Chapter 13

Question 1

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2017 for the purchase of $500,000 of inventory. The face value of the note was $507,800. 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, 2017 will include a debit to

Answer 1

Interest Expense
$507,800 – $500,000 = $7,800. $7,800 × 2/3 = $5,200

Question 2

The effective interest on a 12-month, zero-interest-bearing note payable of $400,000, discounted at the bank at 7% is

Answer 2

28,000 ÷ ($400,000 – $28,000) = 0.0753 = 7.53%

Question 3

On September 1, Horton purchased $39,900 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $840. 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?

Answer 3

($39,900 × .99) = $39,501

Question 4

Slack Inc. borrowed $400,000 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?

Answer 4

400,000 × .12 × 9/12 = $36,000

Question 5

Craig borrowed $700,000 on October 1, 2017 and is required to pay $720,000 on March 1, 2018. What amount is the note payable recorded at on October 1, 2017 and how much interest is recognized from October 1 to December 31, 2017?

Answer 5

($720,000 – $700,000) × 3/5 = $12,000

Question 6

Parton owes $3 million that is due on February 28. The company borrows $2,400,000 on February 25 (5-year note) and uses the proceeds to pay down the $3 million note and uses other cash to pay the balance. How much of the $3 million note is classified as long-term in the December 31 financial statements?

Answer 6

2,400,000.

Question 7

Venible newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?

Answer 7

(6,000 × $150) × 5/12 = $375,000.

Question 8

Bargain Surplus made cash sales during the month of October of $375,000. 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

Answer 8

Credit Sales Taxes Payable for
375,000 × .06 = $22,500

Question 9

On February 10, 2018, after issuance of its financial statements for 2017, Higgins Company entered into a financing agreement with Cleveland Bank, allowing Higgins Company to borrow up to $8,000,000 at any time through 2020. 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 $3,000,000 of notes payable with Star National Bank maturing March 15, 2018. The company intends to borrow $5,000,000 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 $12,000,000 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, 2017 balance sheet date is

Answer 9

3,000,000.

Question 10

On December 31, 2017, Isle Co. has $6,000,000 of short-term notes payable due on February 14, 2018. On January 10, 2016, Isle arranged a line of credit with Beach Bank which allows Isle to borrow up to $4,500,000 at one percent above the prime rate for three years. On February 2, 2018, Isle borrowed $3,600,000 from Beach Bank and used $1,500,000 additional cash to liquidate $5,100,000 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, 2017 balance sheet which is issued on March 5, 2018 is

Answer 10

6,000,000 – $3,600,000 = $2,400,000.

Question 11

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 $754,350. The amount of sales taxes (to the nearest dollar) for May is

Answer 11

S + .07S = 754,350
S = 705,000
754,350 – 705,000 = 49,350.

Question 12

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 $754,350. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is

Answer 12

49,350 × .98 = $48,363.

Question 13

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, 2017 Valley remitted $203,700 tax to the state tax division for March 2017 retail sales. What was Valley’s March 2017 retail sales subject to sales tax?

Answer 13

.05S × .97 = 203,700
S = 4,200,000

Question 14

Jump Corporation has $3,000,000 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 $25 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?

Answer 14

85,000 × $25 = $2,125,000.

Question 15

Elmer Corporation has $2,500,000 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 $30 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?

Answer 15

50,000 × $30 = $1,500,000

Question 16

Palco Co., which has a taxable payroll of $1,200,000, 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.?

Answer 16

[(.062 – .054) + .02] × $1,200,000 = $33,600

Question 17

Roxy Co., which has a taxable payroll of $800,000, 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.?

Answer 17

[(.062 – .054) + .02] × $800,000 = $22,400

Question 18

A company gives each of its 75 employees (assume they were all employed continuously through 2017 and 2018) 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 2017, they made $21 per hour and in 2018 they made $24 per hour. During 2018, 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 2017 and 2018 balance sheets, respectively?

Answer 18

75 × 12 × 8 × $21 = $151,200
75 × 15 × 8 × $24 = $216,000

Question 19

A company gives each of its 75 employees (assume they were all employed continuously through 2017 and 2018) 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 2017, they made $24.50 per hour and in 2018 they made $28 per hour. During 2018, 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 2017 and 2018 balance sheets, respectively?

