Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 11
Current Liabilities and Payroll
Review Questions
1. What are the three main characteristics of liabilities?
The three main characteristics of liabilities are:
2. What is a current liability? Provide some examples of current liabilities.
Current liabilities must be paid with cash or with goods and services within one year or within
3. How is sales tax recorded? Is it considered an expense of a business? Why or why not?
4. How do unearned revenues arise?
5. What do short-term notes payable represent?
6. Coltrane Company has a $5,000 note payable that is paid in $1,000 installments over five years.
How would the portion that must be paid within the next year be reported on the balance sheet?
7. What is the difference between gross pay and net pay?
Gross pay is the total amount of salary, wages, commissions, and bonuses earned by the employee
11-2
8. List the required employee payroll withholding deductions, and provide the tax rate for each.
Required payroll withholding deductions are:
Withholding Deductions
Tax Rate
Federal, State and Local Income Tax
The amount withheld depends on the
employee’s gross pay, filing status,
and the number of withholding
allowances he or she claims.
$200,000.
9. How might a business use a payroll register?
Many companies use a payroll register to help summarize the earnings, withholdings, and net pay for
each employee.
10. What payroll taxes is the employer responsible for paying?
The payroll taxes an employer is responsible for paying are:
11. What are the two main controls for payroll? Provide an example of each.
There are two main controls for payroll: controls for efficiency and controls to safeguard payroll
disbursements.
11-3
When do businesses record warranty expense, and why?
The matching principle requires businesses to record Warranty Expense in the same period that the
12. What is a contingent liability? Provide some examples of contingencies.
13. Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible
that it will lose the lawsuit. How should Curtis report this lawsuit?
14. How is the times-interest-earned ratio calculated, and what does it evaluate?
The times-interest-earned ratio is calculated as earnings before interest and taxes or EBIT (Net
Short Exercises
For all payroll calculations, use the following tax rates and round amounts to the nearest cent.
Employee: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45% up to $200,000, 2.35% on
earnings above $200,000.
Employer: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45%; FUTA: 0.6% on first $7,000
earned; SUTA: 5.4% on first $7,000 earned.
S11-1 Determining current versus long-term liabilities
Learning Objective 1
Rios Raft Company had the following liabilities.
a. Accounts Payable
b. Note Payable due in 3 years
c. Salaries Payable
d. Note Payable due in 6 months
e. Sales Tax Payable
f. Unearned Revenue due in 8 months
g. Income Tax Payable
Determine whether each liability would be considered a current liability (CL) or a long-term liability
(LTL).
SOLUTION
a.
current liability (CL)
S11-2 Recording sales tax
Learning Objective 1
On July 5, Williams Company recorded sales of merchandise inventory on account, $55,000. The sales
were subject to sales tax of 4%. On August 15, Williams Company paid the sales tax owed to the state
from the July 5 transaction.
Requirements
1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold.
2. Journalize the transaction to record the payment of sales tax to the state on August 15.
S11-2, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
July 5
Accounts Receivable
57,200
Requirement 2
Date
Accounts and Explanation
Debit
Credit
S11-3 Recording unearned revenue
Learning Objective 1
On June 1, Hunting Man Magazine collected cash of $63,000 on future annual subscriptions starting on
July 1.
Requirements
1. Journalize the transaction to record the collection of cash on June 1.
2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no revenue
earned has been recorded. (Round adjustment to the nearest whole dollar.)
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
June 1
Cash
63,000
S11-4 Accounting for a note payable
Learning Objective 1
On December 31, 2017, Franklin purchased $13,000 of merchandise inventory on a one-year, 9% note
payable. Franklin uses a perpetual inventory system.
Requirements
1. Journalize the company’s purchase of merchandise inventory on December 31, 2017.
2. Journalize the company’s accrual of interest expense on June 30, 2018, its fiscal year-end.
3. Journalize the company’s payment of the note plus interest on December 31, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2017
Requirement 2
Requirement 3
S11-5 Determining current portion of long-term note payable
Learning Objective 1
On January 1, Irving Company purchased equipment of $280,000 with a long-term note payable. The
debt is payable in annual installments of $56,000 due on December 31 of each year. At the date of
purchase, how will Irving Company report the note payable?
SOLUTION
S11-6 Computing and journalizing an employee’s total pay
Learning Objective 2
Lucy Rose works at College of Fort Worth and is paid $12 per hour for a 40-hour workweek and time-
and-a-half for hours above 40.
Requirements
1. Compute Rose’s gross pay for working 60 hours during the first week of February.
2. Rose is single, and her income tax withholding is 15% of total pay. Rose’s only payroll deductions
are payroll taxes. Compute Rose’s net (take-home) pay for the week. Assume Rose’s earnings to date
are less than the OASDI limit.
