9-16
EXERCISE 9-5A
1. Probable and can be reasonably estimated. This category of
2. Reasonably possible, or probable but cannot be reasonably
3. Remote. This category of contingent liabilities is not recognized
in the financial statements or disclosed in the notes.
b.
1. This is a contingent liability that can be reasonably estimated. It
must be recognized in the financial statements.
Account Title
Debit
Credit
Warranty Expense
2,000,000
Warranty Payable
2,000,000
2. This is a contingent liability which is possible but cannot be
3. This is not a contingent liability since contingencies are only for past
9-17
EXERCISE 9-6A
Note: T-Accounts are provided for the use of the instructor.
Assets
=
Liabilities
Stockholders’ Equity
Cash
Warranties Payable
Sales Revenue
Sales 250,000
Pur. 140,000
Pd. 2,820
Est. 5,000*
Sales 250,000
Pd. 2,820
Bal. 2,180
Bal. 107,180
Cost of Goods Sold
*$250,000 x 2% = $5,000
Sold 150,000
Mdse. Inventory
Pur. 140,000
Sold 140,000
Warranty Expense
Bal. -0-
Est. 5,000
Daun’s Stereos
Financial Statements
Income Statement
Sales Revenue
$250,000
Cost of Goods Sold
(140,000)
Gross Margin
110,000
Warranty Expense
(5,000)
Net Income
$105,000
Statement of Cash Flows
Cash Flows From Operating Activities:
Inflow from Customers
$250,000
Outflow to Purchase Inventory
(140,000)
Outflow for Warranty Expense
(2,820)
Net Cash Flow from Operating Activities
$107,180
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash
107,180
Plus: Beginning Cash Balance
-0-
9-18
Ending Cash Balance
$107,180
9-19
EXERCISE 9-6A (cont.)
9-20
EXERCISE 9-7A
a.
Event
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Est.
NA
+
−
NA
+
−
NA
Pd.
−
−
NA
NA
NA
NA
− OA
Event
Account Titles
Debit
Credit
b.
Est.
Warranty Expense
2,650
Warranties Payable
2,650
c.
Payment
Warranties Payable
1,830
Cash
1,830
9-21
PROBLEM 9-8A
a.
Event
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash
Flow
1.
+
NA
+
NA
NA
NA
+ FA
2.
+
+
NA
NA
NA
NA
NA
3a.
+
+
+
+
NA
+
+ OA
3b.
−
NA
−
NA
+
−
NA
4.
NA
+
−
NA
+
−
NA
5.
−
−
NA
NA
NA
NA
− OA
6.
+
+
NA
NA
NA
NA
+ FA
7.
−
−
NA
NA
NA
NA
− OA
8.
−
NA
−
NA
+
−
− OA
9.
−
−
NA
NA
NA
NA
− OA
10.
NA
+
−
NA
+
−
NA
9-22
EXERCISE 9-8A (cont.)
b.
Ozark Sales
General Journal for 2016
Event
Account Title
Debit
Credit
1.
Cash
50,000
Common Stock
50,000
2.
Merchandise Inventory
380,000
Accounts Payable
380,000
3a.
Cash ($510,000 x 1.08)
550,800
Sales Revenue
510,000
Sales Tax Payable
40,800
3b.
Cost of Goods Sold
330,000
Merchandise Inventory
330,000
4.
Warranty Expense ($510,000 x 2%)
10,200
Warranties Payable
10,200
5.
Sales Tax Payable ($400,000 x 8%)
32,000
Cash
32,000
6.
Cash
50,000
Notes Payable
50,000
7.
Warranty Payable
6,200
Cash
6,200
8.
Operating Expense
78,000
Cash
78,000
9.
Accounts Payable
250,000
Cash
250,000
10.
Interest Expense1
667
Interest Payable
667
1$50,000 x 4% x 4/12 = $667 (rounded)
9-23
EXERCISE 9-8A b. (cont.)
Ozark Sales
T-Accounts for 2016
Assets
=
Liabilities
+
Stockholder’s Equity
Cash
Accounts Payable
Common Stock
1. 50,000
5. 32,000
9. 250,000
2. 380,000
1. 50,000
3a. 550,800
7. 6,200
Bal.130,000
Bal. 50,000
6. 50,000
8. 78,000
9. 250,000
Sales Tax Payable
Sales Revenue
Bal.
