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Chapter 11

Current Liabilities and Payroll
Accounting
QUESTIONS
1.

The three questions are: (1) Who must be paid? (2) When is payment due? (3) How
much is to be paid?

2.

A current liability is expected to be paid within one year or the company’s operating
cycle, whichever is longer. Any liability that is not current is considered to be longterm.

3.

An estimated liability is an obligation to make a future payment, the exact amount of
which is uncertain but it is capable of being reasonably estimated.

4.

The amount of the sale for the item only is $860 ($894.40/1.04).

5.

The combined Social Security tax rate (assuming the maximum wage amount is not
yet reached) is 12.4% (6.2% + 6.2%). The maximum level of earnings [wage base on
which taxes are due] for 2003 is $87,000.

6.

The Medicare tax rate is 1.45%. This rate is applied to all wages earned by an
employee—no maximum limit exists.

7.

An employee’s gross earnings along with the number of withholding allowances that
an employee claims, as well as whether they are married or single, determine the
amount deducted for federal income taxes.

8.

The employee is responsible for federal income taxes, state income taxes, local
income taxes (if any), and the employee portion of the FICA taxes. The employer is
responsible for both federal and state unemployment taxes and the employer
portion of the FICA taxes.

9.

An unemployment merit rating is based on an evaluation of an employer’s
experience in creating or avoiding unemployment with its employees. The merit
rating affects the state unemployment taxes that the employer must pay. Merit
ratings cause more of the cost of unemployment benefits to be paid by those who
create more unemployment.

10. The obligation to correct or replace defective products (or services) is created when
the products are sold with the warranties. Even though the seller does not know
with certainty when the obligation will be paid, to whom it will be paid, or the amount
to be paid, past experience shows that some amount will probably be paid. If the
seller can reasonably estimate that amount, the warranty liability must be reported
on the balance sheet.

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11. There are no conditions in which a probable loss tied to a future event can create a
liability, regardless of its probability. A liability is an obligation created by a past
event, not by a future event. If a disaster occurs, the company must report the loss
in the period when it occurs.
12.A A wage bracket withholding table shows for a pay period of a given length (weekly,
biweekly, semimonthly, monthly), the amounts of federal income taxes to be
withheld from the pay of an employee, at varying amounts of gross pay and varying
numbers of withholding allowances.
13.A Single employee earning $725 with two allowances has $81 taxes withheld.
Single employee earning $625 with no allowances has $86 taxes withheld.
14. Krispy Kreme does not report short-term notes payable on its balance sheet.
Instead, it appears to meet short-term borrowing needs by drawing on revolving
lines of credit.
Lines of credit differ from short-term notes in several respects. For example, notes
payable are structured with definite amounts borrowed (face value) and with a strict
repayment date (due date). Lines of credit allow flexibility by only specifying the
maximum amount that can be borrowed. A company can borrow none or something
less than the maximum, if desired. Lines of credit usually also offer flexible dates
for repayment.
15. Tastykake has two income-tax-related accounts on its balance sheet. One account
is a current Deferred Income Taxes asset account and another is a noncurrent
Deferred Income Taxes asset account. Deferred tax assets are accounts that
represent income taxes that the company has paid before the taxes have been
reported on the income statement as income tax expenses.
16. Harley-Davidson has three current liabilities: Accounts Payable, Accrued Expenses
and Other Liabilities, and Current Portion of Finance Debt. It is not clear where the
payroll-related liabilities are reported but they are probably included in Accrued
Expenses and Other Liabilities.

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Fundamental Accounting Principles, 17th Edition

QUICK STUDIES
Quick Study 11-1 (5 minutes)
Items 1, 3, 5 and 6 are current liabilities for this company.

Quick Study 11-2 (10 minutes)
Sept. 30

Cash...........................................................................5,200
Sales....................................................................
Sales Taxes Payable..........................................

5,000
200

To record cash sales and 4% sales tax.

Sept. 30

Cost of Goods Sold..................................................2,900
Merchandise Inventory......................................

2,900

To record cost of Sept. 30th sales.

Oct. 15

Sales Taxes Payable................................................ 200
Cash.....................................................................

200

To record remittance of sales taxes to govt.

Quick Study 11-3 (10 minutes)
Oct. 31

Cash...........................................................................
4,000,000
Unearned Ticket Revenue.................................

4,000,000

To record sales in advance of concerts.

Nov. 5

Unearned Ticket Revenue.......................................
1,000,000
Earned Ticket Revenue......................................

1,000,000

To record concert revenues earned.

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Quick Study 11-4 (15 minutes)
1.

Computation of interest payable at December 31, 2005:
Days from November 7 to December 31..................... 54 days
Accrued interest (8% x $150,000 x 54/360)................. $1,800

2. 2005
Dec.31 Interest Expense....................................................... 1,800
Interest Payable.................................................

1,800

To record accrual of interest
(8% x $150,000 x 54/360).

3. 2006
Feb. 5 Interest Expense....................................................... 1,200
Interest Payable........................................................ 1,800
Notes Payable...........................................................150,000
Cash.....................................................................

153,000

To record payment of note plus interest
(8% x $150,000 x 90/360).

Quick Study 11-5 (15 minutes)
[Note: Two months (January and February) of earnings have
already been recorded for each of the 5 employees.]

Mar. 31

Payroll Taxes Expense.............................................1,318.50
FICA—Social Security Taxes Payable1..............
FICA—Medicare Taxes Payable2........................
State Unemployment Taxes Payable3................
Federal Unemployment Taxes Payable4............

806.00
188.50
252.00
72.00

To record employer payroll taxes.
$13,000 x 6.2% = $806.00
2
$13,000 x 1.45% = $188.50
3
[5 x ($7,000 - ($2,600 x 2))] x 2.8% = $252.00
4
[5 x ($7,000 - ($2,600 x 2))] x 0.8% = $72.00
1

Quick Study 11-6 (10 minutes)
2005

July 24

Estimated Warranty Liability...................................
Repair Parts Inventory........................................

35
35

To record cost of warranty repairs.
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Fundamental Accounting Principles, 17th Edition

Quick Study 11-7 (5 minutes)
Dec. 31 Employee Bonus Expense...................................... 10,000
Bonus Payable..................................................

10,000

To record expected bonus costs.

Quick Study 11-8 (10 minutes)
1. (b); reason—is reasonably estimated but not a probable loss.
2. (b); reason—probable loss but cannot be reasonably estimated.
3. (a); reason—can be reasonably estimated and loss is probable.

Quick Study 11-9 (10 minutes)
Times interest earned =

$1,575,000
$137,000

= 11.5 times

Interpretation: This company’s times interest earned ratio of 11.5 exceeds (is
superior to) its competitors’ average ratio of 4.0. Moreover, a times interest
earned of 11.5 suggests sufficient income to cover interest obligations.

Quick Study 11-10B (10 minutes)
Dec. 31

Income Taxes Expense............................................ 30,000
Income Taxes Payable.......................................
Deferred Income Tax Liability...........................

22,000
8,000

To record tax expense and deferred tax liability.

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................. No adjusting entry is required since it is not probable that the supplier will default on the debt.......... 5......... C C 9....................... ©McGraw-Hill Companies.... The guarantor. Yacht Company.000...... Mention of the suit as a contingent liability should be made in the notes to the financial statements....... 2.. 2005 96 Fundamental Accounting Principles........000 To record sales and sales taxes..........000 units x 8% x $15]................... 100............ Vacation Benefits Expense...... Vacation Benefits Payable........... 4...] 1.............000 40..000 To record cost of sales................... N C 5............ Estimated Warranty Liability.....................000 To record product revenue earned.... 2....... should describe the guarantee in its financial statement notes as a contingent liability.............. 3....100............................... 2005............................. 3...........600 To record warranty expense [3. 8.........400 To record vacation benefits expense [20 employees x 1 day x $120].... Unearned Services Revenue.......... C C 7...... 2.. 10......EXERCISES Exercise 11-1 (10 minutes) 1........ 6.....400 2..000..... 17th Edition ........... Earned Services Revenue......... 4..................... Cash.........600 3.. 1........ Cost of Goods Sold.......... 6..... 40. Inc.........................000 Merchandise Inventory.......... 2......... 2......000 Sales....000 Sales Taxes Payable..... No adjusting entry can be made since the loss cannot be reasonably estimated.... 1.. L L Exercise 11-2 (15 minutes) [Note: All entries dated December 31............ C C 3........ Warranty Expense.......000.

.............. 2b.. 12% x Fraction of year. 2006 Jan..$94......... Bonus Payable.....................126 (rounded to nearest dollar) 2... 60/360 Total interest....... Inc.. Chapter 11 ©McGraw-Hill Companies..... 2005 97 ............. 29........... 2005 2a.................... B = 0...................................................000 B = $29..000 – 0.................................... * Principal............................................000 Borrowed cash by issuing an interest-bearing note. 29. 19 Bonus Payable...... 31 Employee Bonus Expense...................126 To record payment of bonus.......03B 1................$ 1.....880 Solutions Manual............ July 14 Interest Expense*.... 94..880 Repaid note plus interest........................................ Cash ................. 95....................... 2005 Dec......... 1.................................. 94.... May 15 Cash........ Exercise 11-4 (30 minutes) 1..000 – B) B = $30.........03B = $30................................... 3........... 94............000... Maturity date = May 15 + 60 days = July 14..000 Cash.....126 29...............000 Notes Payable...........................................880 Notes Payable..............03 ($1...126 29....126 To record expected bonus costs...Exercise 11-3 (15 minutes) 1....................000 x Interest rate.............

