Intermediate Chapter 13

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 payable (to the nearest dollar) to the state for the month of May is a. $12,573. b. $16,121. c. $20,762. d. $17,250

$16,450 × .98 = $16,121

Vanco Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2013, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2013 may first be taken on January 1, 2014. Information relative to these employees is as follows: Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Employee 2013 $20.50 10 0 2014 22.50 10 8 2015 25.50 10 10 Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. 110. What is the amount of expense relative to compensated absences that should be reported on Vanco's income statement for 2013?

$20.50 × 8 × 10 × 35 = $57,400

The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 7% is a. 6.54%. b. 7%. c. 14.29%. d. 7.53%

$21,000 ÷ ($300,000 - $21,000) = 0.0753 = 7.53%

Bargain Surplus made cash sales during the month of October of $225,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions? a. Debit Accounts Receivable for $225,000. b. Credit Sales Taxes Payable for $12,736. c. Credit Sales Revenue for $208,490. d. Credit Sales Taxes Payable for $13,500.

$225,000 × .06 = $13,500.

Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction? a. Assets decrease $170,000 and liabilities do not change. b. Assets decrease $128,820 and liabilities increase $41,180. c. Assets decrease $128,820 and liabilities decrease $41,180. d. Assets decrease $110,820 and liabilities increase $59,180.

$25,400 + $15,780 + $18,000 = $59,180; $170,000 - $59,180 = $110,820.

Slack Inc. borrowed $320,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31? a. $0. b. $38,400. c. $25,600. d. $28,800

$320,000 × .12 × 9/12 = $28,800

Presented below is information available for Marley Company. Current Assets Cash $ 4,000 Short-term investments 65,000 Accounts receivable 61,000 Inventory 110,000 Prepaid expenses 30,000 Total current assets $270,000 Total current liabilities are $100,000. The acid-test ratio for Marley is: a. 2.80 to 1 b. 2.40 to 1 c. 1.30 to 1 d. 0.69 to 1

$4,000 + $65,000 + $61,000/ 100000= 1.30 to 1.

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 a. $0. b. $600,000. c. $1,000,000. d. $1,600,000.

$4,000,000 - $2,400,000 = $1,600,000

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $225 per unit sold and reported a liability for estimated warranty costs $7.8 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? (assume accrual method) a. $2,800,000. b. $4,500,000. c. $12,300,000. d. $13,500,000.

$7,800,000 + (60,000 × $225) - $9,000,000 = $12,300,000

On September 1, Horton purchased $13,300 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was made on September 18. Assuming Horton uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase? a. $13,167. b. $13,447. c. $13,580. d. $13,300

($13,300 × .99) = $13,167.

Vanco Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2013, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2013 may first be taken on January 1, 2014. Information relative to these employees is as follows: Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Employee 2013 $20.50 10 0 2014 22.50 10 8 2015 25.50 10 10 Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2015?

($25.50 × 8 × 10 × 35) + ($22.50 × 8 × 2 × 35) = $84,000.

A company buys an oil rig for $3,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events? a. Depreciation expense of $360,000 b. Depreciation expense of $300,000 and interest expense of $23,133 c. Depreciation expense of $300,000 and interest expense of $60,000 d. Depreciation expense of $323,133 and interest expense of $23,133

($3,000,000 + $231,330) ÷ 10 = $323,133; $231,330 × .10 = $23,133.

During 2013, Salton Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales Actual Warranty Expenditures 2013 $ 1,400,000 $ 26,000 2014 1,000,000 40,000 2015 1,400,000 90,000 $3,800,000 $156,000 What amount should Salton report as a liability at December 31, 2015? a. $0 b. $14,000 c. $22,000 d. $148,000

($3,800,000 × .08) - $156,000 = $148,000

Craig borrowed $350,000 on October 1, 2014 and is required to pay $360,000 on March 1, 2015. What amount is the note payable recorded at on October 1, 2014 and how much interest is recognized from October 1 to December 31, 2014? a. $350,000 and $0. b. $350,000 and $6,000. c. $360,000 and $0. d. $350,000 and $10,000

($360,000 - $350,000) × 3/5 = $6,000.