Answer 19

75 × 12 × 8 × $24.50 = $176,400
75 × 15 × 8 × $28 = $252,000

Question 20

The total payroll of Trolley Company for the month of October, 2017 was $960,000, of which $180,000 represented amounts paid in excess of $118,500 to certain employees. $600,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $180,000 of federal income taxes and $18,000 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 $118,500 and 1.45% in excess of $118,500. What amount should Trolley record as payroll tax expense?

Answer 20

($780,000 × 7.65%) + ($180,000 × 1.45%) + ($360,000 × 1.8%) = $68,760.

Question 21

Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1, 2017, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2017 may first be taken on January 1, 2018. Information relative to these employees is as follows:
Wages – Hourly Vacation Days Earned by Each Employee — Vacation Days Used Wages by Each Employee
2017: 20.5 – 10 – 0
2018: 22.5 – 10 – 8
2019: 25.5 – 10 – 10
What is the amount of expense relative to compensated absences that should be reported on Vanco’s income statement for 2017?

Answer 21

20.50 × 8 × 10 × 70 = $114,800.

Question 22

Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1, 2017, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2017 may first be taken on January 1, 2018. Information relative to these employees is as follows:
Wages – Hourly Vacation Days Earned by Each Employee — Vacation Days Used Wages by Each Employee
2017: 20.5 – 10 – 0
2018: 22.5 – 10 – 8
2019: 25.5 – 10 – 10
What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2019?

Answer 22

$25.50 × 8 × 10 × 70) + ($22.50 × 8 × 2 × 70) = $168,000

Question 23

Qualpoint pays a weekly payroll of $255,000 that includes federal taxes withheld of $38,100, FICA taxes withheld of $23,670, and 401(k) withholdings of $27,000. What is the ffect of assets and liabilities from this transaction?

Answer 23

$38,100 + $23,670 + $27,000 = $88,770 liabilities increase

$255,000 – $88,770 = $166,230 assets decrease

Question 24

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 $960, what is the required journal entry?

Answer 24

Debit Salaries and Wages Expense
Credit Salaries and Wages Payable

65 × 2 weeks × $960/week = $124,800

Question 25

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 $800,000. What is the required journal entry as a result of this litigation?

Answer 25

Likelihood of loss is only possible, not probable.

Question 26

Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $12 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 $17 million (the present value of which is $6.5 million). What is the journal entry required to record the asset retirement obligation?

Answer 26

Debit Natural Gas Facility
Credit Asset Retirement Obligation

Present value of the removal cost.

Question 27

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 $162 each. Related to these contracts, the company spent $800,000 servicing the contracts during the current year and expects to spend $4,200,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?

Answer 27

[((42,000 × $162) ÷ 4 yrs.)] – $800,000 = $901,000

Question 28

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 $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 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?

Answer 28

10,400,000 + (60,000 × $300) – $12,000,000 = $16,400,000

Question 29

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2018. Historically, 10% of customers mail in the rebate form. During 2018, 3,750,000 packages of light bulbs are sold, and 200,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2018 financial statements dated December 31?

Answer 29

3,750,000 × .10 × $1 = 375,000;
375,000 – 200,000 = 175,000

Question 30

A company buys an oil rig for $3,000,000 on January 1, 2018. 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 2018 as a result of these events?

Answer 30

($3,000,000 + $231,330) ÷ 10 = $323,133 for Depreciation Expense
$231,330 × .10 = $23,133 for Interest Expense

Question 31

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 $2,000,000 per year. The company estimates that on average it will incur losses of $1,600,000 per year. During 2018, $700,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sawyer Company for 2018?

Answer 31

700,000 losses and no insurance expense

Question 32

A company offers a cash rebate of $2 on each $6 package of batteries sold during 2018. Historically, 10% of customers mail in the rebate form. During 2018, 5,000,000 packages of batteries are sold, and 175,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2018 financial statements dated December 31?

Answer 32

5,000,000 × .10 × $2 = $1,000,000

Question 33

A company buys an oil rig for $5,000,000 on January 1, 2018. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $1,000,000 (present value at 10% is $385,550). 10% is an appropriate interest rate for this company. What expense should be recorded for 2018 as a result of these events?

Answer 33

($5,000,000 + $385,550) ÷ 10 = $538,555 for Depreciation Expense

$385,550 × .10 = $38,555 for Interest Expense

Question 34

During 2016, 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 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)
Year – Sales – Actual Warranty Expenditures
2016: 1,600,000 – 39,000
2017: 2,500,000 – 65,000
2018: 2,100,000 – 135,000
– = 6,200,000 – = 239,000
What amount should Rao report as a liability at December 31, 2018?