284,600
5. 32,000
3a. 40,800
3a. 510,000
Bal. 8,800
Bal.510,000
Merchandise Inventory
2. 380,000
3b. 330,000
Warranties Payable
Cost of Goods Sold
Bal. 50,000
7. 6,200
4. 10,200
3b. 330,000
Bal. 4,000
Bal. 330,000
Interest Payable
Operating Expenses
10. 667
8. 78,000
Bal. 667
Bal. 78,000
Notes Payable
Warranty Expense
6. 50,000
4. 10,200
Bal. 50,000
Bal. 10,200
Interest Expense
10. 667
Bal. 667
9-24
EXERCISE 9-8A (cont.)
c.
Ozark Sales
Income Statement
For the Year Ended December 31, 2016
Sales Revenue
$510,000
Cost of Goods Sold
(330,000)
Gross Margin
180,000
Expenses
Operating Expenses
$78,000
Warranty Expense
10,200
Total Operating Expenses
(88,200)
Operating Income
91,800
Interest Expense
(667)
Net Income
$91,133
9-25
EXERCISE 9-8A c. (cont.)
Ozark Sales
Balance Sheet
As of December 31, 2016
Assets
Cash
$284,600
Merchandise Inventory
50,000
Total Assets
$334,600
Liabilities
Accounts Payable
$130,000
Sales Tax Payable
8,800
Warranties Payable
4,000
Interest Payable
667
Notes Payable
50,000
Total Liabilities
193,467
Stockholders’ Equity
Common Stock
$50,000
Retained Earnings
91,133
Total Stockholders’ Equity
141,133
Total Liabilities and Stockholders’ Equity
$334,600
9-26
EXERCISE 9-8A c. (cont.)
Ozark Sales
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Inflow from Customers
$510,000
Inflow from Sales Tax
40,800
Outflow to Purchase Inventory
(250,000)
Outflow for Expenses1
(84,200)
Outflow for Sales Tax
(32,000)
Net Cash Flow from Operating Activities
$184,600
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Stock Issue
$ 50,000
Inflow from Loan
50,000
Net Cash Flow from Financing Activities
100,000
Net Change in Cash
284,600
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$284,600
1. $78,000 + $6,200 = $84,200
d. Current Liabilities:
9-27
EXERCISE 9-9A
a.
Computation of Gross Earnings
Employee
Hours Worked
x
Wage Rate
per Hour
=
Gross Pay
Kelly
Reg. 40
32
$1,280.00
OT 14
48
672.00
Total
54
$1,952.00
Jon
Reg. 40
26
$1,040.00
OT 4
39
156.00
Total
44
$1,196.00
Kelly
Gross Earnings
$1,952.00
Deductions:
Federal Income Tax
$260.00
FICA Tax – SS ($1,952 x 6%)
117.12
FICA Tax – Medicare ($1,952 x 1.5%)
29.28
Total Deductions
(406.40)
Net Pay
1,545.60
Jon
Gross Earnings
$1,196.00
Deductions:
Federal Income Tax
$220.00
FICA Tax – SS ($1,196 x 6%)
71.76
FICA Tax – Medicare ($1,196 x 1.5%)
17.94
Total Deductions
(309.70)
Net Pay
$ 886.30
9-28
EXERCISE 9-9A (cont.)
c.
Zolnick Enterprises
General Journal Entries
Date
Account Titles
Debit
Credit
Jan.
Salaries Expense ($1,952 + $1,196)
3,148.00
Employee Income Tax Payable ($260 +
$220)
480.00
FICA Tax − SS Payable ($117.12 + $71.76)
188.88
FICA Tax − Med. Payable ($29.28 + $17.94)
47.22
Cash
2,431.90
9-29
EXERCISE 9-10A
a.
