Chapter 11: Current Liabilities and Payroll
170.
Journalize the following transactions:
Dec. 31 The accrued product warranty expense for the year is estimated to be 1.5% of
sales. Sales for the year totaled $7,760,000.
31 The accrued vacation pay for the year is estimated to be $46,000.
31 Paid Reliable Insurance Co. $85,000 as fund trustee for the pension plan. The
annual
pension cost is $109,000.
Chapter 11: Current Liabilities and Payroll
171.
Ecco Company sold $150,000 of kitchen appliances with six-month warranties during September. The cost to
repair defects under the warranty is estimated at 6% of the sales price. On October 15, a customer required a
$200 part replacement, plus $85 labor under the warranty.
Provide the journal entry for (a) the estimated expense on September 30 and (b) the October 15 warranty work.
172.
Florida Keys Construction installs swimming pools. It calculates that warranty obligations are 3% of sales. For
the year just ending, Florida Keys’ sales were $1,450,000. Previous quarterly entries debiting Warranty Expense
totaled $28,700. Determine the estimated warranty expense for the year and make the journal entry necessary to
bring the
account to the needed balance.
Chapter 11: Current Liabilities and Payroll
173.
Aqua Construction installs swimming pools. It calculates that warranty obligations are 5% of sales. For the year
just
ending, Aqua’s sales were $1,500,000. Previous quarterly entries debiting Warranty Expense totaled $48,700.
Determine the estimated warranty expense for the year and make the journal entry necessary to bring the account
to the needed balance.
174.
Lamar Industries warrants its products for one year. The estimated product warranty expense is 3% of sales.
Sales for June were $190,000. In July, a customer received warranty repairs requiring $185 of parts and $50
of
labor.
(a)
Journalize the adjusting entry required at June 30, the end of the first month of
the
current year, to record the estimated product warranty expense.
(b)
Journalize the entry to record the warranty work provided in July.
Chapter 11: Current Liabilities and Payroll
175.
Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of
its
plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company
contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a
homeowner
has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the
plant, he
believes that the spill has reduced his home’s resale value by $260,000.
Jones’ legal counsel believes the following will happen in relationship to these incidents:
(a)
It is probable that the EPA fine will stand.
(b)
An out-of court-settlement for $165,000 has recently been reached with the
employee,
with the final papers to be signed next week.
(c)
Counsel believes that the homeowner’s case is weak and will be decided in favor of
Jones Company.
(d)
Other litigation related to the spill is possible, but the damage amounts are uncertain.
(1)
Based on this information, journalize the contingent liabilities associated with the spill. Use the account
“Damage Awards and Fines” to recognize the expense for the period.
(2)
Prepare any note disclosure related to the spill.
Chapter 11: Current Liabilities and Payroll
176.
Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River
from
one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000.
The
company contested the fine. In addition, an employee is seeking $975,000 damages related to the spill.
Finally, a
homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream
from the
plant, he believes that the spill has reduced his home’s resale value by $580,000.
Maximilien’s legal counsel believes the following will happen in relationship to these incidents:
(a)
It is probable that the EPA fine will stand.
(b)
An out-of-court settlement for $650,000 has recently been reached with the
employee,
with the final papers to be signed next week.
(c)
Counsel believes that the homeowner’s case is weak and will be decided in favor of Maximilien Company.
(d)
Other litigation related to the spill is possible, but the damage amounts are uncertain.
(1)
Based on this information, prepare the journal entries for the contingent
liabilities
associated with the spill. Use the account “Environmental Awards
and Fines” to
recognize the expense for the period.
(2)
Prepare any note disclosure related to the spill.
Chapter 11: Current Liabilities and Payroll
177.
Hadley Industries warrants its products for one year. The estimated product warranty expense is 4% of sales.
Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $205 of
parts
and $75 of labor.
(a)
Journalize the adjusting entry required at June 30, the end of the first month of
the
current year, to record the estimated product warranty expense.
(b)
Journalize the entry to record the warranty work provided in July.
Chapter 11: Current Liabilities and Payroll
178.
The current assets and current liabilities for Kolbie Company and Newton Company are as follows:
Kolbie Company
( in millions)
For the Year Ending
December 31
Newton Company
(in millions)
For the Year Ending
December 31
Current assets:
Cash and cash equivalents
$ 8,352
$ 8,546
Short-term investments
6,034
752
Accounts receivable
3,029
5,152
Inventories
446
660
Other current assets*
2,195
2,829
Total current assets
$20,056
$17,939
Current liabilities:
Accounts payable
$4,970
$10,430
Accrued and other current liabilities
3,329
6,361
Total current liabilities
$8,299
$16,791
*These represent prepaid expenses and other non-quick current assets.
(a)
Determine the quick ratio for both companies. Round to two decimal places.
