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10-1
CHAPTER 10
LIABILITIES: CURRENT, INSTALLMENT NOTES,
AND CONTINGENCIES
DISCUSSION QUESTIONS
1. No. A discounted note payable has no stated interest rate, but provides interest by discounting the note
3. The deductions from employees’ earnings are for amounts owed (liabilities) to others for such items as
federal taxes, state and local income taxes, and contributions to pension plans.
4. 1. a
5. An advantage of using a separate payroll bank account is that reconciling the bank statements is
6. The vacation pay expense should be recorded during the period in which the vacation privilege is earned.
7. In a defined contribution plan, the company invests contributions on behalf of the employee during the
8. a. Each periodic payment includes (1) a repayment of the principal amount of the note and (2) a payment
of interest on the outstanding balance.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
BASIC EXERCISES
BE 10–1
BE 10–2
Total wage payment ......................................................... $ 800.00
BE 10–3
Salaries Expense
70,000
Social Security Tax Payable
4,200
Medicare Tax Payable
1,050
Employees Federal Income Tax Payable
15,350
Retirement Savings Deductions Payable
2,800
Salaries Payable
46,600
BE 10–4
Payroll Tax Expense
5,994
Social Security Tax Payable
4,200
Medicare Tax Payable
1,050
State Unemployment Tax Payable
648
Federal Unemployment Tax Payable
96
State Unemployment Tax Payable = $12,000 5.4% = $648
Federal Unemployment Tax Payable = $12,000 0.8% = $96
BE 10–5
a.
Vacation Pay Expense
40,000
Vacation Pay Payable
40,000
Vacation pay accrued for the period.
b.
Pension Expense
222,750
Cash
185,000
Unfunded Pension Liability
37,750
To record pension cost and funding.
10-3
BE 10–6
a.
Cash
45,000
Notes Payable
45,000
Issued installment notes for cash.
b.
Interest Expense
3,600
Notes Payable
6,134
Cash
9,734
Paid principal and interest on installment notes.
BE 10–7
a.
July
31
Product Warranty Expense
14,625
Product Warranty Payable
14,625
To record warranty expense for
July (4.5% $325,000).
b.
Nov.
11
Product Warranty Payable
220
Cash
220
BE 10–8
a.
sLiabilitieCurrent
AssetsQuick
Ratio Quick =
1.6
$1,875
$800 $1,200 $1,000
:20Y4
1.5
$2,300
$910 $1,400 $1,140
:20Y3
=
++
=
++
b. The quick ratio of Adieu Company has improved from 1.5 in 20Y3 to 1.6 in 20Y4. This
increase is the result of small decreases in the three types of quick assets (cash,
temporary investments, and accounts receivable) compared to the larger decrease in the
current liability, accounts payable. The increase shows Adieu to be in a better position to
pay current liabilities within a short period of time.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-4
EXERCISES
Ex. 10–1
Current liabilities as of March 31st, 2016:
Ex. 10–2
a. 1. Bennett Enterprises:
Inventory
400,000
Notes Payable
400,000
2.
Notes Payable
400,000
Interest Expense
5,000
Cash
405,000
b. 1. Spectrum Industries:
Notes Receivable
400,000
Sales
400,000
2.
Cash
405,000
Notes Receivable
400,000
Interest Revenue
5,000
Interest Expense/Revenue = $400,000 5% 90 360 = $5,000
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
Ex. 10–3
a. $150,000 4% 45 360 = $750 for each alternative.
Ex. 10–4
a.
Accounts Payable
60,000
Notes Payable
60,000
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
Ex. 10–6
a.
June
30
Building
560,000
Land
400,000
Notes Payable
600,000
Cash
360,000
b.
Dec.
31
Notes Payable
30,000
Interest Expense
15,000
Cash
45,000
(First installment interest =
$600,000 5% 6/12)
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-7
Ex. 10–9
Consultant
Computer
Programmer
Administrator
Regular earnings ...............................
$5,000.00
$2,000.00
$2,400.00
Overtime earnings .............................
800.00*
990.00**
Gross pay ..........................................
$5,000.00
$2,800.00
$3,390.00
Deductions:
Social security tax ..........................
$ 300.001
$ 168.002
$ 203.403
Medicare tax ...................................
75.004
42.005
50.856
Federal income tax withheld ..........
1,150.00
428.00
572.00
Total deductions ........................
$1,525.00
$ 638.00
$ 826.25
Net pay ...............................................
$3,475.00
$2,162.00
$2,563.75
1 6.0% $5,000.00 = $300.00
2 6.0% $2,800.00 = $168.00
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-8
Ex. 10–10
a. Summary: (1) $460,000; (3) $540,000; (8) $6,750; (12) $135,000
Net amount paid .................................................................. $ 338,850
Total earnings .................................................................... $ 540,000
b.