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 2015 Sales $500,000 $700,000 Actual warranty expenditures 30,000 50,000 What is the estimated warranty liability at the end of 2015?(assume the accrual method) a. $16,000. b. $64,000. c. $96,000. d. $20,000.

($500,000 + $700,000) × .08] - $80,000 = $16,000

During 2013, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales Actual Warranty Expenditures 2013 $ 1,600,000 $ 39,000 2014 2,500,000 65,000 2015 2,100,000 135,000 $6,200,000 $239,000 What amount should Rao report as a liability at December 31, 2015? a. $0 b. $134,000 c. $105,000 d. $381,000

($6,200,000 × .10) - $239,000 = $381,000.

The total payroll of Trolley Company for the month of October, 2014 was $800,000, of which $150,000 represented amounts paid in excess of $106,800 to certain employees. $500,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employee's wages to $106,800 and 1.45% in excess of $106,800. What amount should Trolley record as payroll tax expense? a. $72,800. b. $66,300. c. $57,300. d. $61,200.

($650,000 × 7.65%) + ($150,000 × 1.45%) + ($300,000 × 1.8%) = $57,300.

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 Issued On 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 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: a. $0. b. $60,000. c. $124,000. d. $360,000.

($720,000 × .5) - $300,000 = $60,000.

Venible newspapers sold 6,000 of annual subscriptions at $125 each on June 1. How much unearned revenue will exist as of December 31? a. $0. b. $312,500. c. $375,000. d. $750,000

(6,000 × $125) × 5/12 = $312,500.

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? a. $2,716,000. b. $2,660,000. c. $2,800,000. d. $2,741,667.

.05S × .97 = $135,800, S = $2,800,000.

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31? a. $300,000; $300,000 b. $300,000; $140,000 c. $140,000; $140,000 d. $160,000; $140,000

3,000,000 × .10 × $1 = $300,000; $300,000 - $160,000 = $140,000

A company gives each of its 50 employees (assume they were all employed continuously through 2014 and 2015) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2014, they made $21 per hour and in 2015 they made $24 per hour. During 2015, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2014 and 2015 balance sheets, respectively? a. $100,800; $140,400 b. $115,200; $144,000 c. $100,800; $144,000 d. $115,200; $140,400

50 × 12 × 8 × $21 = $100,800; 50 × 15 × 8 × $24 = $144,000

A company gives each of its 50 employees (assume they were all employed continuously through 2014 and 2015) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2014, they made $24.50 per hour and in 2015 they made $28 per hour. During 2015, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2014 and 2015 balance sheets, respectively? a. $117,600; $163,800 b. $134,400; $168,000 c. $117,600; $168,000 d. $134,400; $163,800

50 × 12 × 8 × $24.50 = $117,600; 50 × 15 × 8 × $28 = $168,000

Elmer Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 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? a. $1,000,000 b. $1,800,000 c. $800,000 d. $0

50,000 × $20 = $1,000,000

A company offers a cash rebate of $2 on each $6 package of batteries sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31? a. $1,200,000; $1,200,000 b. $1,200,000; $780,000 c. $780,000; $780,000 d. $420,000; $780,000

6,000,000 × .10 × $2 = $1,200,000; $1,200,000 - $420,000 = $780,000

Qualpoint provides its employees two weeks of paid vacation per year. As of December 31, 65 employees have earned two weeks of vacation time to be taken the following year. If the average weekly salary for these employees is $1,140, what is the required journal entry? a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable for $148,200. b. No journal entry required. c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense for $147,600. d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable for $74,100

65 × 2 weeks × $1,140/week = $148,200.

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? a. $1,700,000 b. $2,500,000 c. $800,000 d. $0

85,000 × $20 = $1,700,000.