3. Journalize the accrual of wages expense and the payment related to the employment of Lucy Rose.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($12 × 40 hours)
$ 480
S11-6, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Wages Expense
840.00
S11-7 Computing payroll amounts considering FICA tax limits
Learning Objective 2
Lily Carter works for JDK all year and earns a monthly salary of $12,100. There is no overtime pay.
Lily’s income tax withholding rate is 10% of gross pay. In addition to payroll taxes, Lily elects to
contribute 5% monthly to United Way. JDK also deducts $250 monthly for co-payment of the health
insurance premium. As of September 30, Lily had $108,900 of cumulative earnings.
Requirements
1. Compute Lily’s net pay for October.
2. Journalize the accrual of salaries expense and the payment related to the employment of Lily Carter.
11-9
S11-7, cont.
SOLUTION
Requirement 1
Gross pay
$ 12,100.00
Withholding deductions:
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Oct. 31
Salaries Expense
12,100.00
Employee Income Taxes Payable
1,210.00
S11-8 Computing and journalizing the payroll expense and payments
Learning Objective 2
Macintosh Company has monthly salaries of $26,000. Assume Macintosh pays all the standard payroll
taxes, no employees have reached the payroll tax limits, total income tax withheld is $2,000, and the
only payroll deductions are payroll taxes. Journalize the accrual of salaries expense, accrual of employer
payroll taxes, and payment of employee and employer payroll taxes for Macintosh Company.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Salaries Expense
26,000
FICA—OASDI Taxes Payable (6.2% × $26,000)
1,612
FICA—Medicare Taxes Payable (1.45% × $26,000)
377
S11-9 Computing bonus payable
Learning Objective 3
On December 31, Weston Company estimates that it will pay its employees a 5% bonus on net income
after deducting the bonus. The company reports net income of $64,000 before the calculation of the
bonus. The bonus will be paid on January 15 of the next year.
Requirements
1. Journalize the December 31 transaction for Weston.
2. Journalize the payment of the bonus on January 15.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Employee Bonus Expense
3,047.62
S11-10 Journalizing vacation benefits
Learning Objective 3
Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays
each employee a weekly salary of $1,250 for a five-day workweek.
Requirements
1. Determine the amount of vacation expense for one month.
2. Journalize the entry to accrue the vacation expense for the month.
SOLUTION
Requirement 1
Employees
3
Weekly salary
$1,250
× Vacation Days per month
× 2
÷ Days in the week
5
S11-11 Accounting for warranty expense and warranty payable
Learning Objective 3
Trail Runner guarantees its snowmobiles for three years. Company experience indicates that warranty
costs will be approximately 5% of sales.
Assume that the Trail Runner dealer in Colorado Springs made sales totaling $600,000 during 2018. The
company received cash for 20% of the sales and notes receivable for the remainder. Warranty payments
totaled $10,000 during 2018.
Requirements
1. Record the sales, warranty expense, and warranty payments for the company. Ignore cost of goods
sold.
2. Assume the Estimated Warranty Payable is $0 on January 1, 2018. Post the 2018 transactions to the
Estimated Warranty Payable T-account. At the end of 2018, how much in Estimated Warranty
Payable does the company owe?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Cash (20% × $600,000)
120,000
Notes Receivable (80% × $600,000)
480,000
11-14
S11-12 Accounting treatment for contingencies
Learning Objective 4
Freeman Motors, a motorcycle manufacturer, had the following contingencies.
a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit.
Freeman’s attorneys estimate the potential loss will be $4,500,000.
b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.
c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the
lawsuit and estimates the damages to be paid will be $75,000.
Determine the appropriate accounting treatment for each of the situations Freeman is facing.
SOLUTION
Situation
Appropriate accounting treatment
S11-13 Computing times-interest-earned ratio
Learning Objective 5
Abernathy Electronics reported the following amounts on its 2018 income statement:
Year Ended December 31, 2018
Net income
$ 45,000
Income tax expense
6,750
Interest expense
3,750
What is Abernathy’s times-interest-earned ratio for 2018? (Round to two decimals.)
SOLUTION
Times-interest-earned ratio
Exercises
E11-14 Recording sales tax
Learning Objective 1
Sales Tax Payable $16,100
Consider the following transactions of Sapphire Software:
Mar. 31
Recorded cash sales of $230,000, plus sales tax of 7% collected for the
state of New Jersey.
Apr. 6
Sent March sales tax to the state.
Journalize the transactions for the company. Ignore cost of goods sold.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Cash
246,100
Sales Revenue
230,000
11-16
E11-15 Recording note payable transactions
Learning Objective 1
Aug. 1, 2018 Interest Expense $840
Consider the following note payable transactions of Creative Video Productions.
