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81
187) 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.
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188) 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 are $800,000. Actual warranty
expenses incurred so far are $13,000.
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 actual warranty expenditures of $13,000 incurred so far.
4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?
189) 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, $12 million. Based on these amounts, calculate the current ratio and
the acid-test ratio for The Copper Grill.
84
190) Selected financial data regarding current assets and current liabilities for two competing
companies, Simon and Garfunkel, are provided as follows:
($ in millions)
Simon
Garfunkel
Current assets
Cash and cash equivalents
$648
$2,917
Short-term investments
3,676
0
Net receivables
991
1,372
Inventory
515
202
Other current assets
334
476
Total current assets
$6,164
$4,967
Current liabilities
Accounts payable
$7,081
$4,295
Short-term debt
1,239
1,021
Other current liabilities
0
1,308
Total current liabilities
$8,320
$6,624
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?
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191) Listed below are several terms and phrases associated with current liabilities. Pair each item
from List A (by letter) with the item from List B that is most appropriately associated with it.
List A
List B
_____
1. Long-term debt maturing within one
year of the balance sheet date.
a. FICA
_____
2. Borrowing from another company
with maturities up to 270 days.
b. Acid-test ratio
_____
3. Classifying liabilities as either current
or long-term helps investors and
creditors assess this.
c. Accrual accounting
_____
4. Cash, short-term investments, and
accounts receivable all divided by
current liabilities.
d. Recording a contingent liability
_____
5. Incurred on a notes payable.
e. Deferred revenues
_____
6. Interest expense is recorded in the
period interest is incurred rather than in
the period interest is paid.
f. The riskiness of a business's
obligations
_____
7. Loss is reasonably possible and
amount is reasonably estimable.
g. Current portion of long-term debt
_____
8. Loss is probable and amount is
reasonably estimable.
h. Disclosure of a contingent liability
_____
9. Gift cards.
i. Interest expense
_____
10. Social Security and Medicare.
j. Commercial paper
192) Aerospace Engineering borrows $40 million cash on November 1, 2021. Aerospace issues a
six-month, 6% promissory note to First National Bank under a prearranged short-term line of
credit. Interest on the note is payable at maturity. Each firm has a December 31 year end.
Required:
1. Prepare the journal entries on November 1, 2021 to record (a) the notes payable for Aerospace
Engineering and (b) the notes receivable for First National Bank.
2. Record the adjusting entries on December 31, 2021 for (a) Aerospace Engineering and (b)
First National Bank.
3. Prepare the journal entries on April 30, 2022 to record payment of (a) the notes payable for
Aerospace Engineering and (b) the notes receivable for First National Bank.
193) Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the
following withholdings, fringe benefits, and payroll taxes apply:
Federal and state income taxes withheld $38,000
Health insurance premiums (Blue Cross) paid by employer 12,000
Contribution to retirement plan (Fidelity) paid by employer 15,000
FICA tax rate (Social Security and Medicare) 7.65%
Federal and state unemployment tax rate 3.80%
Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January
(record them as payables) and that no employee's cumulative wages exceed the relevant wage
bases.
Required:
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
90
194) Arrow Systems offers its employees free medical, dental, and life insurance coverage. It
also matches employee contributions to a voluntary retirement plan up to 6% of their salaries.
Assume that no employee's cumulative wages exceed the relevant wage bases. Payroll
information for the bi-weekly payroll period ending January 24th is listed below.
Wages and salaries $1,000,000
Employee contribution to voluntary retirement plan 60,000
Medical insurance premiums 25,000
Dental insurance premiums 6,000
Life insurance premiums 7,000
Federal and state income taxes to be withheld 205,000
FICA tax rate 7.65%
Federal and state unemployment tax rate 3.80%
Required:
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