....................................................... 17th Edition ................................ 2005 Nov..........000 Borrowed cash by issuing an interest-bearing note..........125 4a............... 1 – Jan........................ Principal.................... 2.......... ©McGraw-Hill Companies........................... 2006 Jan........................ 30 Interest Expense.......$150........$ 2................. 2006..........250 Notes Payable..... 2.000 x Interest rate............ 2................. Principal........150....... 153...........................150.......................... 4c................ 150....... 30/360 Total interest in 2006....................... Inc...$ 1....... Maturity date = November 1 + 90 days = January 30.......000 x Interest rate.................................... 2005 98 Fundamental Accounting Principles....................... 30)............000 Cash... 31 Interest Expense..................375 Repaid note plus interest....... 9% x Fraction of year (Jan...... 1.....................000 Notes Payable..... 60/360 Total interest in 2005....250 Interest Payable.............Exercise 11-5 (30 minutes) 1..............250 3....... 1 – Dec............. 4b...............$150......................... 9% x Fraction of year (Nov...... 2005 Dec.......... 31).................................................125 Interest Payable............ 2............................... 1 Cash...........250 Accrued interest on note payable.................

... $310.90 17........60 Full amount is subject to tax...... Solutions Manual...... FICA--Social Security..... 2...... Exercise 11-7 (20 minutes) Sept... 30 (1) Salaries Expense... 49.......... SUTA. Accrued Payroll Payable....20% FICA—Medicare....000 1....60 4....... c....00 Full amount is over maximum.45 Full amount is subject to tax........ 30.......20% $130............ FICA--Social Security......00 Full amount is over maximum.......... 116.........20 Full amount is subject to tax........................... 0 0.... SUTA...00 Full amount is subject to tax.. Federal Unemployment Taxes Payable......80 To record payroll for pay period ended September 30......................90 0.. SUTA. 600 0........... 0 2..... 0 0........... 83......00 Full amount is over maximum...... (2) Sept......80 4.......... Inc...........40 To record employer payroll taxes.100 6............. 800.. FUTA.............. 2005 99 . $2. Employee Federal Income Taxes Payable.... 8...60 11..00 $3......20% FICA—Medicare...60 135.............. b...000 is over the maximum. State Unemployment Taxes Payable...45 FUTA......80 0.80 17.80 0..... FICA--Social Security...00 FICA—Social Security Taxes Payable.. FICA—Medicare.......... $5...... 49................ 30 Payroll Taxes Expense..00 603........40 FICA—Social Security Taxes Payable.. $ 49..... 600 2... FICA—Medicare Taxes Payable..45 11.....000 6.............................................100 1. 0 2..... $ 800 6..................... 800 1.....Exercise 11-6 (20 minutes) Subject to Tax Rate Tax Explanation a.....90 0....... FICA—Medicare Taxes Payable....... Chapter 11 ©McGraw-Hill Companies..........00 Full amount is over maximum........60 Full amount is subject to tax..80 $200 is over the maximum......45 FUTA.............60 11.......40 $200 is over the maximum..............

.... Warranty Expense = 4% of dollar sales = 4% x $5................................... The December 31.... 5.... ©McGraw-Hill Companies.. 31 Warranty Expense................................. Inc.... 16 Cost of Goods Sold..................................................................................... 2006..800 3....... 17th Edition ............ Repair Parts Inventory....500 To record cash sale of copier............... 4............... (199) Ending 2006 balance... The company should report no additional warranty expense in 2006 for this copier. Aug.. balance of the Estimated Warranty Liability account equals the 2006 beginning balance minus the costs incurred in 2006 to repair the copier: Beginning 2005 balance..... 3.......... Journal entries: 2005 (a) Aug........500 5................... $ 21 5......... $220 Less parts cost.. 220 220 To record warranty expense for copier sold in 2005..... Estimated Warranty Liability. Merchandise Inventory............................. 22 Estimated Warranty Liability......... (b) Dec...... Sales...........500 = $220 2..... 199 199 To record cost of warranty repairs. balance of the liability equals the expense because no repairs are provided in 2005.................800 To record cost of August 16 sale............................................... 2005... 2005 100 Fundamental Accounting Principles.. the ending balance of the Estimated Warranty Liability account is $220..... The December 31................ Therefore.................................... 16 Cash... 2006 (c) Nov. 3.Exercise 11-8 (25 minutes) 1.........

......45%).........000 $218.6).....000 Ratio...77 Note: Trish Farqua is not subject to state income tax because her cumulative earnings from the previous pay period exceed the $9................66 Income tax deduction (from Exhibit 11A.....000 $ 8....6)...... 10..................26 ©McGraw-Hill Companies. Net pay. Total deductions...................................................... FICA—Medicare tax deduction (1...................74 $513....000 $407................ FICA—Social Security tax deduction (6. Exercise 11-11A (15 minutes) Regular pay (48 hours @ $12)........00 48..........00)...00 Total deductions..........000 $ 12.........2%)........... 2005 101 .............$223................. Income tax deduction (from Exhibit 11A............ Net pay.....000 $ 12...................08 0..........92 times........ $ 45...............$ 48...................................................23 $578.2%)....92 Denominator Interest expense..................00 110.000 maximum....05 63..... Exercise 11-10A (15 minutes) Gross pay.... Solutions Manual..........000 $ 15................................................... $735....................000 $121................25 33.000 (b) (c) (d) (e) (f) $205..00 624....................... Gross pay............................................... 4.....000 $ 8.............45%)......00 156...................... Chapter 11 $576............... Inc. Overtime premium pay (8 hours @ $6..65 13...........................57 Medicare tax deduction (1...69 9.......67 10...................Exercise 11-9 (15 minutes) (a) Numerator Income before interest & taxes............. 100..........000 27...000 $12........ Social Security tax deduction (6...67 Analysis: Company (d) has the strongest ability to pay interest expense as it comes due as evidenced by the company’s times interest earned (coverage) ratio of 33...00 $38....................

................................ 4.................... Com....................460 Income Taxes Payable.........Aug...........................100 Cash............... 2006 Jan.....................................................000 $21....... 27 Interest due at maturity Principal of the note... PROBLEM SET A Problem 11-1A (45 minutes) Frier 1.......................... 90/360 Interest expense..............640 Adjustment (additional expense).. 5 Nov.......... 3...................... 20 (b) Income Taxes Payable....000 Annual interest rate..............100 Total accrued [($27............. 31 Income Tax Expense........................................................................ 17th Edition .. 5......................................................................700) x ....... Fraction of term in 2004....460 To adjust tax expense and liability... Fraction of term in 2005......................200 + $32..$30.460 2.....900 + $18.................000 8% 60/360 $ 280 Accrued interest on UMB note at the end of 2004 Total interest for note........... Accrued interest expense........... 17 July 8 120 Nov... 9% Fraction of year............ 2005 (a) Dec....................................... 2.................... $ 5........ Interest on UMB note in 2005 Total interest for note.. 23................ Bank UMB Maturity dates Date of the note....... Income Taxes Payable (target balance)...............100 To make the final quarterly payment of income taxes for 2005............ 90 Maturity date.................................................................... $29........ ............................................... 28 60 Jan........................... 29.............$ 675 $60............... Inc....... 2005 102 $ 280 33/60 $ 154 $ 280 27/60 Fundamental Accounting Principles....000 10% 120/360 $ 2.. 5....May 19 Term of the note (in days)........Exercise 11-12B (25 minutes) 1..... 29............... ©McGraw-Hill Companies........30].....

....... Chapter 11 $ 126 ©McGraw-Hill Companies................ Solutions Manual........ Inc.........Interest expense in 2005......... 2005 103 ...

..................... 30..................500 Cash.... 17 Interest Expense....... 60.............. 675 Notes Payable—Frier.............500 30........ Interest Payable......... 38............................................................. 8......................... 21.........................000 Paid $8....................... 9% note to extend due date on account................... 154 154 Accrued interest on note payable.................000 Interest Payable ...................... 38..................... 5 Interest Expense.... 27 Interest Expense..000 Paid note with interest................ 20 Merchandise Inventory.. 17th Edition .......... 60............................500 Accounts Payable—Frier.500 Purchased merchandise on credit..................................... 30. 10% note............................................... 126 Notes Payable—UMB Bank...................000 Borrowed cash with a 120-day................................. 28 Cash........ 2004 Apr..............000 Borrowed cash with 60-day....................... 60..............000 Notes Payable—UMB Bank........... Notes Payable—Frier. 38........ 21.......... 21............................................................................................................................... 62....................................... 2005 104 Fundamental Accounting Principles........ 2005 Jan.... 2..................................500 cash and gave a 90-day............................000 Notes Payable—Community..........000 Cash........... ©McGraw-Hill Companies..................Problem 11-1A (Concluded) 5.......... Aug............ Dec................................ 31 Interest Expense...... May 19 Accounts Payable—Frier...............280 Paid note with interest................... Inc.....000 Notes Payable—Community................................ Nov............................... 21.. 8% note. 154 Cash...............000 Cash...................... July 8 Cash.......................675 Paid note with interest..............................

