Comprehensive Problem for Chapters 11, 12, and 13
The Tusquittee Company is a retail company that began operations on October 1, 2018, when it incorporated in the state of North
Carolina. The Tusquittee Company is authorized to issue 100,000 shares of $1 par value common stock and 50,000 shares of 5%, $50
par value preferred stock. The company sells a product that includes a one-year warranty and records estimated warranty payable each
month. Customers are charged a 6% state sales tax. The company uses a perpetual inventory system. There are three employees that
are paid a monthly salary on the last day of the month.
Following is the chart of accounts for The Tusquittee Company. As a new business, all beginning balances are $0.
The Tusquittee Company
Chart of Accounts
Cash Dividends Payable—Common
Merchandise Inventory Notes Payable
Land Mortgages Payable
Building Common Stock—$1 Par Value
Store Fixtures Paid-In Capital in Excess of Par—Common
Accumulated Depreciation Paid-In Capital from Treasury Stock
Income Tax Payable Utilities Expense
Sales Tax Payable Depreciation Expense
Estimated Warranty Payable Warranty Expense
Interest Payable Income Tax Expense
Interest Expense
The Tusquittee Company completed the following transactions during the last quarter of 2018, its first year of operations:
Oct. 1 Issued 25,000 shares of $1 par value common stock for cash of $10 per share.
1 Issued a $200,000, 10-year, 8% mortgage payable for land with an existing store
building. Mortgage payments of $2,425 are due on the first day of each month,
beginning November 1. The assets had the following market values: Land,
$40,000; Building, $160,000.
1 Issued a one-year, 10% note payable for $10,000 for store fixtures. The principal
and interest are due October 1, 2019.
3 Purchased merchandise inventory on account from Top Rate for $125,000, terms
n/30.
15 Paid all liabilities associated with the October 31 payroll.
15 Remitted (paid) sales tax from October sales to the state of North Carolina.
16 Paid $6,000 to satisfy warranty claims.
17 Declared cash dividends of $1 per outstanding share of common stock.
18 Paid $245 for utilities.
27 Paid the cash dividends.
30 Recorded cash sales for the month of $140,000 plus sales tax of 6%. The cost of
the goods sold was $84,000 and estimated warranty payable was 8%.
30 Recorded November payroll and paid employees.
30 Accrued employer payroll taxes for November.
Requirements
1. In preparation for recording the transactions, prepare:
a. An amortization schedule for the first 3 months of the mortgage payable issued on October 1. Round interest calculations to
the nearest dollar.
b. Payroll registers for October, November, and December. All employees worked October 1 through December 31 and are
subject to the following FICA taxes: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45% up to $200,000, 2.35% on
earnings above $200,000. Additional payroll information includes:
Employee Monthly
Salary
Federal
Income Tax
Health
Insurance
Kate Jones $ 6,000 $ 1,800 $ 300
Mary Smith 5,000 1,000 300
Sherry Martin 3,000 450 300
c. Calculations for employer payroll taxes liabilities for October, November, and December: OASDI: 6.2% on first $118,500
earned; Medicare: 1.45%; SUTA: 5.4% on first $7,000 earned; FUTA: 0.6% on first $7,000 earned.
2. Record the transactions in the general journal. Omit explanations.
3. Post to the general ledger.
4. Record adjusting entries for the three month period ended December 31, 2018:
a. Depreciation on the Building, straight-line, 40 years, no residual value.
b. Store Fixtures, straight-line, 20 years, no residual value.
c. Accrued interest expense on the note payable for the store fixtures.
d. Accrued interest expense on the mortgage payable.
e. Accrued income tax expense of $36,000.
5. Post adjusting entries and prepare an adjusted trial balance.
6. Prepare a multi-step income statement and statement of retained earnings for the quarter ended December 31, 2018. Prepare a
classified balance sheet as of December 31, 2018. Assume that $13,840 of the mortgage payable is due within the next year.
7. Evaluate the company’s success for the first quarter of operations by calculating the following ratios. The market price of the
common stock is $25 on December 31, 2018. Round to two decimal places.
a. Times interest earned
b. Debt to equity
c. Earnings per share
d. Price/earnings ratio
e. Rate of return on common stock
8. The Tusquittee Company wants to expand and is considering options for raising additional cash. The company estimates net
income before the expansion of $250,000 in 2019 and that the expansion will provide additional operating income of $75,000
in 2019. The company intends to sell the shares of treasury stock, so use issued shares for the analysis rather than current
shares outstanding. Compare these options, assuming a 30% income tax rate:
Plan 1: Issue 10,000 additional shares of common stock for $20 per share
Plan 2: Issue $200,000 in 20-year, 12% bonds payable.
Which option will contribute more net income in 2019? Which option provides the highest EPS?
SOLUTION
Requirement 1
DECEMBER Employer Payroll Taxes
Tax Earnings Rate Amount
OASDI $ 14,000.00 6.20% $ 868.00
Medicare 14,000.00 1.45% 203.00
SUTA* 1,000.00 5.40% 54.00
FUTA* 1,000.00 0.60% 6.00
$ 1,131.00
Comprehensive Problem, cont.
Requirement 2
Date Accounts Debit Credit
Oct. 1 Cash (25,000 shares × $10 per share) 250,000
Common Stock—$1 Par Value (25,000 × $1 per share) 25,000
Paid-in Capital in Excess of Par—Common ($250,000 $25,000)‒225,000
Sales Tax Payable ($185,000 × 0.06) 11,100
Sales Revenue 185,000
Comprehensive Problem, cont.
Requirement 2, cont.
Date Accounts Debit Credit
Oct. 31 Payroll Tax Expense 1,911
FICA—OASDI Taxes Payable 868
FICA—Medicare Taxes Payable 203
State Unemployment Taxes Payable 756
Federal Unemployment Taxes Payable 84
FICA—Medicare Taxes Payable ($203 + $203) 406
Employee Income Taxes Payable 3,250
Employee Health Insurance Payable 900
State Unemployment Taxes Payable 756
Federal Unemployment Taxes Payable 84
Cash 7,132
Comprehensive Problem, cont.
Requirement 2, cont.
Date Accounts Debit Credit
Nov. 18 Utilities Expense 245
Cash 245
27 Dividends Payable—Common 24,500
Cash 24,500
Cash 8,779
30 Payroll Tax Expense 1,431
Dec. 1 Interest Expense 1,326
Mortgages Payable 1,099
Cash 2,425