Answer 34

($6,200,000 × .09) – $239,000 = $319,000

Question 35

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 2018, the company sold 1,350,000 boxes of Frosted Flakes and customers redeemed 660,000 boxtops receiving 220,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

Answer 35

{[(1,350,000 × .60) – 660,000] ÷ 3} × $2 = $100,000

Question 36

During 2016, 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, 2% in the year after sale, and 3% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Year – Sales – Actual Warranty Expenditures
2016: 1,400,000 – 26,000
2017: 1,000,000 – 40,000
2018: 3,800,000 – 156,000
= 3,800,000 – = 156,000
What amount should Salton report as a liability at December 31, 2018?

Answer 36

($3,800,000 × .06) – $156,000 = $72,000

Question 37

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 2018, the company sold 800,000 boxes of Frosted Flakes and customers redeemed 352,000 boxtops receiving 88,000 bowls. If the bowls cost Crispy Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

Answer 37

{[(800,000 × .60) – 352,000] ÷ 4} × $2 = $64,000

Question 38

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2017 and 2018 are as follows: 2017 2018
Bags of dog food sold: 500,000 – 600,000
Leashes purchased: 18,000 – 22,000
Coupons redeemed: 120,000 – 150,000
The premium expense for 2017 is

Answer 38

[(500,000 × .45) ÷ 8] × $4 = $112,500

Question 39

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2017 and 2018 are as follows: 2017 2018
Bags of dog food sold: 500,000 – 600,000
Leashes purchased: 18,000 – 22,000
Coupons redeemed: 120,000 – 150,000
The premium liability at December 31, 2018 is

Answer 39

[(225,000 – 120,000) ÷ 8] × $4 = $52,500

Question 40

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2017 and 2018 are as follows: 2017 2018
Bags of dog food sold: 500,000 – 600,000
Leashes purchased: 18,000 – 22,000
Coupons redeemed: 120,000 – 150,000
The premium liability at December 31, 2017 is

Answer 40

{[(600,000 × .45) – 150,000] ÷ 8} × 4 = 60,000
60,000 + 52,500 = 112,500

Question 41

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 $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, Wooten should accrue

Answer 41

a loss contingency of $5,400,000 and disclose an additional contingency of up to 3,600,000

Question 42

Holland Company estimates its annual warranty expense as 3% of annual net sales. The following data relate to the calendar year 2018:
Net sales $1,500,000
Warranty liability account Balance, Dec. 31, 2018 $10,000 debit before adjustment
Balance, Dec. 31, 2018 20,000 credit after adjustment
Which one of the following entries was made to record the 2018 estimated warranty expense?

Answer 42

Debit Warranty Expense
Credit Warranty Liability
1,500,000 × .03 = $45,000

Question 43

In 2017, 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 2017 and 2018 are presented below: 2017 – 2018
Sales: $750,000 – $1,050,000
Actual warranty expenditures: 45,000 – 75,000
What is the estimated warranty liability at the end of 2018?(assume the accrual method)

Answer 43

[($750,000 + $1,050,000) × .08] – $120,000 = $24,000

Question 44

On January 3, 2018, Benton Corp. owned a machine that had cost $400,000. The accumulated depreciation was $240,000, estimated salvage value was $24,000, and fair value was $640,000. On January 4, 2018, this machine was irreparably damaged by Pogo Corp. and became worthless. In October 2018, a court awarded damages of $480,000 against Pogo in favor of Benton. At December 31, 2018, 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, 2018, what amount should Benton accrue for this gain contingency?

Answer 44

$0, gain contingencies are not accrued.

Question 45

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 2018 Flavor issued two separate series of coupons as follows:
Issued On – Consumer Total Value Expiration – Amount Disbursed as of 12/31/18
1/1/18 :500,000 – 6/30/18 – $236,000
7/1/18: 840,000 – 12/31/18 – 350,000
The only journal entry recorded to date is: debit to coupon expense and credit to cash of $815,000. The December 31, 2018 balance sheet should include a liability for unredeemed coupons of:

Answer 45

($840,000 × .5) – $350,000 = $70,000.

Question 46

Presented below is information available for Marley Company.
Current Assets Cash $ 4,000
Short-term investments 55,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $260,000
Total current liabilities are $100,000. The acid-test ratio for Marley is

Answer 46

(4,000 + $55,000 + $61,000) / 100,000 = 1.2 to 1