Sawyer Company self-insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,500,000 per year. The company estimates that on average it will incur losses of $1,200,000 per year. During 2014, $525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sawyer Company for 2014? a. $525,000 in losses and no insurance expense b. $525,000 in losses and $675,000 in insurance expense c. $0 in losses and $1,200,000 in insurance expense d. $0 in losses and $1,500,000 in insurance expense

A

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 a. $0. b. $2,250,000. c. $3,000,000. d. $6,000,000

B

Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation? a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000. b. No journal entry is required. c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000. d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.

B

Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Wooten should accrue a. a loss contingency of $1,600,000 and disclose an additional contingency of up to $6,400,000. b. a loss contingency of $4,800,000 and disclose an additional contingency of up to $3,200,000. c. a loss contingency of $4,800,000 but not disclose any additional contingency. d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.

B

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2014 for the purchase of $250,000 of inventory. The face value of the note was $253,900. Assuming Greeson used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2014 will include a a. debit to Discount on Note Payable for $1,300. b. debit to Interest Expense for $2,600. c. credit to Discount on Note Payable for $1,300. d. credit to Interest Expense for $2,600

B. $253,900 - $250,000 = $3,900. $3,900 × 2/3 = $2,600

Parton owes $2 million that is due on February 28. The company borrows $1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long- term in the December 31 financial statements. a. $2,000,000. b. $0. c. $1,600,000. d. $400,000

C

On January 3, 2014, Benton Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair value was $480,000. On January 4, 2014, this machine was irreparably damaged by Pogo Corp. and became worthless. In October 2014, a court awarded damages of $480,000 against Pogo in favor of Benton. At December 31, 2014, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Benton's attorney, Pogo's appeal will be denied. At December 31, 2014, what amount should Benton accrue for this gain contingency? a. $480,000. b. $390,000. c. $300,000. d. $0.

D

Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $15 million. However, Xtra is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation? a. No journal entry required. b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000 c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000. d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.

D

Holland Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2014: Net sales $1,500,000 Warranty liability account Balance, Dec. 31, 2014 $10,000 debit before adjustment Balance, Dec. 31, 2014 20,000 credit after adjustment Which one of the following entries was made to record the 2014 estimated warranty expense?(assume the accrual method) a. Warranty Expense ............................................................. 30,000 Retained Earnings (prior-period adjustment) ........... 5,000 Warranty Liability ..................................................... 25,000 b. Warranty Expense ............................................................. 25,000 Retained Earnings (prior-period adjustment) ...................... 5,000 Warranty Liability ..................................................... 30,000 c. Warranty Expense ............................................................. 20,000 Warranty Liability ..................................................... 20,000 d. Warranty Expense ............................................................. 30,000 Warranty Liability ..................................................... 30,000

D $1,500,000 × .02 = $30,000

A company buys an oil rig for $2,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events? a. Depreciation expense of $240,000 b. Depreciation expense of $200,000 and interest expense of $15,422 c. Depreciation expense of $200,000 and interest expense of $40,000 d. Depreciation expense of $215,422 and interest expense of $15,422

D. ($2,000,000 + $154,220) ÷ 10 = $215,422; $154,220 × .10 = $15,422.

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. 100. The amount of sales taxes (to the nearest dollar) for May is

S + .07S = $251,450, S = $235,000. $251,450 - $235,000 = $16,450

Roxy Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roxy Co.? a. $70,200 b. $49,200 c. $24,000 d. $16,800

[(.062 - .054) + .02] × $600,000 = $16,800

Palco Co., which has a taxable payroll of $900,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Palco Co.? a. $104,400 b. $73,800 c. $36,000 d. $25,200

[(.062 - .054) + .02] × $900,000 = $25,200.

Composite provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts? a. $902,000. b. $3,002,000. c. $400,000. d. $450,500.

[(42,000 × $81) 4 yrs.] - $400,000 = $450,500

Crispy Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Crispy Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost Crispy Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014? a. $150,000 b. $40,000 c. $60,000 d. $84,000

{[(500,000 × .60) - 220,000] ÷ 4} × $2 = $40,000.

Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014? a. $270,000 b. $50,000 c. $75,000 d. $138,000

{[(675,000 × .60) - 330,000] ÷ 3} × $2 = $50,000