2017
Aug. 1
Purchased equipment costing $16,000 by issuing a one-year, 9% note
payable.
Dec. 31
Accrued interest on the note payable.
2018
Aug. 1
Paid the note payable plus interest at maturity.
Journalize the transactions for the company.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2017
Aug. 1
Equipment
16,000
Notes Payable
16,000
E11-16 Recording and reporting current liabilities
Learning Objective 1
Dec. 31 Subscription Revenue $80
Watson Publishing completed the following transactions during 2018:
Oct. 1
Sold a six-month subscription (starting on November 1), collecting cash of
$240, plus sales tax of 8%.
Nov.
15
Remitted (paid) the sales tax to the state of Tennessee.
Dec.
31
Made the necessary adjustment at year-end to record the amount of
subscription revenue earned during the year.
Journalize the transactions (explanations are not required). Round to the nearest dollar.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Oct. 1
Cash
259
Unearned Revenue
240
11-18
E11-17 Journalizing current liabilities
Learning Objectives 1, 2
Salaries Expense $3,400
Erin O’Neil Associates reported short-term notes payable and salaries payable as follows:
2018
2017
Current Liabilities—partial:
Short-term Notes Payable
$ 16,900
$ 16,000
Salaries Payable
3,400
4,000
During 2018, O’Neil paid off both current liabilities that were left over from 2017, borrowed cash on
short-term notes payable, and accrued salaries expense. Journalize all four of these transactions for
O’Neil during 2018. Assume no interest on short-term notes payable of $16,000.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Notes Payable
16,000
Cash
16,000
11-19
E11-18 Computing and recording gross and net pay
Learning Objective 2
1. Net Pay $576.69
Hugh Stanley manages a Dairy House drive-in. His straight-time pay is $12 per hour, with time-and-a-
half for hours in excess of 40 per week. Stanley’s payroll deductions include withheld income tax of
20%, FICA tax, and a weekly deduction of $5 for a charitable contribution to United Way. Stanley
worked 58 hours during the week.
Requirements
1. Compute Stanley’s gross pay and net pay for the week. Assume earnings to date are $18,000.
2. Journalize Dairy Houses wages expense accrual for Stanley’s work. An explanation is not required.
3. Journalize the subsequent payment of wages to Stanley.
SOLUTION
Requirement 1
Straight-time pay for 40 hours ($12 × 40 hours)
$ 480.00
11-20
E11-18, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Wages Expense
804.00
Requirement 3
Date
Accounts and Explanation
Debit
Credit
E11-19 Recording employer payroll taxes and employee benefits
Learning Objective 2
1. Payroll Tax Expense $6,063.00
Ricardo’s Mexican Restaurant incurred salaries expense of $62,000 for 2018. The payroll expense
includes employer FICA tax, in addition to state unemployment tax and federal unemployment tax. Of
the total salaries, $22,000 is subject to unemployment tax. Also, the company provides the following
benefits for employees: health insurance (cost to the company, $3,000), life insurance (cost to the
company, $330), and retirement benefits (cost to the company, 10% of salaries expense).
Requirements
1. Journalize Ricardo’s expenses for employee benefits and for payroll taxes. Explanations are not
required.
2. What was Ricardo’s total expense for 2018 related to payroll?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Payroll Tax Expense
6,063.00
FICA—OASDI Taxes Payable (6.2% × $62,000)
3,844.00
Requirement 2
11-22
E11-20 Recording employee and employer payroll taxes
Learning Objective 2
2. Salaries & Wages Payable $15,923.20
County Company had the following partially completed payroll register:
11-23
Earnings
Withholdings
Net
Pay
Check
No.
Salaries
and Wages
Expense
Beginning
Cumulative
Earnings
Current
Period
Earnings
Ending
Cumulative
Earnings
OASDI
Medicare
Income
Tax
Health
Insurance
United
Way
Total
Withholdings
$ 77,000
$ 4,500
$ 900
$ 90
$ 15
801
112,000
7,200
1,200
144
35
802
48,000
3,300
600
66
0
803
61,000
3,300
850
66
20
804
0
4,500
1,100
90
0
805
$ 298,000
$ 22,800
$ 4,650
$ 456
$ 70
5. Journalize the payment for withholdings and employer payroll taxes.
Requirements
1. Complete the payroll register. Round to two decimals.
2. Journalize County Company’s salaries and wages expense accrual for the current pay period.
3. Journalize County Company’s expenses for employer payroll taxes for the current pay period.
4. Journalize the payment to employees.
SOLUTION
Requirement 1
Earnings
Withholdings
Beginning
Cumulative
Earnings
Current
Period
Earnings
Ending
Cumulative
Earnings
OASDI
Medicare
Income
Tax
Health
Insurance
United
Way
Total
Withholdings
Net Pay
Check
No.