Factory Wages Expense
285,000
Sales Salaries Expense
135,000
Office Salaries Expense
120,000
Social Security Tax Payable
32,400
Medicare Tax Payable
8,100
Employees Income Tax Payable
135,000
Medical Insurance Payable
18,900
Union Dues Payable
6,750
Salaries Payable
338,850
c.
Salaries Payable
338,850
cash
338,850
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-9
Ex. 10–11
a. Social security tax (6% $110,000) ................................................................... $6,600
$9,800
b.
Payroll Tax Expense
9,800
Social Security Tax Payable
6,600
Medicare Tax Payable
1,650
State Unemployment Tax Payable
1,350
Federal Unemployment Tax Payable
200
Ex. 10–12
a.
May
18
Salaries Expense
615,000
Social Security Tax Payable ($615,000 6%)
36,900
Medicare Tax Payable ($615,000 1.5%)
9,225
Employees Federal Income Tax Payable
165,000
Salaries Payable
403,875
b.
May
18
Payroll Tax Expense
48,915
Social Security Tax Payable
36,900
Medicare Tax Payable
9,225
State Unemployment Tax Payable
2,430
Federal Unemployment Tax Payable
360
State Unemployment Tax Payable = $45,000 5.4% = $2,430
Federal Unemployment Tax Payable = $45,000 0.8% = $360
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-10
Ex. 10–13
a.
June
17
Wages Expense
320,000
Social Security Tax Payable
19,200
Medicare Tax Payable
4,800
Employees Federal Income Tax Payable
64,000
Wages Payable
232,000
b.
June
17
Payroll Tax Expense
26,976
Social Security Tax Payable
19,200
Medicare Tax Payable
4,800
State Unemployment Tax Payable
2,592
Federal Unemployment Tax Payable
384
State Unemployment Tax Payable = $48,000 5.4% = $2,592
Federal Unemployment Tax Payable = $48,000 0.8% = $384
Ex. 10–14
Big Howie’s Hot Dog Stand does have an internal control procedure that should detect the
Ex. 10–15
a. Appropriate. All changes to the payroll system, including wage rate increases, should be
authorized by someone outside the Payroll Department.
b. Inappropriate. Each employee should record his or her own time out for lunch. Under the
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-11
Ex. 10–16
a.
Jan.
31
Vacation Pay Expense
3,500
Vacation Pay Payable
3,500
Vacation pay accrued for January
($42,000 1/12).
b. Vacation pay is reported as a current liability on the balance sheet. If employees are
Ex. 10–17
a.
Dec.
31
Pension Expense
365,000
Unfunded Pension Liability
365,000
To record quarterly pension cost.
Jan.
15
Unfunded Pension Liability
365,000
Cash
365,000
b. In a defined contribution plan, the company invests contributions on behalf of the
employee during the employee’s working years. Normally, the employee and employer
contribute to the plan. The employee’s pension depends on the total contributions and the
Ex. 10–18
The $5,955 million unfunded pension liability is the approximate amount of the pension
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-12
Ex. 10–19
a.
1.
Cash
85,000
Notes Payable
85,000
2.
Interest Expense
5,950
Notes Payable
9,822
Cash
15,772
b. Notes payable are reported as liabilities on the balance sheet. The portion of the note
payable that is due within one year is reported as a current liability. The remaining portion
Annual payment on note .................................................................................... $ 15,772
Second year interest payment ($75,178 0.07) ................................................ (5,262)
Principal repayment portion of next installment .............................................. $ 10,510
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-13
Ex. 10–20
20Y2
Jan.
1
Cash
175,000
Notes Payable
175,000
Dec.
31
Interest Expense
14,000
Notes Payable
29,830
Cash
43,830
20Y5
Dec.
31
Interest Expense
6,253
Notes Payable
37,577*
Cash
43,830
Ex. 10–21
a.
A
B
C
D
E
For the
Year Ending
Dec. 31
January 1
Carrying
Amount
Note
Payment
(Cash Paid)
Interest Expense
(7% of January 1
Note Carrying Amount)
Decrease in
Notes
Payable
(B – C)
Dec. 31
Carrying
Amount
(A – D)
Year 1
$147,750
$ 43,620
$10,343 (7% of $147,750)
$ 33,277
$114,473
Year 2
114,473
43,620
8,013 (7% of $114,473)
35,607
78,866
Year 3
78,866
43,620
5,521 (7% of $78,866)
38,099
40,767
Year 4
40,767
43,620
2,853*
40,767
0
$174,480
$26,730
$147,750
* The interest expense in Year 4 is rounded to $2,853.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-14
Ex. 10–21 (Concluded)
b.
Year 1
Jan.
1
Cash
147,750
Notes Payable
147,750
Dec.
31
Interest Expense
10,343
Notes Payable
33,277
Cash
43,620
Year 2
Dec.
31
Interest Expense
8,013
Notes Payable
35,607
Cash
43,620
Year 3
Dec.
31
Interest Expense
5,521
Notes Payable
38,099
Cash
43,620
Year 4
Dec.