..... 29 Estimated Warranty Liability....................... Chapter 11 ©McGraw-Hill Companies...........................176 1............................................................................................. 11 Cost of Goods Sold......................................................... Merchandise Inventory.........................................Problem 11-2A (40 minutes) 1........................ 3..000 6...350 1.. 2005 105 ... Estimated Warranty Liability...........................................780 To record cost of December 16 sale (210 x $18).... Merchandise Inventory............... 16 Cost of Goods Sold............................. 1.........176 To record razor warranty expense and liability at 7% of selling price................780 3................... 9 Estimated Warranty Liability.......... 31 Warranty Expense................... Estimated Warranty Liability........... 16 Cash............ 11 Cash..... 1..............................800 Sold razors to customers.800 Sales...350 To record cost of November 11 sale (75 x $18)................ 6.......... Merchandise Inventory......... 270 270 To record cost of razor warranty replacements (15 x $18).. Inc...................................... 2004 Nov........... Merchandise Inventory.................... 540 540 To record cost of razor warranty replacements (30 x $18)............ 16...................................... 16.............................. Solutions Manual...............000 Sold razors to customers.... 420 420 To record razor warranty expense and liability at 7% of selling price... 30 Warranty Expense................... Dec..................... Sales..........................................

...... $ 420 Warranty expense for December.............................. 7% Warranty expense..........176 Total...............................400 Warranty percent..................................................... Warranty expense for November 2004 and December 2004 Sales Percent Warranty Expense November.......... 2.400 Sold razors to customers.............. $ 786 1..........................050 Balance of the estimated liability as of January 31...........................................................................400 Sales.... 10. 5 Cash......... 31 Warranty Expense.............. 2005 Beginning balance........................................$10............. Warranty expense for January 2005 Sales in January. 728 Cost of replacing items in January (50 x $18).....000 7% $ 420 December.........$ 728 4................................... 2005 106 credit credit debit credit credit credit debit credit Fundamental Accounting Principles.............800 7 1....... $ 614 5............ 900 900 To record cost of razor warranty replacements (50 x $18).............800 $1... ( 900) Estimated Warranty Liability balance......340 2.................................. Balance of the estimated liability as of December 31................................................................... 2...... ©McGraw-Hill Companies...................... 5 Cost of Goods Sold............ 10... 17th Edition . $ 6.................................... 16..............596 3........ $ 786 Warranty expense for January................ Estimated Warranty Liability......................... (810) Estimated Warranty Liability balance...................... Merchandise Inventory..... Merchandise Inventory............... Inc..........340 To record cost of January 5 sale (130 x $18).......Problem 11-2A (Concluded) 2005 Jan................ 728 728 To record razor warranty expense and liability at 7% of selling price.. 2004 Warranty expense for November...... $22....... 1.............. 17 Estimated Warranty Liability....176 Cost of replacing items in December (45 x $18)........................

....000 260..000 130. Income before interest & taxes Interest expense 3....000 150.... 71% 143% Sales increase by 80% (multiply prior sales by 1... Ace Co...........000 130...000 300... Interest expense (fixed)...... Net income..... Income before interest & taxes Interest expense = $100.....000 600........ Sales increase by 30% (multiply prior sales by 1........ Chapter 11 ©McGraw-Hill Companies.....000 180... Inc..... $650. 114% 229% Solutions Manual....000 = 1.000 540.. 4....000 Net income increases by.... 5... $900...............000 Net income increases by*.......000 Deuce Co.000 = 3...000 130.. Ace Co... $650..54 2.... $750......... Sales increase by 50% (multiply prior sales by 1............000 Deuce Co.000 $230..Problem 11-3A (60 minutes) 1......000 720.. 43% 86% * Computed as the increase in net income divided by prior net income......000 Net income........ Net income.....8) Sales Variable expenses.. Income before interest..................5) Sales Variable expenses... Interest expense (fixed)...........000 450.................. $900..... $100...000 30....000 30....000 $150..... 2005 107 .000 Deuce Co..............000 360..........3) Sales Variable expenses.000 520. Deuce Co....000 30. Interest expense (fixed)....000 $30...33 = $200...000 Net income increases by......000 $170....000 $130. Ace Co..........000 $120........ Income before interest..... Income before interest......000 390..000 130. $750. Ace Co....000 $130......

......000 130. enjoys greater percent increases in its net income because it has made this choice (see parts 3............ Deuce Co. Deuce Co..000 $ 30. 7.... That is.......... -14% -57% -114% The higher fixed cost strategy (having more fixed interest expense) of Deuce Co... $300...000 270. 9....000 130.000 Net income decreases by. ©McGraw-Hill Companies.000 Variable expenses....... $ 60..........000 Variable expenses.........000 240.. and 8).......000 Net income.... Sales.........Problem 11-3A (Concluded) 6..000 $300.. Deuce Co........000 120..................6) Ace Co.... 80.. 30.000 180......... 30.. and 5)...............000 $450.........000 $ (10.....000 $ 50....000 130........000 Interest expense (fixed).... -29% Sales decrease by 20% (multiply prior sales by 0.... is indicated by a lower value of the times interest earned ratio..... 30........ $400........... $450.......000 $400..... $ 50.... Sales. experiences smaller percent decreases in its net income because it has made this choice (see parts 6. The higher fixed cost strategy works fine if the sales level increases. 7. Ace Co... The lower fixed cost strategy protects the company if the sales level decreases.....000 Interest expense (fixed).000 Interest expense (fixed)..... 90...... 240. Inc..9) Ace Co. Sales decrease by 10% (multiply prior sales by 0........000 180............. -29% -57% Sales decrease by 40% (multiply prior sales by 0.000 Income before interest.....000) Net income decreases by.........000 160...8) Ace Co..................000 Variable expenses...... 60......... Deuce Co..... 2005 108 Fundamental Accounting Principles..... 8..... 4.. accentuates the effects of increases and decreases in sales.000 Net income... Sales.. 320....000 Income before interest.....000 Income before interest.... 17th Edition ...000 Net income decreases by. increases in sales produce greater increases in net income and decreases in sales produce greater decreases in net income......000 Net income....... $ 30.... 360..... The higher fixed cost strategy of Deuce Co........

..80 900 450 Total 400 $158..45% $ 400 1..10 2.000 6... Inc.45% $ 450 1...80 Kate Chas $ 27.. Each employee’s FICA withholdings for Medicare (no limits) Dale Ted Kate Chas Earned this week..80 $ 27. $87...45% $ 900 1..........60 $ 55...20% Social Security tax. Employer’s FICA taxes for Social Security Dale Amount from part 1. $ 2...... 2005 109 ....38 ©McGraw-Hill Companies.250 $87.950 Earned this week.20% 450 6..... Chapter 11 $ 29............700 $57.00 Ted $ 13. $ 49..53 $ 5.000 86. Tax rate..90 $ 24.750 $80....20% 900 6.000 29..000 $ $ $ Subject to tax......05 $ 6......80 Kate Chas Total $ 54....050 $85...........53 $ 5. Employer’s FICA taxes for Medicare Dale Amount from part 2.. $ 2....10 4........ Each employee’s FICA withholdings for Social Security Dale Ted Kate Chas Maximum base. Tax rate... $ 29.Problem 11-4A (60 minutes) 1..000 1...000 1.......00 $ 13. Solutions Manual.45% Medicare tax.....05 $ 6.20% 400 6..80 Total $ 54.. $ 49.... 800 6.............300 $87..90 $ 24. Earned through 8/18.... Amount subject to tax.80 Total $158..60 Ted $ 55...200 $ 800 $87.38 3..