Salaries and
Wages
Expense
$ 77,000.00
$ 4,500.00
$ 81,500.00
$ 279.00
$ 65.25
$ 900.00
$ 90.00
$ 15.00
$ 1,349.25
$ 3,150.75
801
$ 4,500.00
11-25
E11-20, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Salaries and Wages Expense
22,800.00
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Payroll Tax Expense
1,970.80
FICA—OASDI Taxes Payable *
1,370.20
E11-20, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Salaries and Wages Payable
15,923.20
Requirement 5
Date
Accounts and Explanation
Debit
Credit
Employee Income Taxes Payable
4,650.00
11-27
E11-21 Accounting for warranty expense and warranty payable
Learning Objective 3
1. Warranty Expense $10,170
The accounting records of Sculpted Ceramics included the following at January 1, 2018:
In the past, Sculpted’s warranty expense has been 9% of sales. During 2018, Sculpted made sales of
$113,000 and paid $7,000 to satisfy warranty claims.
Requirements
1. Journalize Sculpted’s warranty expense and warranty payments during 2018. Explanations are
not required.
2. What balance of Estimated Warranty Payable will Sculpted report on its balance sheet at
December 31, 2018?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Warranty Expense (9% × $113,000)
10,170
E11-22 Accounting for warranties, vacation, and bonuses
Learning Objective 3
Dec. 31 Employee Bonus Expense $1,515
McNight Industries completed the following transactions during 2018:
Nov. 1
Made sales of $52,000. McNight estimates that warranty expense is 6%
of sales. (Record only the warranty expense.)
20
Paid $1,600 to satisfy warranty claims.
Dec. 31
Estimated vacation benefits expense to be $6,000.
31
McNight expected to pay its employees a 3% bonus on net income after
deducting the bonus. Net income for the year is $52,000.
Journalize the transactions. Explanations are not required. Round to the nearest dollar.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Nov. 1
Warranty Expense (6% × $52,000)
3,120
Estimated Warranty Payable
3,120
11-29
E11-23 Accounting treatment for contingencies
Learning Objective 4
Analyze the following independent situations.
a. Weaver, Inc. is being sued by a former employee. Weaver believes that there is a remote chance that
the employee will win. The employee is suing Weaver for damages of $40,000.
b. Gulf Oil Refinery had a gas explosion on one of its oil rigs. Gulf believes it is likely that it will have
to pay environmental clean-up costs and damages in the future due to the gas explosion. Gulf cannot
estimate the amount of the damages.
c. Lawson Enterprises estimates that it will have to pay $75,000 in warranty repairs next year.
Determine how each contingency should be treated.
SOLUTION
Situation
Appropriate accounting treatment
E11-24 Computing times-interest-earned ratio
Learning Objective 5
1. Cash Ratio 118.80 times
The following financial information was obtained from the year ended 2018 income statements for
Cash Automotive and Pennington Automotive:
Cash
Pennington
Net income
$
26,070
$ 74,188
Income tax expense
9,270
27,080
Interest expense
300
2,900
Requirements
1. Compute the times-interest-earned ratio for each company. Round to two decimals.
2. Which company was better able to cover its interest expense?
SOLUTION
Requirement 1
Times-interest-earned ratio
Cash
Pennington
Net Income
$ 26,070
$ 74,188
11-31
Problems (Group A)
P11-25A Journalizing and posting liabilities
Learning Objectives 1, 2
1d. Rent Revenue $3,000
The general ledger of Seal-N-Ship at June 30, 2018, the end of the company’s fiscal year, includes
the following account balances before payroll and adjusting entries.
Accounts Payable
$
114,000
Interest Payable
0
Salaries Payable
0
Employee Income Taxes Payable
0
FICA—OASDI Taxes Payable
0
FICA—Medicare Taxes Payable
0
Federal Unemployment Taxes
Payable
0
State Unemployment Taxes
Payable
0
Unearned Rent Revenue
7,200
Long-term Notes Payable
210,000
The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:
a. The long-term debt is payable in annual installments of $42,000, with the next installment due on
July 31. On that date, Seal-N-Ship will also pay one year’s interest at 9%. Interest was paid on
July 31 of the preceding year. Make the adjusting entry to accrue interest expense at year-end.
b. Gross unpaid salaries for the last payroll of the fiscal year were $4,700. Assume that employee
income taxes withheld are $910 and that all earnings are subject to OASDI.
c. Record the associated employer taxes payable for the last payroll of the fiscal year, $4,700.
Assume that the earnings are not subject to unemployment compensation taxes
d. On February 1, the company collected one year’s rent of $7,200 in advance.