(b)
Interpret the quick ratio difference between the two companies.
Chapter 11: Current Liabilities and Payroll
179.
The Core Company had the following assets and liabilities as of December 31:
ASSETS
Cash
$58,000
Accounts receivable
25,000
Inventory
20,000
Equipment
50,000
LIABILITIES
Current portion of long-term debt
20,000
Accounts payable
12,000
Long-term debt
25,000
Calculate the current ratio, working capital, and quick ratio.
Chapter 11: Current Liabilities and Payroll
180.
Use the following information and calculate the quick ratio for Davis Company and for Bender Inc.
(a)
Calculate the quick ratio for each company.
(b)
Comment on which one is more able to meet current liabilities.
Davis Co.
Bender Inc.
Account
Dr.
Cr.
Dr.
Cr.
Cash
$ 321
$ 425
Cash equivalents
88
95
Current notes receivable
56
46
Accounts receivable
603
307
Prepaid expenses
55
85
Merchandise inventory
714
898
Fixed assets
920
755
Accumulated depreciation—Fixed assets
$ 415
$ 225
Accounts payable
260
198
Current accrued liabilities
213
149
Mortgage payable
917
824
Capital
952
1,215
Total
$2,757
$2,757
$2,611
$2,611
(a)
Davis Co. Quick ratio: $1,068 ÷ $473 = 2.26
Bender Inc. Quick ratio: $873 ÷ $347 = 2.52
(b)
Bender Inc. is more liquid.
Chapter 11: Current Liabilities and Payroll
181.
For Company A and Company B:
(a)
Calculate the quick ratio for each company.
(b)
Comment on which one is more able to meet current liabilities.
Company A
Company B
Account
Dr.
Cr.
Dr.
Cr.
Cash
$21
$ 25
Cash equivalents
8
10
Trade notes receivable
7
6
Accounts receivable
6
7
Prepaid expenses
5
5
Merchandise inventory
14
8
Fixed assets
20
55
Accumulated depreciation—Fixed assets
$ 5
$ 25
Accounts payable
26
8
Current accrued liabilities
13
19
Mortgage payable
17
24
Capital
20
40
Total
$81
$81
$116
$116
Chapter 11: Current Liabilities and Payroll
Match each payroll item that follows to the one item (a–f) that best describes its characteristics.
a.
Amount is limited, withheld from employee only
b.
Amount is limited, withheld from employee and matched by employer
c.
Amount is limited, paid by employer only
d.
Amount is not limited, withheld from employee only
e.
Amount is not limited, withheld from employee and matched by employer
f.
Amount is not limited, paid by employer only
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.11-02 – 11–02
ACCT.WARD.16.11-03 – 11–03
ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 – Payroll/Other Compensation
ACCT.AICPA.BB.03 – Legal
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
182.
Federal income tax
183.
FICA – Social security
184.
FICA – Medicare
185.
Federal unemployment compensation tax (FUTA)
186.
State unemployment compensation tax (SUTA)
Chapter 11: Current Liabilities and Payroll
Use the following key (a–d) to identify the proper treatment of each contingent liability.
a.
Record only
b.
Record and disclose
c.
Disclose only
d.
Do not record or disclose
DIFFICULTY: Easy
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.11-05 – 11–05
ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 – Current Liabilities Reporting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
187.
Event is reasonably possible and amount is estimable
188.
Event is reasonably possible but amount is not estimable
189.
Event is probably and amount is estimable
190.
Event is probable but amount is not estimable
191.
Event is remote and amount is estimable
192.
Event is remote and amount is not estimable
Chapter 11: Current Liabilities and Payroll
Match the following terms or phrases in (a–g) with the explanations in 1–8. Terms or phrases may be used
more
than once.
a.
Current ratio
b.
Working capital
c.
Quick assets
d.
Quick ratio
e.
Record an accrual and disclose in the notes to the financial statements
f.
Disclose only in notes to financial statements
g.
No disclosure needed in notes to financial statements
DIFFICULTY: Moderate
Bloom’s: Remembering
LEARNING OBJECTIVES: ACCT.WARD.16.11-05 – 11–05
ACCT.WARD.16.11-06 – 11–06
ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 – Current Liabilities Reporting
ACCT.ACBSP.APC.23 – Financial Statement Analysis
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
193.
Current assets/Current liabilities
194.
Remote contingent liability
195.
Current assets – Current liabilities
196.
Cash + Temporary investments + Accounts receivable
197.
(Cash + Temporary investments + Accounts receivable)/Current liabilities
198.
Probable likelihood and estimable liability
Chapter 11: Current Liabilities and Payroll
199.
Probable likelihood of a liability but cannot be estimated
200.
Reasonably possible likelihood of a liability
201.
Measures the “instant” debt-paying ability of a company