Clay – March
Gross Earnings
$3,600.00
Deductions:
Federal Income Tax ($3,600 x 15%)
$540.00
FICA Tax – SS ($3,600 x 6%)
216.00
FICA Tax – Medicare ($3,600 x 1.5%)
54.00
Total Deductions
(810.00)
Net Pay
$2,790.00
Philip – March
Gross Earnings
$10,800.00
Deductions:
Federal Income Tax ($10,800 x 20%)
$2,160.00
FICA Tax – SS ($10,800 x 6%)
648.00
FICA Tax – Medicare ($10,800 x 1.5%)
162.00
Total Deductions
(2,970.00)
Net Pay
$7,830.00
9-30
EXERCISE 9-10A
b.
Clay – December
Gross Earnings
$3,600.00
Deductions:
Federal Income Tax ($3,600 x 15%)
$540.00
FICA Tax – SS ($3,600 x 6%)
216.00
FICA Tax – Medicare ($3,600 x 1.5%)
54.00
Total Deductions
(810.00)
Net Pay
$2,790.00
Philip – December
Gross Earnings
$10,800.00
Deductions:
Federal Income Tax ($10,800 x 20%)
$2,160.00
FICA Tax – Medicare ($10,800 x 1.5%)
162.00
Total Deductions
(2,322.00)
Net Pay
$8,478.00
c. Philip’s net pay is different in December because he does not pay
FICA Social Security tax in December. His year-to-date earnings
exceeded $110,000 in November. However, there is no limit on the
FICA Medicare tax. Clay’s net pay is the same for both March and
December because his gross earnings do not exceed $110,000 for the
year.
d.
Amount appearing on W-2 for 2016
Clay
Box 1 Wages, tips, and other compensation
3,600.00 x 12
43,200.00
Box 2 Federal income tax withheld
540.00 x 12
6,480.00
Box 3 Social Security wages
3,600.00 x 12
43,200.00
Box 4 Social Security tax withheld
216.00 x 12
2,592.00
Box 5 Medicare wages and tips
3,600.00 x 12
43,200.00
Box 6 Medicare tax withheld
54.00 x 12
648.00
9-31
9-32
EXERCISE 9-10A d. (cont.)
Amount appearing on W-2 for 2017
Philip
Box 1 Wages, tips, and other compensation
10,800.00 x 12
129,600.00
Box 2 Federal income tax withheld
2,160.00 x 12
25,920.00
Box 3 Social Security wages
110,000.00
Box 4 Social Security tax withheld
110,000.00 x 6%
6,600.00
Box 5 Medicare wages and tips
10,800.00 x 12
129,600.00
Box 6 Medicare tax withheld
162.00 x 12
1,944.00
9-33
EXERCISE 9-11A
a. (1)
Tom
Gross Earnings
$5,100.00
Deductions:
Federal Income Tax
$900.00
FICA Tax – SS ($5,100 x 6%)
306.00
FICA Tax – Medicare ($5,100 x 1.5%)
76.50
Total Deductions
(1,282.50)
Net Pay
$3,817.50
(2). Tom’s monthly FICA tax:
(3). Sky Co. payroll tax expense – January:
Employer FICA Social Security tax $306.00
Employer FICA Medicare tax 76.50
Employer unemployment tax ($5,100 x 6.0*%) 306.00
9-34
Employer FICA Medicare tax 76.50
9-35
EXERCISE 9-11A (cont.)
b. (1) (January – November)
Tom
Gross Earnings
$9,600.00
Deductions:
Federal Income Tax
$900.00
FICA Tax – SS ($9,600 x 6%)
576.00
FICA Tax – Medicare ($9,600 x 1.5%)
144.00
Total Deductions
(1,620.00)
Net Pay
$7,980.00
b. (1) (December)
Tom
Gross Earnings
$9,600.00
Deductions:
Federal Income Tax
$900.00
FICA Tax – SS ($110,000 – $105,600) x 6%
264.00
FICA Tax – Medicare ($9,600 x 1.5%)
144.00
Total Deductions
(1,308.00)
Net Pay
$8,292.00
b. (2) Tom’s monthly FICA tax: (January – November)
Social Security tax $576.00
Medicare tax 144.00
Total monthly FICA tax $720.00
b. (2) Tom’s monthly FICA tax: (December)
Social Security tax $264.00
Medicare tax 144.00
Total monthly FICA tax $408.00