Requirements
1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened.
Identify each adjusting entry by letter. Round to the nearest dollar.
3. Prepare the current liabilities section of the balance sheet at June 30, 2018.
SOLUTION
Requirements 1 and 2
Date
Accounts and Explanation
Debit
Credit
2018
June 30
a.
Interest Expense
17,325
Interest Payable ($210,000 × 9% × 11/12)
17,325
P11-25A, cont.
Requirements 1 and 2, cont.
Accounts Payable
114,000 Beg. Bal.
114,000 End Bal.
Employee Income Taxes Payable
0 Beg. Bal.
910 b.
910 End Bal.
FICA—OASDI Taxes Payable
0 Beg. Bal.
291 b.
291 c.
582 End Bal.
P11-25A, cont.
Requirement 3
SEAL-N-SHIP
Balance Sheet (Partial)
June 30, 2018
Liabilities
Current Liabilities:
Accounts Payable
$ 114,000
P11-26A Computing and journalizing payroll amounts
Learning Objective 2
1. Net Pay $152,199
Logan White is general manager of Valuepoint Salons. During 2018, White worked for the company all
year at a $13,600 monthly salary. He also earned a year-end bonus equal to 15% of his annual salary.
White’s federal income tax withheld during 2018 was $1,360 per month, plus $4,876 on his bonus
check. State income tax withheld came to $150 per month, plus $60 on the bonus. FICA tax was
withheld on the annual earnings. White authorized the following payroll deductions: Charity Fund
contribution of 1% of total earnings and life insurance of $40 per month.
Valuepoint incurred payroll tax expense on White for FICA tax. The company also paid state
unemployment tax and federal unemployment tax.
Requirements
1. Compute White’s gross pay, payroll deductions, and net pay for the full year 2018. Round all
amounts to the nearest dollar.
2. Compute Valuepoint’s total 2018 payroll tax expense for White.
3. Make the journal entry to record Valuepoint’s expense for White’s total earnings for the year, his
payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit
liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Valuepoint’s payroll tax expense for White’s total
earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.
P11-26A, cont.
SOLUTION
Requirement 1
Logan White
Payroll for the year ended December 31, 2018
Calculation
Annual
Gross Pay:
Salary
$13,600 × 12
$ 163,200
Bonus
$163,200 × 15%
24,480
Total Gross Pay
$ 187,680
Requirement 2
Logan White
Employer Payroll Expense for the year ended December 31, 2018
Calculation
Annual
Total Gross Pay
$187,680
11-37
P11-26A, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Salaries Expense
163,200
Requirement 4
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Payroll Tax Expense
10,488
Requirement 5
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Employee Federal Income Taxes Payable
21,196
P11-27A Journalizing liability transactions
Learning Objectives 1, 3
Jan. 29 Cash $16,695
The following transactions of Plymouth Pharmacies occurred during 2017 and 2018:
2017
Jan. 9
Purchased computer equipment at a cost of $12,000, signing a six-month,
9% note payable for that amount.
29
Recorded the week’s sales of $63,000, three-fourths on credit and one-
fourth for cash. Sales amounts are subject to a 6% state sales tax. Ignore
cost of goods sold.
Feb. 5
Sent the last week’s sales tax to the state.
Jul. 9
Paid the six-month, 9% note, plus interest, at maturity.
Aug.
31
Purchased merchandise inventory for $9,000, signing a six-month, 10%
note payable. The company uses the perpetual inventory system.
Dec.
31
Accrued warranty expense, which is estimated at 4% of sales of $609,000.
31
Accrued interest on all outstanding notes payable.
2018
Feb. 28
Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Plymouth’s general journal. Explanations are not required. Round to
the nearest dollar.
11-39
P11-27A, cont.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2017
Jan. 9
Computer Equipment
12,000
Notes Payable
12,000
P11-28A Journalizing liability transactions
Learning Objectives 3, 4
1. June 30 Warranty Expense $7,000
The following transactions of Jasmine Reef occurred during 2018:
Apr. 30
Reef is party to a patent infringement lawsuit of $190,000. Reef’s attorney
is certain it is remote that Reef will lose this lawsuit.
Jun. 30
Estimated warranty expense at 2% of sales of $350,000.
Jul. 28
Warranty claims paid in the amount of $5,500.
Sep. 30
Reef is party to a lawsuit for copyright violation of $80,000. Reef’s attorney
advises that it is probable Reef will lose this lawsuit. The attorney estimates
the loss at $80,000.
Dec. 31
Reef estimated warranty expense on sales for the second half of the year of
$510,000 at 2%.