. Withholding taxes. Employer’s total payroll-related expense for each employee Dale Gross earnings.00) (252.00 Fundamental Accounting Principles.53 2..00) (54..00 72. Employer’s SUTA taxes Dale Subject to tax (from 5)..20 Ted $ 0 2.38 5.......00) $716.00) (16..... Take-home pay...00 250 0.....00 $450.............80) (27......90 6..700 0 Kate $ 7..950 Earned this week..00 0......10) (54.... 49.00 16......00 27. tax..... 8.10 54.15% $ 8. 29.......00) (64.8% $ 0.20 8.80) (13.....05 0...200 0 Ted $ 7..05) (6...15% $ 0.....000 1..90) (24.00 SUTA tax. Inc.00 Pension contrib.750. 2005 110 Ted $ 900. 16.60 10...00 Total $ 13..40 (55.750..40 (158.....00 Chas $400.... FUTA tax..000.00 (49...000 29. $2...00) (16.......00 ©McGraw-Hill Companies..00 300.032....60 FICA Medicare taxes. 0 0.. (8%)...00) (36...00 Total $3.......53) (5...38 Chas $ 400 2...00 32... Tax rate...... 0.00 24.00 Kate $ 250 2.00 Total $3..15% $ 0..00 Plus FICA Social Sec. .00) (16.000... 17th Edition .80) (99.. Earned through 8/18...80 3.80 5.....20 6.....000 $ $ $ Subject to tax.........00 FUTA tax.. Tax rate.38 16.8% $ 2... .00) $3.... 160.8% $ 3. 0......000 6..00 5..........15% $ 5.. SUTA tax...98 64....00 Health insurance.. Amount subject to tax.....15 $345..20 13.... Health insurance.....00 400 0............00 Chas $400.38) (441.. Employer’s FUTA taxes Maximum base..8% 0.00 Ted Kate $900...... $ 0 2......00 55. FICA Medicare taxes.60) (29........00 900 450 Total 400 0 0..... Dale $ 7.653......050 5. Less FICA Social Sec.. Each employee’s net (take-home) pay Gross earnings.000 86.. tax...00 Kate $450. $ 2.......Problem 11-4A (Concluded) 5...00) $1.57 $317.00) (16.60 Dale $2..98 7....00 36.750 250 Chas $ 7....60 16..52 $ $ 5.80 13.......00 158.....

2005 111 ..345.85 $543.40 $4.254.81 $490. Inc. $2.056.60 Solutions Manual... Chapter 11 $1..66 ©McGraw-Hill Companies.Total payroll expense.

.....2% **$44. 2.35 6..300 x 6... 8 Office Salaries Expense...........772.......... Employee Fed.....60 642.300 x .....................40 ©McGraw-Hill Companies... Taxes Payable*.... Employee Medical Insurance Payable......00 354..........300 x 1............. Inc.00 670... FICA—Medicare Taxes Payable..........380.. 5....00 420...746.........00 Sales Salaries Expense......... FICA—Medicare Taxes Payable**... Inc............746...04 = $1............. Employee Union Dues Payable.......008 = $354.. 32............... 2005 112 Fundamental Accounting Principles.60 642..340.....920.35 FICA—Social Sec.....35 1......... State Unemployment Taxes Payable*........300 x .481............. 17th Edition . * $44....................45% Part 2 Jan................. 8 Payroll Taxes Expense... 11.00 33. 2........................... Taxes Payable... Taxes Payable....05 To record payroll for period.....772...........00 FICA—Social Sec.. Accrued Payroll Payable.....00 **$44.............. * $44. Federal Unemployment Taxes Payable**......................Problem 11-5A (25 minutes) Part 1 Jan....515.40 To record employer payroll taxes.

................ 31 Payroll Taxes Expense*........800 SUTA = $1....................... 20..........* *The check numbers may be entered in the Payroll Register....... 31 Accrued Payroll Payable..... 15...600 = $5........ Inc. 31 Office Salaries Expense. 1..$5....... Accrued Payroll Payable.. Taxes Payable....000 ....... FICA Medicare Taxes Payable............612 (same as employees) FICA Medicare Taxes = $377 (same as employees) Solutions Manual................................. Chapter 11 ©McGraw-Hill Companies.... * Amount earned through 2/28 = 2 x $2. Income Taxes Payable.... 7.......200 Subject to SUTA/FUTA in March = $7........8% = $144 FICA Social Security Taxes = $1...800 x 10 employees x 0.....................900 Cash....612 377 720 144 To record employer payroll taxes..................400 Shop Wages Expense...... Income Taxes Payable............. Employee Fed..........2....0% = $720 FUTA = $1... FICA Medicare Taxes Payable..............................612 377 3..................................................111 To record payroll for period.........800 x 10 employees x 4.200 = $1... 20............111 To record payment of payroll...600 FICA Social Sec.Problem 11-6AA (50 minutes) Mar................... 15 FICA Social Security Taxes Payable............... 754 Employee Fed.....853 FICA Social Sec...............900 20............................3..........111 Cash........... 10...........................3.............................224 FICA Medicare Taxes Payable......... 2005 113 ...... State Unemployment Taxes Payable................878 To record payment of FICA and federal income taxes........ Taxes Payable........... 1.......... Federal Unemployment Taxes Payable..

...............Problem 11-6AA (Concluded) Apr............... 560 To record payment of FUTA taxes [$416 + $144]... 7.....2............. 2.800 To record payment of SUTA taxes [$2..080 + $720].. 2005 114 Fundamental Accounting Principles............................... 560 Cash........ 17th Edition ..........900 Cash............3.......800 Cash. Income Taxes Payable....................... 15 FICA Social Security Taxes Payable........................878 To record payment of FICA and federal income taxes............224 FICA Medicare Taxes Payable........... Inc................................................. 30 No entry required upon mailing Form 941...........3................................. ©McGraw-Hill Companies.... 30 Federal Unemployment Taxes Payable........ 15 State Unemployment Taxes Payable....... 754 Employee Fed..........................

........................... 60 Maturity date.........................................................PROBLEM SET B Problem 11-1B (45 minutes) Quinn Products 1......................................................... 15% Fraction of year............000 9% 45/360 $ 180 Interest due at maturity Principal of the note........................................... Chapter 11 ©McGraw-Hill Companies............................ 25/45 Accrued interest expense.............600 Annual interest rate........................$ 100 4.............. 20 $ 9...............000 10% 120/360 $ 300 $16... July 22 2................ City Bank Maturity dates Date of the note............................................60/360 Interest expense.......... 2005 115 ........................................................ 20/45 Interest expense in 2005........$3..$ 80 Solutions Manual......................... 12 Dec..$ 90 3..............$ 180 Fraction of term in 2005.... Blackhawk Bank Accrued interest on City Bank note at the end of 2004 Total interest for note....... 6 45 Jan....................$ 180 Fraction of term in 2004..................... May 23 Term of the note (in days).... Interest in 2005 Total interest for note..... Inc..................................... July 15 120 Nov................

......................... Interest Payable........................000 400 3....600 3.... 22 Merchandise Inventory..................................................690 Paid note with interest. ©McGraw-Hill Companies..................................................... 300 9.000 Cash.............................. 2005 Jan...... Notes Payable Blackhawk Bank........ 2005 116 Fundamental Accounting Principles...000 Borrowed cash with a 45-day............Problem 11-1B (Concluded) 5......... 9% note.......... 9.......... Notes Payable Quinn Products.............................. 90 3. 31 Interest Expense.............................................................. Notes Payable Quinn Products. Inc........ Nov.................................................. July 15 Cash................... 17th Edition ......000 9. 100 100 Accrued interest on note payable................. Notes Payable Blackhawk Bank........ 10% note. Accounts Payable Quinn Products.....000 9............ 6 Cash......................... 12 Interest Expense.................. 22 Interest Expense...................................000 Purchased merchandise on credit......................................... 100 Notes Payable City Bank........................... 15% note to extend due date on account......................... Dec..........180 Paid note with interest........ 20 Interest Expense............ Cash........... May 23 Accounts Payable Quinn Products. 4..................... 16. Cash.............................................................. 16........................................600 Paid $400 cash and gave a 60-day..................000 Borrowed cash with a 120-day........... 16......... Cash.. 80 Interest Payable.................. 4......000 Notes Payable City Bank.......... 16...........................................................300 Paid note with interest...........................................................000 4.................... 2004 Apr....

................ Merchandise Inventory....................................... 2005 117 ................. Inc............................. 700 700 To record cost of November 16 sale (50 x $14)... Estimated Warranty Liability..... Dec.............. 525 525 To record coffee grinder warranty expense and liability at 10% of selling price..............250 Sold coffee grinders to customers................... Sales............. 12 Estimated Warranty Liability.............................................. 18 Cost of Goods Sold.......... Solutions Manual.................................................. 31 Warranty Expense.......................................................................... Merchandise Inventory....... 84 84 To record cost of coffee grinder warranty replacements (6 x $14).......... Merchandise Inventory.......100 2........250 5......................... 18 Cash.................100 To record cost of December 18 sale (150 x $14).... 238 238 To record cost of coffee grinder warranty replacements (17 x $14)...........750 Sold coffee grinders to customers........................................... 16 Cash............. 2004 Nov...................................... 1. 175 175 To record coffee grinder warranty expense and liability at 10% of selling price......................................... 5............... Chapter 11 ©McGraw-Hill Companies.................Problem 11-2B (40 minutes) 1................ 30 Warranty Expense............... 28 Estimated Warranty Liability........... Merchandise Inventory....................... Sales..... Estimated Warranty Liability...... 16 Cost of Goods Sold.............................750 1....................................... 2..........................................

