127. During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in
January are $76,500 for the employee portion of FICA, $210,000 for federal and state income
tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue
Shield). The company incurs an additional $38,000 for federal and state unemployment tax
and $30,000 for the employer portion of health insurance.
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
128. Midwest Shipping pays employees at the end of each month. Payroll information is listed
below for January, the first month of the fiscal year. Assume that none of the employees
exceeds the Federal unemployment tax maximum salary of $7,000 in January.
Record salaries expense and payroll tax expense for the January pay period.
129. On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1
million for customized computer equipment to be completed on August 1. The remaining
$750,000 payment is received upon delivery of the product on August 1. The equipment had a
total production cost of $700,000. What journal entries should Compusoft record on July 8
and August 1? Assume Compusoft uses the perpetual inventory system.
130. T. Boone Pickens football stadium at Oklahoma State University has a seating capacity
of about 60,000. Assume the stadium sells out all six home games before the season begins
and the athletic department collects $30.6 million in ticket sales.
1. What was the average price per season ticket and average price per individual game ticket
sold?
2. Record the advance collection of $30.6 million in ticket sales.
3. Record the revenue earned after the first home game was completed.
131. During November, Wireless, Inc. makes a $1,600 credit sale. The state sales tax rate is
5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax payable.
132. Two competing advertising agencies provide similar services, but record sales using
different methods.
1. Diversified Advertising records sales and sales taxes in separate accounts. For the month of
March, sales total $10,000 and sales taxes are $600.
2. Centralized Advertising records sales and sales taxes together. For the month of March,
sales total $5,300, including a 6% sales tax.
Record sales revenue and the related sales tax payable for (1) Diversified Advertising and (2)
Centralized Advertising.
133. On April 1, 2012, the Electronic Superstore borrows $22 million of which $4 million is
due in 2013. Show how the company would report the $22 million debt on its December 31,
2012 balance sheet.
134. Consultants notify management of Generic Drug that a prescription medication poses a
potential health risk. Legal counsel indicates that a product recall is probable and is estimated
to cost the company between $5 and $8 million. How will this affect the company’s income
statement and balance sheet this period?
135. Decorative Concrete produces a concrete overlay for residential and commercial
concrete flooring. Customers have complained that one of the products results in excessive
cracking. The likelihood the company will incur a loss on this product is probable and the
amount of the loss is estimated to be somewhere between $1.5 and $3 million.
1. Should this contingent liability be reported, disclosed in a note only, or both? Explain.
2. What loss, if any, should Decorative Concrete report in its income statement?
3. What liability, if any, should Decorative Concrete report in its balance sheet?
4. What entry, if any, should be recorded?
Answer:
136. Panama Shirt Designs is a defendant in litigation involving an employee accident in its
manufacturing plant.
For each of the following scenarios, determine the appropriate way to report the situation.
Explain your reasoning and record any necessary entry.
1. The likelihood of a loss occurring is probable and the estimated loss is $650,000.
2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of
$500,000 to $800,000.
3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.
4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.
Answer:
137. Rotary Tools sells power tools and backs each product it sells with a one-year warranty
against defects. Based on previous experience, the company expects warranty costs to be
approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures
are $800,000 and $13,000, respectively.
1. Does this situation represent a contingent liability? Why or why not?
2. Record warranty expense and warranty liability for the year based on 5% of sales.
3. Record the reduction in warranty liability and the reduction in cash of $13,000 incurred
during the year.
4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?
Answer:
138. The Copper Grill has the following current assets: cash, $12 million; receivables, $50
million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the
following liabilities: accounts payable, $38 million; current portion of long-term debt, $7
million; and long-term debt, $12 million. Based on these amounts, calculate the current ratio
and the acid-test ratio for The Copper Grill.
($ in millions)
Answer:
139. Selected financial data regarding current assets and current liabilities for two competing
companies, Simon and Garfunkel, are provided as follows:
1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which
of the two companies has the best current ratio?
2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for
Garfunkel. Which of the two companies has the best acid-test ratio?
140. Why is it important to distinguish between current and long-term liabilities?
141. Define a contingent liability. Provide three common examples. Under what
circumstances should a firm report a contingent liability?
142. Explain why we record interest in the period in which we incur it rather than in the
period we pay it.
143. Name as many items as you can that are withheld from employee payroll checks. Which
employee deductions are required by law and which are voluntary? Name as many items as
you can that are employer payroll costs in addition to the employee’s salary. Which employer
costs are required by law and which are voluntary?
144. Retailers like McDonalds, American Eagle, and Apple Computer sell a large number of
gift cards. Explain how these companies account for the sale of gift cards.
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