Requirements
1. Journalize required transactions, if any, in Reef’s general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
11-41
P11-28A, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Apr. 30
No entry required
Requirement 2
Estimated Warranty Payable
11-42
P11-29A Computing times-interest-earned ratio
Learning Objective 5
1. Net Income $4,305
The income statement for California Communications follows. Assume California Communications
signed a 3-month, 9%, $3,000 note on June 1, 2018, and that this was the only note payable for the
company.
Requirements
1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to
the nearest dollar.
2. Compute the times-interest-earned ratio for the company. Round to two decimals.
P11-29A, cont.
SOLUTION
Requirement 1
Interest Expense = $3,000 × 9% × 2/12 = $45
Requirement 2
Times-interest-earned ratio
Net Income
$ 4,305
Problems (Group B)
P11-30B Journalizing and posting liabilities
Learning Objectives 1, 2
1d. Rent Revenue $2,250
The general ledger of Prompt Ship at June 30, 2018, the end of the company’s fiscal year, includes the
following account balances before payroll and adjusting entries.
Accounts Payable
$ 118,000
Interest Payable
0
Salaries Payable
0
Employee Income Taxes Payable
0
FICA—OASDI Taxes Payable
0
FICA—Medicare Taxes Payable
0
Federal Unemployment Taxes Payable
0
State Unemployment Taxes Payable
0
Unearned Rent Revenue
5,400
Long-term Notes Payable
198,000
The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:
a. The long-term debt is payable in annual installments of $39,600, with the next installment due on
July 31. On that date, Prompt Ship will also pay one year’s interest at 10%. Interest was paid on
July 31 of the preceding year. Make the adjusting entry to accrue interest expense at year-end.
b. Gross unpaid salaries for the last payroll of the fiscal year were $4,800. Assume that employee
income taxes withheld are $920 and that all earnings are subject to OASDI.
c. Record the associated employer taxes payable for the last payroll of the fiscal year, $4,800.
Assume that the earnings are not subject to unemployment compensation taxes.
d. On February 1, the company collected one year’s rent of $5,400 in advance.
Requirements
1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened.
Identify each adjusting entry by letter. Round to the nearest dollar.
3. Prepare the current liabilities section of the balance sheet at June 30, 2018.
11-45
P11-30B, cont.
SOLUTION
Requirements 1 and 2
Date
Accounts and Explanation
Debit
Credit
2018
Jun. 30
a.
Interest Expense
18,150
Interest Payable ($198,000 × 10% × 11/12)
18,150
Accounts Payable
118,000 Beg. Bal.
118,000 End Bal.
P11-30B, cont.
Requirements 1 and 2, cont.
Employee Income Taxes Payable
0 Beg. Bal.
920 b.
920 End Bal.
P11-30B, cont.
Requirement 3
PROMPT SHIP
Balance Sheet (Partial)
June 30, 2018
Liabilities
Current Liabilities:
Accounts Payable
$ 118,000
P11-31B Computing and journalizing payroll amounts
Learning Objective 2
1. Net Pay $128,360
Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company
all year at a $13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.
Wallace’s federal income tax withheld during 2018 was $2,010 per month, plus $1,608 on his bonus
check. State income tax withheld came to $110 per month, plus $80 on the bonus. FICA tax was
withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund
contribution of 2% of total earnings and life insurance of $15 per month.
Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state
unemployment tax and federal unemployment tax.
Requirements
1. Compute Wallace’s gross pay, payroll deductions, and net pay for the full year 2018. Round all
amounts to the nearest dollar.
2. Compute Moonwalk’s total 2018 payroll tax expense for Wallace.
3. Make the journal entry to record Moonwalk’s expense for Wallace’s total earnings for the year, his
payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit
liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Moonwalk’s payroll tax expense for Wallace’s total
earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.
P11-31B, cont.
SOLUTION
Requirement 1
Liam Wallace
Payroll for the year ended December 31, 2018
Calculation
Annual
Gross Pay:
Requirement 2
Liam Wallace
Employer Payroll Expense for the year ended December 31, 2018
Calculation
Annual
Gross Pay
$168,840
11-49
P11-31B, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Salaries Expense
160,800
Requirement 4
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 5
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Employee Federal Income Taxes Payable
25,728
Employee State Income Taxes Payable
1,400
P11-32B Journalizing liability transactions
Learning Objectives 1, 3
Jan. 29 Cash $18,020
The following transactions of Philadelphia Pharmacies occurred during 2017 and 2018:
2017
Jan. 9
Purchased computer equipment at a cost of $7,000, signing a six-month, 8%
note payable for that amount.
29
Recorded the week’s sales of $68,000, three-fourths on credit and one-
fourth for cash. Sales amounts are subject to a 6% state sales tax. Ignore
cost of goods sold.
Feb. 5
Sent the last week’s sales tax to the state.