..... 17th Edition ...................Problem 11-2B (Concluded) 2005 Jan..................... 5....100 2..... 2............. $ 378 credit credit debit credit Balance of the estimated liability as of January 31................ Merchandise Inventory....................... 2004 Warranty expense for November.............. 21 Estimated Warranty Liability....................................................................................750 10% $ 175 December...... Warranty expense for January 2005 Sales in January..................... $2....250 10 525 Total............................. 532 532 To record cost of coffee grinder warranty replacements (38 x $14).........100 Sold coffee grinders to customers............................. $7........................................................................ 31 Warranty Expense......................... 210 210 To record coffee grinder warranty expense and liability at 10% of selling price............................. Warranty expense for November 2004 and December 2004 Sales Percent Warranty Expense November..... $1........ 10% Warranty expense..... Estimated Warranty Liability............................. 210 Cost of replacing items in January (38 x $14).............................. Merchandise Inventory......................... 840 840 To record cost of January 7 sale (60 x $14)...... 7 Cost of Goods Sold............................ ©McGraw-Hill Companies..............100 Warranty percent.......... $ 175 Warranty expense for December.. 2005 118 Fundamental Accounting Principles................ 2....... Sales.................... $ 210 4.............................. 2005 Beginning balance.............. 7 Cash........... Inc................................... (322) Estimated Warranty Liability balance....................................... $ 56 credit credit debit credit 5................ 525 Cost of replacing items in December (23 x $14). $ 378 Warranty expense for January............................. (532) Estimated Warranty Liability balance................ Balance of the estimated liability as of December 31...000 $ 700 3......

...... Income before interest & taxes Interest expense = $60..000 171..0 2.000 Net income increases by............000 $ 69.000 66....... Interest expense (fixed)... Sales increase by 10% (multiply prior sales by 1.....................000 126.000 15.. 40% 20% Sales increase by 40% (multiply prior sales by 1......000 Zodiac Co.........000 84.............. Virgo Co............... $168...000 $ 27.............000 $ 18.......... 5....90) Sales...........000 114..000 Net income increases by.... Income before interest.000 114.000 15.......000 45... $132.......10) Sales.000 45..... $228......000 $15.. Virgo Co......... $228...................000 15. Variable expenses..000 84...000 $ 42.40) Sales......000 33... 2005 119 ..000 = 2..... Net income..000 Zodiac Co. Variable expenses.......... Inc.......000 Zodiac Co... Interest expense (fixed)... 160% 80% Sales increase by 90% (multiply prior sales by 1.. Variable expenses.....000 45............... Net income.... Income before interest & taxes Interest expense 3...... Net income.000 Net income increases by...000 42.000 66.. Zodiac Co......33 = $30.... 360% 180% Solutions Manual. Interest expense (fixed)......000 $ 39...000 = 1......000 $45........ Virgo Co.... $168. Income before interest..... Virgo Co.000 57.000 99.........................Problem 11-3B (60 minutes) 1............ Income before interest...... 4.000 $ 21. Chapter 11 ©McGraw-Hill Companies..... $132........

..000 6.000 Income before interest...50) Virgo Co. Virgo Co...000 Net income.. and 8)............... and 5).. 7............ -40% Sales decrease by 50% (multiply prior sales by 0........ Zodiac Co......... $(15.. Zodiac Co.... 7. $ 96........ 45. -80% -320% -160% The higher fixed cost strategy (having more fixed interest expense) of Virgo Co.. Sales decrease by 20% (multiply prior sales by 0..000 $24.000 $ 9.000 Interest expense (fixed)..000 Interest expense (fixed)........ 48...000 Variable expenses........ The lower fixed cost strategy protects the company if the sales level decreases...000 $ 96.000 Income before interest. Sales.... Inc.000 Variable expenses.000 15.000 15.... That is.... Zodiac Co....... 12...000 45.......... Sales...................000) $ 0 Net income decreases by.000 72.80) Virgo Co. enjoys substantially greater increases in its net income because it has made this choice (see parts 3.....000 Net income.000 18.......... 8............. 2005 120 Fundamental Accounting Principles........... ©McGraw-Hill Companies... The higher fixed cost strategy of Virgo Co....... 4....000 15............ Sales. $(33..000 Net income.000 15.... The higher fixed cost strategy works fine if the sales level increases..... accentuates the effects of increases and decreases in sales. 17th Edition ............... 45.......000 Income before interest....Problem 11-3B (Concluded) 6...000 Interest expense (fixed)........ $ 24.......... experiences much smaller decreases in its net income because it has made this choice (see parts 6.... 48........20) Virgo Co. 45.....000 $ 60..... 12............ $ 60....000) $(9............. increases in sales produce greater increases in net income and decreases in sales produce greater decreases in net income......... 30.. -200% -100% Sales decrease by 80% (multiply prior sales by 0.. $ 3......... Zodiac Co..........000 Net income decreases by..000) Net income decreases by........ is indicated by a lower value of the times interest earned ratio....000 24...... 9.000 Variable expenses... 30.......

000 Earned through 9/23.25 $ 21......93 $ 29.........20 $259..............085 6. Employer’s FICA taxes for Social Security Amount from part 1......... Employer’s FICA taxes for Medicare Amount from part 2...200 Amount subject to tax. Alli Eve Hong Juan Total $ 99.97 $ 6.20 $ 93.......20% Social Security tax. 1.400 59....78 Total 4.000 $87....45% 1.......600 $27..... 85.20 $ 93... Chapter 11 Alli Eve Hong Juan $ 36....650 22.500 $ 1...20% 6..500 $ 1..70 $ 73.. Each employee’s FICA withholdings for Social Security Alli Eve Hong Juan Maximum base..45 $ 37..45 $ 37..Problem 11-4B (60 minutes) 1...25 $ 21.915 $80....89 $ 475 Juan $ Total 600 1..45% 1. 6....45% Medicare tax......81 ©McGraw-Hill Companies..800 Earned this week.. Inc. $ 2.....600 $ 1. $ 1. Solutions Manual.515 Tax rate... $ 87........89 $ 8. $ 99.20% 6...515 $ 475 $ 600 Tax rate......20 Total $259...000 $87.... $ 36....45% $ 8.350 $64.81 3.. $ 1... Each employee’s FICA withholdings for Medicare (no limits) Alli Eve Hong Earned this week....93 $ 29.515 $ 475 $ 600 Subject to tax....78 2.70 $ 73.000 $87. $ 2.20% 6..97 $ 6. 2005 121 ..

090.89 8.10 $4..00) (22...8% $ 0. $ 7....... Employer’s FUTA taxes Alli Maximum base..00 Total $5. $2.00 SUTA tax.....00 $475........400 Amount subject to tax.93 29.....75% SUTA tax.500.. $ 2. (36..515... (99.... 2005 122 Total 6. Employer’s SUTA taxes Alli Subject to tax (from 5)....... 125...00 0.25 21..00 Plus FICA Social Sec.....000 Earned through 9/23.90 ©McGraw-Hill Companies. $ 0 Eve $ 7...50 $5.. $2..... FUTA tax..20) (93.......00 22...93) FICA Medicare taxes..... (5%).144. 0.. Employer’s total payroll-related expense for each employee Alli Eve Hong Juan Gross earnings..80 6......8% 0.20 FICA Medicare taxes. 22..515..13 88....02 Fundamental Accounting Principles.66 (37..25) (21... ..... 99.00 2.00) Take-home pay..00 $600....775.20 93.195...00) $484.00 (29... 36.75 30...00 254... Each employee’s net (take-home pay) Alli Eve Gross earnings.188..00) (88..75 23...97 6...00 Pension contrib......89) (52.78) (8....13 0.728....20) (259.00 259. $2.. $ 0 0.. (198....13 Total $5.. $ Tax rate.00 Health insurance.80 6.500.. Inc..80 $ Hong $ 350 1.. 17th Edition ...00 $ 2...00 $ 350 0..97) Withholding taxes..00 22.....085 $ 0 Hong $ 7.8% 0..00 $1..75% $ 6.......81 2.... 1.000 59.782....Problem 11-4B(Concluded) 5..41 $ Total 600 0 0..00 $ 0 0.....81) (48....00 0...00) Health insurance.....02 $697..70) (73..00 Total payroll.... 85.............00 Eve $ 0 1.00) (22....45) (6.00 75.650 $ 350 Juan $ 7.....00 22. 0......75% $ 0......00 Less FICA Social Sec....00 6..00) (182........000 6... (22..13 Juan $ 0 1....65 $566.00 $1.45 $1..55 $1...78 73. $ 0 Tax rate.00 7. tax.. tax...00 $ Hong $475.75% $ 0.......70 FUTA tax.... $ 0.00 Juan $600..200 $ 0 Earned this week...10 8..80 0.00) (480...8% $ 2......45 37....500 $ 1.00) $364.090. $2....000 22.00) (22....515 $ 475 $ Subject to tax...

