Chapter 12 Flashcards
Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased $60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of $1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.
Purchases (7/1)
D - Purchases: 60,000
C - Accounts Payable: 60,000
D - Freight-In: 1,200
C - Cash: 1,200
Returns (7/3)
D - Accounts Payable: 6,000
C - Purchase Returns and Allowances: 6,000
Payments (7/10)
D - Accounts Payable (60,000 - 6,000): 54,000
C - Cash (54,000 - 1,080): 52,920
C - Purchase Discounts (54,000 * 2%): 1,080
Upland Company borrowed $40,000 on November 1, 2025, by signing a $40,000, 9%, 3-month note. Prepare Upland’s November 1, 2025, entry; the December 31, 2025, annual adjusting entry; and the February 1, 2026, entry.
11/1
D - Cash: 40,000
C - Notes Payable: 40,000
12/31
D - Interest Expense: 600
C - Interest Payable (40,000 * 9% * 2/12): 600
2/1
D - Notes Payable: 40,000
D - Interest Payable: 600
D - Interest Expense (40,000 * 9% * 1/12): 300
C - Cash ((40,000 * 9% * 3/12) + 40,000): 40,900
Takemoto Corporation borrowed $60,000 on November 1, 2025, by signing a $61,350, 3-month, zero-interest-bearing note. Prepare Takemoto’s November 1, 2025, entry; the December 31, 2025, annual adjusting entry; and the February 1, 2026 entry.
11/1
D - Cash: 60,000
D - Discount on Notes Payable: 1,350
C - Notes Payable: 61,350
12/31
D - Interest Expense: 900
C - Discount on Notes Payable (1,350 * 2/3): 900
2/1
D - Interest Expense: 450
C - Discount on Notes Payable (1,350 * 1/3): 450
D - Notes Payable: 61,350
C - Cash: 61,350
Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) Prepare the entry to record Dillons’ credit sales. (b) Prepare the entry to record Dillons’ cash sales.
(a)
D - Accounts Receivable: 31,800
C - Sales Revenue: 30,000
C - Sales Taxes Payable (30,000 * 6%): 1,800
(b)
D - Cash: 20,670
C - Sales Revenue (20,670 / 1.06): 19,500
C - Sales Taxes Payable (20,670 - 19,500): 1,170
Lexington Corporation’s weekly payroll of $24,000 included FICA taxes withheld of $1,836, federal taxes withheld of $2,990, state taxes withheld of $920, and insurance premiums withheld of $250. Prepare Lexington’s journal entry to record the weekly payroll.
D - Salaries and Wages Expense: 24,000
C - FICA Taxes Payable (24,000 * 7.65%): 1,836
C - Withholding Taxes Payable (2,990 + 920): 3,910
C - Insurance Premium Payable: 250
C - Cash: 18,004
Kasten Inc. provides paid vacations to its employees. At December 31, 2025, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week. Prepare Kasten’s December 31, 2025, adjusting entry.
D - Salaries and Wages Expense: 30,000
C - Salaries and Wages Payable (30 * 2 * 500): 30,000
Mayaguez Corporation provides its officers with bonuses based on net income. For 2025, the bonuses total $350,000 and are paid on February 15, 2026. Prepare Mayaguez’s December 31, 2025, adjusting entry and the February 15, 2026, entry.
12/31
D - Salaries and Wages Expense: 350,000
C - Salaries and Wages Payable: 350,000
2/15
D - Salaries and Wages Payable: 350,000
C - Cash: 350,000
Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2025, for $18 each. Prepare Sport Pro’s August 1, 2025, journal entry and the December 31, 2025, annual adjusting entry, assuming the magazines are published and delivered monthly.
8/1
D - Cash: 216,000
C - Unearned Subscriptions Revenue (12,000 * 18): 216,000
12/31
D - Unearned Subscriptions Revenue: 90,000
C - Subscriptions Revenue (216,000 * 5/12): 90,000
Rio Grande Taco Palace sells 200 gift cards at $50 per gift card and 100 of the gift cards are redeemed by year-end. Prepare the journal entries. (Ignore Cost of Goods Sold and possible breakage.)
