds
Accrued interest
Cash paid
Loss on retirement of bonds:
Cost of retired bonds
Less:
Face amount
Unamortized discount
Carrying amount
Unamortized bond issue costs
Net carrying amount
Loss on retirement of bonds
$2,000,000
$1,945,525
5,759
1,951,284
$48,716
$120,000
$24,000
24,000
24,000
16,000
88,000
$32,000
$2,000,000
102
$2,040,000
26,667
$2,066,667
$2,040,000
$2,000,000
48,716
1,951,284
32,000
1,919,284
$120,716
8
5. Spencer Company sold a piece of equipment that originally cost $1,000,000 and had
accumulated depreciation of $400,000. The contract terms were as follows:
Cash down payment $70,000
$700,000, 10-year, 5% note receivable with interest paid at the end of each year.
The market rate of interest on a comparable note would be 8% per annum.
a. In the space provided calculate the selling price of the piece of equipment.
Analysis of Selling Price
Principal
Principal
PV of 1, n=10, i=8%
PV of principal
Interest
Face amount
Stated interest rate
Annual interest payments
PVOA, n=10, i=8%
Present value of interest payments
Present value of contract
Cash down payment
Selling price of equipment
$700,000
0.46319
$324,233
$700,000
5%
35,000
6.71008
234,853
559,086
70,000
$629,086
b. In the space provided calculate the gain on the sale of the equipment.
Gain on Sale of Equipment
Selling price
Original cost
Accumulated depreciation
Book value
Gain on Sale of Equipment
$629,086
$1,000,000
400,000
600,000
$29,086
c. In the space provided prepare the journal entry to record the sale of the piece of
equipment.
9
Account
Cash
Note receivable
Accumulated depreciation
Equipment
Discount on note receivable
Gain on sale of equipment
To record the sale of equipment.
Debit
$70,000
700,000
400,000
Credit
$1,000,000
140,914
29,086
d. In the space provided prepare the journal entry to record interest revenue, amortization of
the discount and collection of the first interest payment.
Account
Cash
Discount on note receivable
Interest revenue
Debit
$35,000
9,727
Credit
$44,727
To record the receipt of the first payment and the amortization of the discount
Analysis of amortization:
Carrying value of note
Effective interest rate
Interest revenue
Interest received
Amortization of discount
$559,086
8%
44,727
35,000
$9,727
10