...................068 ** $114....... Employee Fed... Accrued Payroll Payable........13...........876 **$114......068 1......... Employee Med... Income Taxes Payable.................69...000 x 6................... 8 Sales Salaries Expense. 8 Payroll Taxes Expense...653 3...42...........450 Delivery Wages Expense......................................Problem 11-5B (25 minutes) Part 1 Jan.....250 2................068 1......... Chapter 11 ©McGraw-Hill Companies... * $114.. FICA—Medicare Taxes Payable................2% = $7................... State Unemployment Taxes Payable*...........509 FICA—Social Security Taxes Payable.... Federal Unemployment Taxes Payable**.008 = $912 Solutions Manual... 7....320 275 85...............060 FICA—Social Security Taxes Payable*........653 Part 2 Jan.... 2005 123 ....... 2...490 Office Salaries Expense..000 x ................ Insurance Payable....653 17........876 912 To record employer payroll taxes....................45% = $1..000 x 1............... Inc....434 To record payroll for period.......034 = $3...... FICA—Medicare Taxes Payable**........... 7.. * $114.. Employee Union Dues Payable..000 x ....

.............. 4............ Employee Fed................000 Subject to SUTA/FUTA in June = $7..............000 .....................000 x 5 employees x 4.........................200 = $6............... Federal Unemployment Taxes Payable.................. 4....................000 = $1..000 Shop Wages Expense......* *The check numbers may be entered in the Payroll Register.......................... 30 Payroll Taxes Expense*............... FICA Medicare Taxes Payable............ Cash................... 2......000 SUTA = $1.................. Accrued Payroll Payable. 744 174 900 1. FICA—Medicare Taxes Payable..................000 x 5 employees x 0........641 Cash......000 FICA—Social Security Taxes Payable.. 2005 124 Fundamental Accounting Principles..8% = $40 FICA Social Security Taxes = $372 (same as employees) FICA Medicare Taxes = $87 (same as employees) ©McGraw-Hill Companies...641 To record payroll period. * Amount earned through 5/31 = 5 x $1............818 To record payment of FICA and federal income taxes.............. 4........ FICA Social Security Taxes Payable.............0% = $200 FUTA = $1........ Inc.................. 699 372 87 200 40 To record employer payroll taxes........................Problem 11-6BA (50 minutes) June 15 FICA—Social Security Taxes Payable... FICA—Medicare Taxes Payable...... 30 Accrued Payroll Payable.............................641 To record payment of payroll..................................... 372 87 900 4.....$6............... Employee Fed..................... 30 Office Salaries Expense. 17th Edition ...... Income Taxes Payable................................... State Unemployment Taxes Payable... Income Taxes Payable........

. Inc............... 2005 125 ...........Problem 11-6BA (Concluded) July 15 FICA Social Security Taxes Payable. 15 State Unemployment Taxes Payable...... Cash......... 31 Federal Unemployment Taxes Payable...... Cash...............................818 To record payment of FICA and federal income taxes....... Employee Fed. 136 136 To record payment of FUTA taxes [$96 + $40]............... Cash.............................................. 680 680 To record payment of SUTA taxes [$480 + $200]............ Solutions Manual........................................................... 744 174 900 1........ Income Taxes Payable....................... FICA Medicare Taxes Payable....................................... Chapter 11 ©McGraw-Hill Companies................ 31 No entry required upon mailing Form 941.....................

...............50 189........... Federal Unemployment Taxes Payable**....................000 x ..................... 265........002 To record cost of March 25 sale.......000..................... 2005 Feb....... FICA—Medicare Taxes Payable... 14..008 = $8.............00 FICA Social Security tax deduction (6........... State Unemployment Taxes Payable*...........00 **$1..000 x ........ Sales Taxes Payable...Serial Problem Serial Problem........ $ 62.... 2...........124.............2%)*..........50 FICA—Social Sec........ 62............00 734..00 FICA Medicare tax deduction (1.00 4.....................00 Total deductions.............. 1................................... 2..........00 14........ $ 734.......... 26 Payroll Taxes Expense.................00 FICA—Social Security Taxes Payable.............. 2005 126 Fundamental Accounting Principles.....................50 Net Pay...................00 To record employer payroll taxes.................. FICA—Medicare Taxes Payable................04 = $40......00 14....50 Income tax deduction....... Mar.................. * $1.....000............ Success Systems (30 minutes) 1. 2.... 62...... 2005 Feb........................ 3.....................800 112 Sold merchandise on credit and collected sales tax of 4%............................... ©McGraw-Hill Companies..... Employee Federal Income Taxes Payable........ Inc...... 25 Accounts Receivable – Wildcat Services.............45%).......... Taxes Payable.. Gross pay (8 days x $125 per day)....................50 40.......................... 2..... $1...................50 To record payroll period..............00 8.......... Cash.... 17th Edition ................................. 25 Cost of Goods Sold........ 189...................912 Sales....................002 Merchandise Inventory..................... 26 Wages Expense.50 *Employee has not reached the maximum limit....... 2.... 2005 Mar..............

.................................037 Reconciled balance (from above)..000) Depreciable cost.............................. 8 Depreciation for 2005.................... 2............................................. $32.. 52 Less service charges....................287 b.. $ 6................$ 1.... (15............... 2005 127 ..............000 Less salvage value...................................... Anticipated write-off.......................................................... c............................. Correct ending balance of cash and the amount of the omitted check Balance per bank............... $24..000 d........................... 17.......................450 Less outstanding checks................... $828 (679) 149 700 $551 credit debit credit credit credit Depreciation expense on the truck Cost................................... Chapter 11 ©McGraw-Hill Companies..............100 Solutions Manual... $24............800) Reconciled balance................000) Depreciable cost..000 5 $ 3.. (15) Balance before omitted check...................750) Omitted check........... Depreciation expense on the equipment Sprayer Cost........ Desired ending balance..........500) $15........................................ (8.000 Plus interest earned.................................$15..... $ 3................. (1.... Allowance for doubtful accounts Unadjusted balance........$15..000 Less salvage value........ 4 Annual depreciation for 2005........500 Useful life (years)..$17.... Revised unadjusted balance.....................000 Useful life (years)......................... $27.100 Plus deposit in transit..................000 Injector $18...........................750 Balance per books.....000 (2......Comprehensive Problem Bug-Off Exterminators (100 minutes) Part 1 a.... (3....................................... Inc.. Necessary adjustment................

... $60........... Inc................5% Warranty expense (estimated)....................08). $ 1... Thus.840 – $1................ The first time interest will be payable is December 31. (1.. 2005.....760 Unearned Services Revenue account Unadjusted balance........ Overstatement of revenue ($3........ Adjusted balance........840  12 $ 320 Months of services provided.............Comprehensive Problem (Continued) e..................... Adjusted balance........................600) $ 2........................ $ 3..240 Warranty expense Adjusted services revenue for the year (from e)............ 1.............. ©McGraw-Hill Companies... Adjusted revenue and unearned revenue balances Total advance received......................... 5 Total earned ($320 x 5 months)................................... 2005................... 2005 128 Fundamental Accounting Principles..... is zero.... $ 2................240) $57.. f..........444 credit Ending adjusted balance......... $57............................... $ 1...............................760 Warranty percent..... $ 0 2..... the adjusted balance for both Interest Payable and Interest Expense at December 31......................000 (2.....240 $ 2.......... The annual interest expense on the note is $1.400 credit Warranty expense........ 2.......................000 x ..600)................................................... Note payable and interest accrual The note originated on December 31........ Revenue per month..................200 ($15... 2006. Overstatement...... Months in contract......240 Extermination Services Revenue account Unadjusted balance............. 17th Edition ..... Adjustment................................................................844 credit g........444 Estimated warranty liability Unadjusted balance........

Withdrawals.. 6.....700 J.000 872 71.....000 1............ Interest revenue.... 0 59........ Unearned services rev....700 32.............000 551 1.Comprehensive Problem (Continued) Part 2 BUG-OFF EXTERMINATORS December 31.. 3.......... Capital.241 8.240 (a) Deprec. Newman...300 6.........700 Adjusted Trial Balance Adjustments $ 828 (b1) (b1) 679 $ 679 (b2) 551 (c) 0 Estim.....800 (d) (b2) _______ 6..026 Sales... 2005 129 ...000 Bad debts expense..000 Extermination services revenue....000 Accounts receivable.....000 Interest expense........ Chapter 11 ©McGraw-Hill Companies.000 Allowance for doubtful accounts..200 5.... Merchandise inventory.000 1...400 0 15. 1..000 Trucks... 4.......000 60.................. deprec..444 57.......................000 Accounts payable. $ 15... 8....300 Warranty expense.000 Utilities expense...800 1...–Trucks..700 J.........000 (a) (d) 6.....35...........000 Accum... 9...11........ warranty liability..000 Equipment...444 2...000 6... Inc...... expense–Trucks......... 2005 Unadjusted Trial Balance Cash (a) $1..................................................713 2...... (c) 0 Deprec..... 700 45..32..240 15...........321 11.. 6.100 (f) 1....750 ______ 46.......10............100 (a) 551 15 (f) 1...844 2........... 0 Miscellaneous expense. (e) 2...000 6.........300 3..000 Accum. deprec.....760 924 71...... $ 6.46........45.......250 $ 17. Newman...............444 _______ 0 Solutions Manual.026 52 Cost of goods sold......–Equip.. 0 Wages expense.....000 12. Long-term notes payable................... 0 Rent expense...100 35....000 6..226 Repairs expense.............. expense–Equip...............000 0 9................. Interest payable.287 (e) 0 59....240 18.............................. 10.

