35.
Many airlines have frequent flyer programs that permit travelers to accumulate credits
that can be applied to the cost of tickets for future flights. Most airlines recognize the cost
of their frequent flyer programs when the credits are used to purchase tickets. This
practice, which seems to ignore the matching concept, results in:
36.
The liability for product warranty claims is an example of a liability that:
37.
The noncurrent liability, Noncontrolling Interest, arises if:
38.
In consolidated financial statements:
Essay Questions
39.
On March 15, 2017, Birkshire Energy obtained a nine-month working capital loan from the
First National Bank of Oglesby. The face amount of the note signed by the treasurer was
$900,000. The interest rate charged by the bank was 10 percent. The bank made the loan
on a discount basis. (Round your final answers to the nearest dollar).
(a.) Calculate the loan proceeds made available to Birkshire.
(b.) Calculate the amount of interest expense related to this loan during the six months
ended June 30, 2017.
(c.) What is the amount of the current liability related to this loan to be shown in the June
30, 2017, balance sheet?
40.
On September 30, 2017, David’s Co.’s treasurer signed a note promising to pay $260,000
on December 31, 2017. Proceeds of the note were $250,900.
(a.) Calculate the discount rate used by the lender.
(b.) Calculate the effective interest rate on the loan.
(c.) Write the journal entry to show the effect of recording interest expense for the month
of October. (Round to the nearest whole dollar)
41.
Claudette, Inc., provides warranties for many of its products. The January 1, 2017, balance
of the Estimated Warranty Liability account was $77,000. Based on an analysis of warranty
claims during the past several years, this year’s warranty provision was estimated to be
0.8 percent of sales. During 2017, the actual costs of servicing products under warranty
were $102,000, and sales were $10,600,000.
(a.) What amount of Warranty Expense will appear on the income statement for 2017?
(b.) What amount will be reported in the Estimated Warranty Liability account on the
December 31, 2017, balance sheet?
42
.
Assume that Wallywill, Inc. offered its customers, which are primarily retail stores who sell its
products, an advertising allowance equal to 8% of the amount of purchases from Wallywill
during December, if the retail store would spend the money for advertising in January.
Wallywill Inc.’s sales in December totaled $15,000,000, and it was expected that 70% of those
sales were made to retailers who would take advantage of the advertising allowance offer.
Write the journal entry or use the horizontal model to show the effect of the accrual that
should be made as of December 31 with respect to the advertising allowance offer.
43.
The Defiance College sells season tickets for four home football games at a price of $60.
For the 2017 season, 5,000 season tickets were sold.
(a.) Write the journal entry or use the horizontal model to show the effect of the sale of the
season tickets.
(b.) Write the journal entry or use the horizontal model to show the effect of hosting a
home football game.
(c.) Where on the balance sheet would the account balance representing funds Received
for games not yet played be classified? Assume that The Defiance College follows the
same accounting and financial reporting procedures that are used in business.
4
4.
At December 31, 2016, the end of the first year of operations at Xavion Inc., the firm’s
accountant neglected to accrue payroll taxes of $55,400 that were applicable to payrolls for the
year then ended.
(a.) Write the journal entry or use the horizontal model to show the effect of the accrual that
should have been made as of December 31, 2016.
(b.) Determine the income statement and balance sheet effects of not accruing 2016 payroll
taxes at December 31, 2016 (assuming that the payroll taxes were not accrued, as originally
stated).
(c.) Assume that when the payroll taxes were paid in January 2017, the payroll tax expense
account was charged. Assume that at December 31, 2017, the accountant again neglected to
accrue the payroll tax liability, which was $40,800 at that date. Determine the income
statement and balance sheet effects of not accruing 2017 payroll taxes at December 31, 2017.
Topic: Current Liabilities
45.
Ariel, Inc., issued $60 million face amount of 9% bonds when market interest rates were
9.30% for bonds of similar risk and other characteristics.
(a.) How much interest will be paid annually on these bonds?
(b.) Will the bonds be issued at a premium or discount? Explain your answer.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than,
the amount of interest paid each year? Explain your answer.
46.
On April 15, 2017, Melissa purchased $60,000 of Verbecke Co.’s 12%, 20-year bonds at
face amount, with interest being paid on December 31 each year. Verbecke Co. has paid
interest due on the bonds regularly. On April 15, 2021, market interest rates had risen to
14% and Melissa is considering selling the bonds.
Required:
Using the present value tables in Chapter 6 of the textbook, calculate the market value of
Melissa’s bonds on April 15, 2021.
47.
Ariana Co. issued $6,000,000 face amount of 15%, 20-year bonds on April 1, 2017. The
bonds pay interest on a semi-annual basis on June 30 and December 31 each year.
(a.) Assume that market interest rates were slightly lower than 15% when the bonds were
sold. Would the proceeds from the bond issue have been more than, less than, or equal to
the face amount?
(b.) Independent of part (a), assume that the proceeds were $5,940,000. Write the journal
entry or use the horizontal model to show the effects of issuing the bonds.
(c.) Assume that the bonds were issued for $5,940,000 as in part (b). Calculate the
interest expense that Ariana Co. will show with respect to these bonds in its income
statement for the year ended December 31, 2017, assuming that the discount of $60,000 is
amortized on a straight-line basis.
48.
On November 1, 2016, an advance rent payment of $15,000, representing a six-month
prepayment (for the rental period beginning on that date) was received in cash from the
company’s tenant.
Required:
Use the horizontal model (or write the journal entries) to record the effects of the
following items:
(a.) The six months of rent collected in advance on November 1, 2016.
(b.) The adjustment that will be made at the end of each month to show the amount of
rent “earned” during the month.
49.
For the payroll period ended on October 19, 2016, gross pay was $22,300, net pay was
$17,000, FICA tax withholdings were $1,500, income tax withholdings were $3,000, and
medical insurance contributions were $800.
Required:
Use the horizontal model (or write the journal entry) to show the effects of the payroll accrual
on October 19, 2016.
50.
The balance of the Estimated Warranty Liability account was $12,000 on January 1, 2016,
and $13,600 on December 31, 2016. Based on an analysis of warranty claims during the
past several years, this year’s warranty provision was established at 3% of sales, and sales
during the year were $800,000.
Required:
(a.) What amount of warranty expense will appear on the income statement for the year
ended December 31, 2016?
(b.) What were the actual costs of servicing products under warranty during the year?
51.
On July 1, 2016, $8 million face amount of 6%, 10-year bonds were issued. The bonds pay
interest on an annual basis on June 30 each year. The market interest rates were slightly
lower than 6% when the bonds were sold.
Required:
(a.) How much interest will be paid annually on these bonds?
(b.) Were the bonds issued at a premium or discount? Explain.
(c.) Will the annual interest expense on these bonds be more than, equal to, or less than
the amount of interest paid each year? Explain your answer.