8-96
168.
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.
Salaries Payable (to
169.
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.
8-100
170.
The University of Nebraska football stadium is the third largest city in the state of
Nebraska on game days. The stadium has sold out every game since the late 1960’s. The
seating capacity is about 80,000 fans. Assume the stadium sells out all six home games
before the season begins, and the athletic department collects $38.4 million in ticket
sales.
Required:
1. What is the average price per season ticket and average price per individual game
ticket sold?
2. Record the advance collection of $38.4 million in ticket sales.
3. Record the revenue earned after the first home game is completed.
8-101
171.
During its first three months of operation, Palimino’s sold gift cards in various amounts
totaling $5,200. The gift cards are redeemable for meals within one year of the purchase
date. Gift cards totaling $1,900 were presented for redemption prior to yearend on
December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals
(not gift cards) are purchased. Palimino’s will remit sales taxes in January.
Required:
1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in
actuality, each sale of a gift card or a meal would be recorded individually).
2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of
$124.30.
3. Determine the balance in the deferred revenue account (remaining liability for gift card)
to be reported on the December 31 balance sheet.
172.
Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the
8-102
following transactions occur during the year ended December 31, 2018.
Required:
Record any amounts as a result of each of these contingencies.
1. In November 2018, Leisure Luggage became aware of a design flaw in one of its lines
of luggage. A product recall is probable and is estimated to cost the company between
$300,000 and $500,000.
2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a
competitor. It appears reasonably possible Leisure Luggage will lose the case, and
potential losses are estimated to be $1.2 million.
3. Credit sales were $12 million for 2018. Although no customer accounts have been
shown to be uncollectible, the company estimates that 3% of credit sales will eventually
prove uncollectible.
4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final
appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be
awarded $800,000.
8-104
173.
Washington County Airport (WCA) faces three potential contingency situations, described
below. Their fiscal year ends December 31, 2018.
Required:
Determine the appropriate means of reporting each situation for the year ended December
31, 2018 and record any necessary entries. Explain your reasoning.
1. WCA is suing a national airline. WCA’s lawyers confirm that it is probable WCA will be
awarded damages of $500,000 in the case.
2. In June, 2018 a worker was injured in an accident and has sued the company for
$200,000. Legal counsel believes it is reasonably possible, but not probable, that the
outcome of the suit will be unfavorable, and that the settlement would cost the company
from $100,000 to $200,000.
3. A suit for $1.5 million was filed by an airline on November 3, 2018. Legal counsel
believes an unfavorable outcome is probable. A reasonable estimate of the award payment
to the airline is between $500,000 and $1 million. No amount within this range is a better
estimate of potential damages than any other amount.
8-106
174.
Selected financial data regarding two competing airlines are provided as follows:
($ in millions)
Company A
Company B
Current assets
Cash and cash equivalents
$1,225
$4,684
Short-term investments
3,104
1,351
Net receivables
811
1,844
Inventory
525
388
Other current assets
270
637
Total current assets
$5,935
$8,904
Current liabilities
Accounts payable
$6,702
$6,991
Short-term debt
2,672
2,407
Other current liabilities
1,624
Total current liabilities
$9,374
$11,022
Required:
1. Calculate the current ratio for both companies. Which airline has the best current ratio?
2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best
acid-test ratio?
3. How would the purchase of additional inventory by issuing short-term debt affect the
current ratio? How would it affect the acid-test ratio?
Company A
Company B
175.
Why is it important to distinguish between current and long-term liabilities?
176.
Explain why we record interest in the period in which we incur it rather than in the period
we pay it.
177.
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?
178.
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.
179.
Define a contingent liability. Provide three common examples. Under what circumstances
should a firm report a contingent liability?