. 17th Edition ..... Inc. $226.....207 $238..026 ©McGraw-Hill Companies......316 $238.207 Fundamental Accounting Principles.Totals...316 $18..026 $226................. 2005 130 $18...

Chapter 11 ©McGraw-Hill Companies...............) (b1) Allowance for Doubtful Accounts..................... (d) Depreciation Expense—Equipment.............. 6..................... 1... 2005 131 ........................ (c) Depreciation Expense—Trucks........ 52 1......... (f) Warranty Expense................................................................................................000 Accumulated Depreciation—Trucks......................100 Accumulated Depreciation—Equipment. 6......... 2.... 679 679 Wrote off uncollectible accounts.287 Interest Revenue................100 Depreciation on equipment........................................................ Cash.... 6........... 15 Accounts Payable........... Inc.......................... (b2) Bad Debts Expense....... Allowance for Doubtful Accounts...444 Estimated Warranty Liability.240 Adjust for unearned revenues............ 551 551 Recognize bad debts expense...............................................................Comprehensive Problem (Continued) Part 3 2005 (a) Miscellaneous Expenses.. Accounts Receivable......................... 1..........000 Depreciation on truck.................... (e) Extermination Services Revenue... 2.......... 1.. (g) No interest accrual required for 2005 Solutions Manual.........................................240 Unearned Services Revenue................250 Adjust cash account............. (Separate entries are acceptable...... 6...............................444 Estimate warranty expense....................

.... 551 Miscellaneous expenses............ Capital.......... 6....... 6...............241 Repairs expense......000 Bad debts expense..............................................000 Depreciation expense—Equipment.....000 Interest expense.....300 Depreciation expense—Trucks. 2005 132 $59.....444 Total expenses...................100 Wages expense.......................................... 2005 T........ Net income............................ Capital................................................................................ Beginning balance..................................... Expenses Cost of goods sold..................... 0 Rent expense...... Ending balance.. $129..........................700 9............974 (10. 46........ 35.............274 BUG-OFF EXTERMINATORS Statement of Owner’s Equity For Year Ended December 31.....................760 Sales...000) $58........................... 924 Total revenues... 6... Less: Withdrawals........................Comprehensive Problem (Continued) Part 4 BUG-OFF EXTERMINATORS Income Statement For Year Ended December 31....710 120.000 Utilities expense..436 $ 9..... 9........................ Plus: Net income.......... Newman................. 1......................... 8.026 Interest revenue...................................................................... $57..............................974 Fundamental Accounting Principles.. Inc....274 68...................... 2005 Revenues Extermination services revenue............................... 71.......................... T..... ©McGraw-Hill Companies...........800 Warranty expense... 17th Edition ... Newman............................ 1...........

........................974 $82.771 Liabilities Current liabilities Accounts payable.............................................. Accounts receivable........................................ 2....$ 3............ Chapter 11 $ 8.......797 15..... Total liabilities............................................... Capital.771 ©McGraw-Hill Companies.............000 23..300) Total plant assets........................ Newman............... Inc............Comprehensive Problem Part 4 (concluded) BUG-OFF EXTERMINATORS Balance Sheet December 31................000 26.700 $82........ (6.............000 Accumulated depreciation—Trucks....000 Accumulated depreciation—Equipment.............. Equity T...240 Total current liabilities..........000) Equipment. 2005 133 .............$ 3....844 Unearned services revenue....................797 58.......... (18.............. 32.713 Estimated warranty liability...........................071 26.....................................................................700 52....... $15.......... Total liabilities and equity.......700 30..................................... (700) Merchandise inventory......................................... 2005 Assets Current assets Cash........... 45...................................................321 Allowance for doubtful accounts.................750 2........... Long-term liabilities Long-term notes payable.......................... Total assets.. Plant assets Trucks. Solutions Manual............ Total current assets........621 11..... 2............

... we need to monitor this potentiality. — BTN 11-1 Times interest earned ($ thousands) 2/2/2003 Income before income taxes..2b 1/28/2001 $23.781 Income before taxes and interest.. Note 9 describes these amounts in detail...... Krispy Kreme’s balance sheet shows deferred income taxes as a current asset.. there is evidence of temporary differences.390 40...Reporting in Action 1.. 2............2 b Analysis comment: For each of these fiscal years 2001 through 2003..883/ $337 = 127. $56.. 1.8 $42......781 = 31...... Thus....554/ $1. 3.........2c a $56.390/ $607 = 40...773 Interest expense.. $54..... The main evidence of temporary differences between GAAP and tax return income for Krispy Kreme would be the presence of any deferred income tax liabilities or assets... it appears that Krispy Kreme’s risk of not being able to cover its interest expense is low.... The solution depends on the financial statement information accessed. Inc. ©McGraw-Hill Companies....783 607 $24.... the most recent year’s 2003 times interest earned ratio is the lowest among the three years examined.....8a 2/3/2002 $42... Accordingly.........554 Times interest earned ratio.. 17th Edition . and it also shows deferred tax liabilities as a noncurrent liability...... Nevertheless. 2005 134 Fundamental Accounting Principles.2 c $24.. 31...883 127.546 337 $42...

..........926/ $1...... $2.......378 16...............2c Times interest earned ratio..540 $14..066/ $1..... $56.295 Income before income taxes.058 23......... During a comparable time frame.......8 times...609 1..2 to 31..... Krispy Kreme’s ability to cover its interest expense decreased from 40...783 607 $24. 21..............781 Income before taxes and interest..........554/ $1.554 $26............000 Add income taxes..... a $3...066 $ 8.......390/ $607 = 40............... 0 Add interest expense.......... $33.......3 b 2.....725 9.......066 = 2.....775 1..390 31..478 Add income taxes.........773 Add interest expense...........546 337 $42.. a $56..9a 11.8 $42......8a 127.....048 3...........293 2....883 $14.........293/ $1..2b 40.3c Times interest earned ratio.... Krispy Kreme appears considerably stronger in its ability to make interest payments should income decline... Inc....... 2005 135 .........2 c $24. Chapter 11 ©McGraw-Hill Companies..103 $12..... $3.....168 42........... Solutions Manual..3 times to 2....540 = 9.......144 4.9 times over a period of just two years......781 = 31............... 54.. Tastykake’s ability to cover interest expense has declined significantly from 9.......7 c $14..103 = 11........066 Income before taxes and interest... Krispy Kreme—Times interest earned ($ thousands) Current Year One Year Prior Two Years Prior Net income.... 1.....2 b Tastykake—Times interest earned ($ thousands) Current Year One Year Prior Two Years Prior Net income...7b 9..Comparative Analysis — BTN 11-2 1...... 1...926 $ 8...............883/ $337 = 127.9 $12..

It is in Bly’s self-interest to maximize the amount of revenues less warranty expenses so as to maximize his personal bonus. at times it might warrant being adjusted upward (lowering Bly’s bonus) or downward (increasing Bly’s bonus). with some additional weight given to recent experience. Since Bly has some input into setting the warranty expense accrual percent. he potentially faces an ethical dilemma. Although Bly might be able to affect the amount of revenues less warranty expenses via the warranty expense accrual in the short run. ©McGraw-Hill Companies.) 2. Given the variable nature of warranty expenses. a percent should perhaps be based on a long-run average. the lower the expense accrual. 2005 136 Fundamental Accounting Principles. over several years the amounts should even out. Specifically. 17th Edition . The dealership should probably adjust the warranty expense accrual to match the usual (average) experience over time. (The evidence indicates that Bly has tended to overestimate warranty expense in prior years. The accountant and others should offer input into this decision. the lower the warranty expense. Inc..Ethics Challenge — BTN 11-3 1. and the higher his bonus. Since the experience with warranties has varied.

2005 137 .. Another point in favor of reporting the expense and liability now is that we offered the warranty in order to achieve the reported sales. Conservatism requires us to include an expense in this year’s financial statements for costs that we may or may not pay in the future. Chapter 11 ©McGraw-Hill Companies. But we must describe the contingency in the notes. our income measure would be incomplete if it did not match the cost of fulfilling the warranty against revenues generated by offering the warranty. If the product is different from others. even if we are uncertain about the amount. generally accepted accounting principles will allow us to leave them out of the financial statements. General Manager Dustin Clemens. Therefore. Your comment also raised the objection that we don’t know what costs will be. Inc. As a result. This treatment would be in compliance with the matching principle. The purpose of this memorandum is to respond to your objection. You specifically object to the proposed recognition of an expense and liability for warranties. Manager Accounting and Finance Reporting warranties in financial statements This memorandum is in response to your comment on my proposal for the treatment of a contingency in our financial statements. Solutions Manual. we may have a basis for going with only a note disclosure. financial statement recognition is a more effective way to get the information into users’ hands. it is usually preferred.Communicating in Practice — BTN 11-4 MEMORANDUM To: From: Date: Subject: Tom Pretti. However. Both the conservatism and matching principles apply to accounting for warranties. I will be checking with the product design engineers to get their opinion on the estimableness of repair costs. If they are not reasonably estimable.