D - Cash (200 * 50): 10,000
C - Unearned Gift Card Revenue: 10,000
D - Unearned Gift Card Revenue: 5,000
C - Sales Revenue (100 * 50): 5,000
Rio Grande Taco Palace sells 200 gift cards at $50 per gift card and 100 of the gift cards are redeemed by year-end. Prepare the journal entries. (Ignore Cost of Goods Sold and possible breakage.)
Refer to the facts in the above problem. Rio Grande estimates that it will have 10% breakage on its gift cards. Prepare the entry for the gift card redemption and the expected breakage for the gift cards in the current year. (Ignore Cost of Goods Sold.)
D - Unearned Gift Card Revenue: 5,555
C - Sales Revenue (100 * 50): 5,000
C - Sales Revenue (Breakage) (0.5555 * (200 * 50)): 555
Brown University Student Housing Inc. requires all tenants to pay a $500 security deposit, which will be returned at the end of the lease, less any repair costs on the apartment. Brown rented 275 apartments in the current month. Prepare the entry to record the security deposits collected.
D - Cash (500 * 275): 137,500
C - Refundable Deposit Liability: 137,500
Scorcese Inc. is involved in a lawsuit at December 31, 2025. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.
(a)
D - Lawsuit Loss: 900,000
C - Lawsuit Liability: 900,000
(b)
No entry. The loss is not accrued because it is NOT PROBABLE that a liability has been incurred at 12/31/25.
Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damages to be paid by Buchanan is $300,000. In light of this case, Buchanan is considering establishing a $100,000 self-insurance allowance. What entry(ies), if any, should Buchanan record to recognize this loss contingency?
D - Lawsuit Loss: 300,000
C - Lawsuit Liability: 300,000
Streep Factory provides a 2-year warranty with one of its products which was first sold in 2025. Streep sold $1,000,000 of products subject to the warranty. Streep expects $125,000 of warranty costs over the next 2 years. In 2025, Streep spent $70,000 servicing warranty claims. Prepare Streep’s journal entry to record the sales (ignore Cost of Goods Sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.
D - Warranty Expense: 70,000
C - Inventory: 70,000
D - Cash: 1,000,000
C - Sales Revenue: 1,000,000
12/31/25 (Adjusting entry)
D - Warranty Expense: 55,000
C - Warranty Liability (125,000 - 70,000): 55,000
Leppard Corporation sells smart home systems. The corporation also offers its customers a 4-year warranty contract. During 2025, Leppard sold 20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing warranties during 2025. Prepare Leppard’s journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.
(a)
D - Cash: 1,980,000
C - Unearned Warranty Revenue (20,000 * 99): 1,980,000
(b)
D - Warranty Expense: 180,000
C - Inventory: 180,000
(c) (Adjusting entry)
D - Unearned Warranty Revenue: 495,000
C - Warranty Revenue (1,980,000 / 4): 495,000
Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50¢. The block sets cost Wynn $1.10 each to purchase and 60¢ each to mail to customers. During 2025, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2025, 120,000 UPC codes were redeemed. Prepare Wynn’s December 31, 2025, adjusting entry.
UPC codes expected to be sent in (30% * 1,200,000): 360,000
UPC codes already redeemed: 120,000
360,000 - 120,000 = 240,000
Estimated future redemptions: 240,000
Cost of estimated claims outstanding:
(240,000 / 3) * (1.10 + 0.60 - 0.50) = 96,000
D - Premium Expense: 96,000
C - Premium Liability: 96,000
At December 31, 2025, Burr Corporation owes $500,000 on a note payable due February 15, 2026. (a) If Burr had restructured the note on December 15, 2025, such that Burr has the contractual right to defer payment of $250,000 of the note until February 15, 2027, how much of the $500,000 should be reported as a current liability at December 31, 2025? (b) If Burr pays off the note on February 15, 2026, and then borrows $1,000,000 on a long-term basis on March 1, how much of the $500,000 should be reported as a current liability at December 31, 2025, the end of the fiscal year? Burr issues the balance sheet on March 1, 2026.
(a) $250,000
Since Burr has the contractural right at the balance sheet date to defer payment of $250,000, that amount is classified as a LONG-TERM LIABILITY. The remaining $250,000 (500,000 - 250,000) is classified as a CURRENT LIABILITY, as it will require payment from current assets.
(b) $500,000
Because repayment of the note payable required the use of existing 12/31/25 current assets, the entire $500,000 liability must be reported as CURRENT.