Jul. 9
Paid the six-month, 8% note, plus interest, at maturity.
Aug.
31
Purchased merchandise inventory for $3,000, signing a six-month, 10%
note payable. The company uses a perpetual inventory system.
Dec.
31
Accrued warranty expense, which is estimated at 2% of sales of $609,000.
31
Accrued interest on all outstanding notes payable.
2018
Feb. 28
Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Philadelphia’s general journal. Explanations are not required.
11-51
P11-32B, cont.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2017
Jan. 9
Computer Equipment
7,000
Notes Payable
7,000
11-52
P11-33B Journalizing liability transactions
Learning Objectives 3, 4
1. June 30 Warranty Expense $11,700
The following transactions of Belkin Howe occurred during 2018:
Apr. 30
Howe is party to a patent infringement lawsuit of $230,000. Howe’s
attorney is certain it is remote that Howe will lose this lawsuit.
Jun. 30
Estimated warranty expense at 3% of sales of $390,000.
Jul. 28
Warranty claims paid in the amount of $6,300.
Sep. 30
Howe is party to a lawsuit for copyright violation of $90,000. Howe’s
attorney advises that it is probable Howe will lose this lawsuit. The
attorney estimates the loss at $90,000.
Dec. 31
Howe estimated warranty expense on sales for the second half of the
year of $520,000 at 3%.
Requirements
1. Journalize required transactions, if any, in Howe’s general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
11-53
P11-33B, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Apr. 30
No entry required
Requirement 2
11-54
P11-34B Computing times-interest-earned ratio
Learning Objective 5
1. Net Income $9,620
The income statement for Vermont Communications follows. Assume Vermont Communications signed
a 3-month, 3%, $6,000 note on June 1, 2018, and that this was the only note payable for the company.
Requirements
1. Fill in the missing information for Vermont’s year ended July 31, 2018, income statement. Round to
the nearest dollar.
P11-34B, cont.
SOLUTION
Requirement 1
Interest Expense = $6,000 × 3% × 2/12 = $30
VERMONT COMMUNICATIONS
Income Statement
Year Ended July 31, 2018
Net Sales Revenue
$ 26,500
Requirement 2
Times-interest-earned ratio
Net Income
$ 9,620
11-56
Excel Skill Problem
P11-35 Using Excel for Payroll
Ankel Footwear employees three salespeople, and pays time-and-a-half for overtime. Weekly paychecks
are distributed on the Tuesday following the last day of the week (Saturday). Ankel withholds income
tax (20%), FICA—OASDI (6.2%), and FICA—Medicare (1.45%). Ankel also pays payroll taxes for
FICA—OASDI (6.2%), FICA—Medicare (1.45%), and state and federal unemployment (5.4% and
0.6% respectively). The payroll data for the three salespeople for the week ended March 31 follows:
Name
Straight
Time
Rate
Hours
Worke
d
Beginning
Cumulative
Earnings
Jimmy
Chew
$ 15
46
$ 420
Manny
Blanik
17
50
540
Alexa King
22
38
480
Requirements
1. Complete the Payroll Register for the three employees for the week ended March 31, 2018.
2. Complete the Payroll Tax Register.
3. Compute the total payroll expense for the week ended March 31.
4. Record the payroll entries Ankel makes for each of the following:
a. Wage expense related to the three employees on Saturday, March 31.
b. Employer payroll taxes related to the three employees.
c. Payment of all payroll taxes (employee and employer related) on April 3.
d. Payment of wages on Tuesday, April 3.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
11-57
Continuing Problem
P11-36 Accounting for liabilities of a known amount
This problem continues the Canyon Canoe Company situation from Chapter 10. Amber and Zack
Wilson are continuing their analysis of the company’s position and believe the company will need to
borrow $15,000 in order to expand operations. They consult Rivers Nation Bank and secure a 6%, one-
year note on September 1, 2019, with interest due at maturity. Additionally, the company hires an
employee, John Vance, on September 1. John will receive a salary of $3,000 per month. Payroll
deductions include federal income tax at 25%, OASDI at 6.2%, Medicare at 1.45%, and monthly health
insurance premium of $250. The company will incur matching FICA taxes, FUTA tax at 0.6%, and
SUTA tax at 5.4%. Round calculations to two decimals. Omit explanations on journal entries.
Requirements
1. Record the issuance of the $15,000 note payable on September 1, 2019.
2. Record the employee payroll and employer payroll tax entries on September 30, 2019.
3. Record all payments related to September’s payroll. Payments are made on October 15, 2019.
4. Record the entry to accrue interest due on the note at December 31, 2019.
5. Record the entry Canyon Canoe Company would make to record the payment to the bank on
September 1, 2020.