31
Interest Expense
2,853
Notes Payable
40,767
Cash
43,620
c. Interest expense of $10,343 would be reported on the income statement.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-15
Ex. 10–22
a.
Jan.
31
Product Warranty Expense
30,000
Product Warranty Payable
30,000
To record warranty expense for January
($1,500,000 2%).
b.
Feb.
7
Product Warranty Payable
445
Supplies
325
Wages Payable
120
Ex. 10–23
a. The warranty liability represents estimated outstanding automobile warranty claims. Of
b.
Product Warranty Expense
4,132,000,000
Product Warranty Payable
4,132,000,000
c. In order for a product warranty to be reported as a liability in the financial statements, it
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-16
Ex. 10–24
a.
Damage Awards and Fines
365,000
EPA Fines Payable
240,000
Litigation Claims Payable
125,000
Note to Instructors: The “Damage Awards and Fines” would be disclosed on the income
statement under “Other expenses.”
b. The company experienced a hazardous materials spill at one of its plants during the
previous period. This spill has resulted in a number of lawsuits to which the company is a
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-17
PROBLEMS
Prob. 10–1A
1.
Mar.
1
Inventory
225,000
Accounts Payable—Kirkwood Co.
225,000
31
Accounts Payable—Kirkwood Co.
225,000
Notes Payable
225,000
Apr.
30
Notes Payable
225,000
Interest Expense ($225,000 30 ÷ 360 8%)
1,500
Cash
226,500
June
1
Cash
600,000
Notes Payable
600,000
July
1
Tools
49,500
Interest Expense ($50,000 60 ÷ 360 6%)
500
Notes Payable
50,000
16
Notes Payable
600,000
Interest Expense ($600,000 45 ÷ 360 6%)
4,500
Notes Payable
600,000
Cash
4,500
Aug.
15
Notes Payable
600,000
Interest Expense ($600,000 30 ÷ 360 7%)
3,500
Cash
603,500
Aug.
30
Notes Payable
50,000
Cash
50,000
Dec.
1
Office Equipment
280,000
Notes Payable
200,000
Cash
80,000
22
Litigation Loss
40,000
Litigation Claims Payable
40,000
31
Notes Payable
20,000
Interest Expense ($20,000 30 ÷ 360 9%)
150
Cash
20,150
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-18
Prob. 10–1A (Concluded)
2.
a.
Product Warranty Expense
65,000
Product Warranty Payable
65,000
Warranty expense for the current year.
b.
Interest Expense
1,350
Interest Payable
1,350
Interest on notes payable.
Interest Expense = ($280,000 – $80,000 – $20,000) 9% 30 ÷ 360, or $20,000 9 9% 30 ÷ 360
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-19
Prob. 10–2A
1.
a.
Dec.
30
Sales Salaries Expense
540,000
Warehouse Salaries Expense
155,000
Office Salaries Expense
85,000
Employees Income Tax Payable
160,000
Social Security Tax Payable ($780,000 6%)
46,800
Medicare Tax Payable ($780,000 1.5%)
11,700
Bond Deductions Payable
10,500
Group Insurance Payable
9,000
Salaries Payable
542,000
b.
Dec.
30
Payroll Tax Expense
61,476
Social Security Tax Payable
46,800
Medicare Tax Payable
11,700
State Unemployment Tax Payable
2,592
Federal Unemployment Tax Payable
384
State Unemployment Tax Payable = $48,000 5.4%
Federal Unemployment Tax Payable = $48,000 0.8%
2.
a.
Dec.
30
Sales Salaries Expense
540,000
Warehouse Salaries Expense
155,000
Office Salaries Expense
85,000
Employees Income Tax Payable
160,000
Social Security Tax Payable
46,800
Medicare Tax Payable
11,700
Bond Deductions Payable
10,500
Group Insurance Payable
9,000
Salaries Payable
542,000
Social Security Tax Payable = $780,000 6%
Medicare Tax Payable = $780,000 1.5%
b.
Jan.
5
Payroll Tax Expense
106,860
Social Security Tax Payable
46,800
Medicare Tax Payable
11,700
State Unemployment Tax Payable
42,120
Federal Unemployment Tax Payable
6,240
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
Prob. 10–3A
1.
Employee
Gross
Earnings
Federal Income
Tax Withheld
Social Security
Tax Withheld
Medicare
Tax Withheld
Arnett ............
$ 9,000.00
$ 1,698.00
$ 540.00
$ 135.00
Cruz ..............
55,200.00
9,576.00
3,312.00
828.00
Edwards .......
24,600.00
4,896.00
1,476.00
369.00
Harvin ...........
5,900.00
1,052.00
354.00
88.50
Nicks .............
132,000.00
31,020.00
7,920.00
1,980.00
Shiancoe ......
113,000.00
25,330.00
6,780.00
1,695.00
Ward .............
7,050.00
1,182.00
423.00
105.75
$346,750.00
$ 74,754.00
$ 20,805.00
$ 5,201.25
2. a. Social security tax paid by employer ...................................................... $20,805.00