.......... 670.. Teamwork in Action — BTN 11-6 1..6 million Times interest earned......... ©McGraw-Hill Companies.....5 / ($275. Option A: Interest Expense = $6. The portion of long-term debt maturing in the next 12 months is $275......... 374..18 times interest earned ratio seems more than sufficient for McDonald’s to cover its interest obligations....0 Plus interest expense. The decision on which loan is preferred will ultimately depend on whether interest cost savings is valued more than the additional time to use the loaned money..000 x 8% x 120/360 = $160 The interest expense in option B does exceed option A...........18 times Comment: The 5....Taking It to the Net — BTN 11-5 1. 5. $ 893... if a mere $10 more is paid in interest expense the business can use the loan money for an additional 30 days......703.........000 x 10% x 90/360 = $150 Option B: Interest Expense = $6....5 + $9.937....... However...5 Plus income taxes....... 17th Edition ... then Option A is the preferred loan................... $1....76% 3.... McDonald’s current liabilities include  Notes payable  Accounts payable  Income taxes  Other taxes  Accrued interest  Accrued restructuring and restaurant closing costs  Accrued payroll and other liabilities  Current maturities of long-term debt 2. 2005 138 Fundamental Accounting Principles.......... Times interest earned for McDonald’s as of 12/31/2002 12/31/2002 Net Income.............1 Income before interest and taxes..........6) = 2..................... Inc.. If interest cost is the only consideration...

............................. 2005 139 .................................................................................................160 Repaid note plus interest....... 6.000 Notes Payable....................................... Adjusting entry.. 31 Interest Expense......... Option B June 1 Cash.. 31) Dec.. Entries: 4a...... Option A (Dec................. 2d....................................... 2b...................... 6..... Interest Payable..................... Issue date........ Maturity date.......................... Option A Aug..... 4......... 29 Notes Payable.... Inc..... 50 50 Accrue interest on note payable [$6..... 6.....000 Borrowed cash by issuing an interest-bearing note... 150 Cash........... 4b........................................................... 6.000 Interest Expense................. Option B Sep. 30 Notes Payable.................000 x 8% x 30/360]...................................... 6............................................. 31) Dec....... 6........ Option A June 1 Cash............................000 Interest Expense.... Entries: 2a.................... Chapter 11 ©McGraw-Hill Companies...150 Repaid note plus interest........ 160 Cash............... Interest Payable.........000 Notes Payable.............. 2c..................... 6... 40 40 Accrue interest on note payable [$6......................................000 Borrowed cash by issuing an interest-bearing note.... 31 Interest Expense.... Maturity date. Option B (Dec................................. Issue date.................................................000 x 10% x 30/360]............. 6......................Teamwork in Action (Continued) 2.. Adjusting entry. Solutions Manual.........

... Maturity date entry................................... Business Week Activity — BTN 11-7 1... The state of New York would likely classify the tenant as an “employee” and not as an “independent contractor......... the motel owner has liability exposure............................) in lieu of rent...... 17th Edition ......................................... 100 Interest Payable...000 Cash......” An employee classification would obligate the motel owner to pay payroll taxes and make income tax withholdings..... Option B March 31 Interest Expense. 4d........................ Option A March 1 Interest Expense......160 Repaid note plus interest.... 6............. The tenant does not pay to stay at the motel............... mow yard........ ©McGraw-Hill Companies. Also.........Teamwork in Action (Concluded) 4c.......................... Maturity date entry..... the owner feels that the tenant may at some point in the future expect to share in profits of the motel......... 3..............................000 Cash.......... 50 Notes Payable............ Inc.....150 Repaid note plus interest........... etc........................ Therefore........ 6.. A major risk is that the tenant could be injured while performing tasks at the motel and then seek reimbursement or damages for the injury sustained. The fact that the tenant is not a co-owner or joint venturer should be clarified by written agreement..... 2005 140 Fundamental Accounting Principles. 6.......................................................... 120 Interest Payable..... If the motel owner decides to classify the tenant as an employee then the tenant should be insured by a workers’ compensation policy to address the owner’s liability worries........................................ For 17 months the tenant has performed handyman jobs at the motel (clean rooms...................... 2.... Failure to pay the taxes and make the withholdings could result in substantial fines for the owner.. 40 Notes Payable.. 6.........

.....000/$1.000 Interest expense (fixed)................ $3.........140......000)......000 vs...........................160...000 Variable expenses (45%)......639.......000 Times interest earned $1....824....................000 Income before interest..000 1...................... 1....................... Chapter 11 156...795...11 $540......... 2005 141 ....31 Part 3 Income Statement No investment Sales........ $ 840................................ Solutions Manual..........000/$1...........000 = 2...............000 Part 2 Assume: Investment is made and sales equal $3................783..140............... $1.....56 = 1................000 vs. 60......... $ 354..............350.... 1...... 1....999 ©McGraw-Hill Companies....494.. 1.....999 1.. 2..000 $1.......000 Income before interest.........000 Net income.........000 1...........600.............................255....000 = 1........000 $ 684..... 2...140.255......Entrepreneurial Decision — BTN 11-8 Part 1 Times interest earned = Income before interest & taxes Interest expense = $1...000..087..................000 Net income.999 Interest expense ($540................639.................000 Interest expense ($540........000 Depreciation ($60........998 Depreciation............... 60.000 Depreciation........999 .........60 Part 4 Income Statement No investment Sales ..........000 + $96...............000 Net income......140.....000 2......................000 $1......000 Times interest earned Make investment $3...600.... 45%)....... Inc..140...................000 Variable expenses (60% vs.....000 Variable expenses (60% vs.....824..............620............. 1.... $3......000).....$4................380...... $1.000 1............... 540......000.....000 Income Statement Sales......000/$540......................................998 $4..............395... $1..... 45%)..........999 Income before interest.....000 156......000). 540..............140..... 156............140...494.000 $1................999 2..380.000 = 2........140..............

000 = 2. 17th Edition .999/$540.795.999/$1.395.140.Times interest earned ©McGraw-Hill Companies. 2005 142 $1..000 = 3. Inc.10 Fundamental Accounting Principles.33 $2.

.000 $1. but decreases in sales produce greater decreases in net income........000/$540....... If they remain at $3..........................000 = 3.998..000 2...000)....000 to $156..000.000 Depreciation.....400....000 Variable expenses (60% vs...000 .. However.... A higher fixed cost strategy amplifies the effects of increases and decreases in sales.....430........639.000).. 540.... Solutions Manual....000 2........ Chapter 11 ©McGraw-Hill Companies....000/$1... Inc........ 2005 143 . This is $246.......100..100.000 Income before interest.... Our recommendation in this case depends on expected future sales...... $1. then the investment would yield net income of $354.140.......................000 1...674..814.. the risks of the prediction(s) being realized or not.639...... the company is better off not making the investment if expected sales are less than approximately $4.. This means increases in sales produce greater increases in net income.000 (see part 2)....000 Net income...240...000 vs..000 to $1. as with proposals such as these...400.000 lower than the net income of $600.400. 60......” see part 4)..814.............. Indeed.........998 (“the turning point. Times interest earned Make investment 156...... 3.... 2........140.........000 without the investment.............. A higher fixed cost strategy yields a lower times interest earned ratio.............000) and higher depreciation ($60.... we must recognize the risk element(s)—that is.000 $5... This also means that if expected sales are greater than approximately $4.000..Entrepreneurial Decision (Concluded) Part 5 Income Statement No investment Sales ..89 = 2.. 45%)..140.......000 $2. $1.000).$5....560......000 Interest expense ($540......47 Part 6 The proposed investment “strategy” is one that would result in lower variable costs (60% to 45%) but higher fixed costs ($540.... the company is better off making the investment since it would yield a net income exceeding that without the investment (see part 5 results when sales are $5.....140.....000 $2....

........281 $1...2 $2............ Inc.. 17th Edition .. should income decline........578 703 $2............... Add income taxes.....487 193 $2.8 for the current year is superior to Grupo Bimbo’s value of 3.9..9 b 2..... $1....... Global Decision — BTN 11-10 1.......... Add interest expense.... Specifically....... Income before taxes and interest. ©McGraw-Hill Companies................003 575 1........... Krispy Kreme’s ratio is even more superior in the prior year.. Income before income taxes.. Thus.... 2005 144 Fundamental Accounting Principles................. 3.. Grupo Bimbo — Times interest earned Current Year (pesos millions) One Year Prior Net income....680 Times interest earned ratio..680/ $193 = 13....2 and Tastykake’s 2. Krispy Kreme’s times interest earned of 31... Moreover....9b a $2........2a 13. Of these three companies..281/ $703 = 3.. A discussion of the importance of safeguarding social security information would be appropriate especially with respect to the Administration’s decision to no longer transfer benefit information online.......... Krispy Kreme would be in the best position to continue meeting its interest obligations...682 805 2............ Krispy Kreme has the best coverage of interest expense for both years examined..Hitting the Road — BTN 11-9 There is no formal solution to this problem......