11-58
SOLUTION
Requirements 1-5
Date
Accounts and Explanation
Debit
Credit
2019
Sep. 1
Cash
15,000.00
Notes Payable
15,000.00
11-59
Critical Thinking
Tying It All Together Case 11-1
UnitedHealth Group Incorporated is a diversified health and well-being company dedicated to
helping people live healthier lives. The company operates under two distinct platforms: health benefits
(UnitedHealthcare) and health services (Optum).
Requirements
1. What are contingent liabilities?
2. Review Note 13 (Commitments and Contingencies), specifically the section labeled Legal Matters.
Does UnitedHealth Group Incorporated report any contingencies? If so, provide a summary.
3. How should a company handle contingent liabilities that are reasonably possible or probable but
cannot be estimated?
4. Review Note 13 (Commitments and Contingencies), specifically the section labeled California
Claims Processing Matter. How did UnitedHealth Group Incorporated handle the recording of this
contingent liability?
SOLUTION
Requirement 1
Requirement 2
In the notes to the financial statements, UnitedHealth Group Incorporated states the company is
Requirement 3
Contingent liabilities that are either reasonably possible or probable but cannot be estimated should be
Requirement 4
UnitedHealth Group Incorporated states that the company cannot reasonably estimate the amount of loss
11-60
Decision Case 11-1
Golden Bear Construction operates throughout California. The owner, Gaylan Beavers, employs 15
work crews. Construction supervisors report directly to Beavers, and the supervisors are trusted
employees. The home office staff consists of an accountant and an office manager.
Because employee turnover is high in the construction industry, supervisors hire and fire their own
crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee
W-4 forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their
crews, and the accountant prepares the payroll. At noon on Friday, the supervisors come to the office to
get paychecks for distribution to the workers at 5 p.m.
The company accountant prepares the payroll, including the paychecks. Beavers signs all
paychecks. To verify that each construction worker is a bona fide employee, the accountant matches the
employee’s endorsement signature on the back of the canceled paycheck with the signature on that
employee’s W-4 form.
Requirements
1. Identify one way that a supervisor can defraud Golden Bear Construction under the present system.
2. Discuss a control feature that the company can use to safeguard against the fraud you identified in
Requirement 1.
SOLUTION
Requirement 1
A supervisor can enter a fictitious employee on a weekly time sheet, submit the time sheet to the
Requirement 2
To safeguard against the company fraud identified in Requirement 1, Beavers (or a home office
11-61
Decision Case 11-2
Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell-Soft has strong
incentives not to disclose these contingent liabilities. However, GAAP requires that companies report
their contingent liabilities.
Requirements
1. Why would a company prefer not to disclose its contingent liabilities?
2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent
liabilities.
3. What ethical tightrope must companies walk when they report contingent liabilities?
SOLUTION
Requirement 1
A company would prefer not to disclose its contingent liabilities because they cast a shadow on the
Requirement 2
A contingent liability creates risk for a company. If the contingent liability is not reported, the bank may
Requirement 3
Reporting of contingent liabilities often depends on subjective judgment about whether an outcome is
11-62
Ethical Issue 11-1
Many small businesses have to squeeze down costs any way they can just to survive. One way many
businesses do this is by hiring workers as “independent contractors” rather than as regular employees.
Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and
unemployment insurance payments for independent contractors. Similarly, it does not have to withhold
federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20 factor
test” that determines whether a worker should be considered an employee or a contractor, but many
businesses ignore those rules or interpret them loosely in their favor. When workers are treated as
independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not
have any income taxes withheld, and they find themselves subject to “self-employment” taxes, by which
they bear the brunt of both the employee’s and the employer’s shares of FICA taxes.
Requirements
1. When a business abuses this issue, how is the independent contractor hurt?
2. If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there
an ethical issue involved? Who is hurt?
SOLUTION
Requirement 1
The contractor must pay “self-employment tax” which represents both the employer’s and the
Requirement 2
Businesses may take aggressive positions on tax issues, and those positions may be tested in court. It is
11-63
Financial Statement Case 11-1
Details about a company’s liabilities appear in a number of places in the annual report. Visit
1. Give the breakdown of Target’s current liabilities at January 30, 2016.
2. Calculate Target’s times-interest-earned ratio for the year ending January 30, 2016. How does
Target’s ratio compare to Kohl’s Corporation’s ratio?
SOLUTION
Requirement 1
TARGET CORPORATION
Balance Sheet (partial)
January 30, 2016 (In millions)
Requirement 2
Times-Interest-Earned Ratio
(In millions)
January
30, 2016
Communication Activity 11-1
In 150 words or fewer, explain how contingent liabilities are accounted for.
SOLUTION
How businesses record or don’t record contingent liabilities is based on one of three likelihoods of the
