Exercise 8-13
Requirement 1
The contingent liability is probable and reasonably estimable, so it must be recorded
as follows:
Loss 1,300,000
Requirement 2
Pacific Cruise Lines should record a loss and a liability for the minimum amount ($1.1
Loss 1,100,000
Contingent Liability 1,100,000
(Record the contingent liability)
Requirement 3
If the likelihood of loss is reasonably possible rather than probable, we record no entry
Requirement 4
If the likelihood of loss is remote, disclosure is usually not required.
8-22 Financial Accounting, 5e
Exercise 8-14
Requirement 1
Yes, it’s probable that costs for warranties will be incurred and based on previous
experience the amount is reasonably estimable.
Requirement 2
December 31
Requirement 3
January 31
Requirement 4
Warranty Liability
Exercise 8-15
Requirement 1
December 31, 2021
Requirement 2
Summary entry in 2022
Requirement 3
December 31, 2022
Warranty Expense 29,000
Requirement 4
Warranty Liability
0
32,000 Adjusting entry
Exercise 8-16
Requirement 1
Yes, a contingent liability is an existing, uncertain situation that might result in a loss.
Requirement 2
Dow would record a contingency if the loss is probable and is reasonably estimable.
Requirement 3
Loss 381,000,000
Exercise 8-17
Requirement 1
Current Assets
÷
Current Liabilities
=
Current Ratio
$875
÷
$2,638
=
0.33
÷
Current Liabilities
=
Acid-Test Ratio
=
0.24
Requirement 2
Queen’s Line has a lower current ratio and a lower acid-test ratio than either United
8-26 Financial Accounting, 5e
Exercise 8-18
Requirement 1 Transactions during January, 2021
January 2
Debit
Credit
Cash
8,000
Deferred Revenue
8,000
(Sell gift cards for cash)
January 6
Debit
Credit
Inventory
Accounts Payable
147,000
January 15
Debit
Credit
Sales Revenue
135,000
(Sell inventory on account)
Cost of Goods Sold
73,800
Inventory
(Record cost of inventory sold)
January 23
Debit
Credit
Cash
125,400
Accounts Receivable
125,400
(Receive cash on account)
January 25
Debit
Credit
Accounts Payable
90,000
Cash
90,000
(Pay cash on account)
January 28
Debit
Credit
Allowance for Uncollectible Accounts
4,800
Accounts Receivable
4,800
(Write off uncollectible accounts)
January 30
Debit
Credit
Cash
11,000
Accounts Receivable
Sales Revenue
143,000
(Sell inventory for cash and on account)
Inventory
79,500
January 31
Debit
Credit
Salaries Expense
52,000
Cash
52,000
(Pay monthly salaries)
Exercise 8-18 (continued)
Requirement 2 Adjusting entries at end of January, 2021
(a) January 31
Debit
Credit
Depreciation Expense
500
Accumulated Depreciation
500
(Record depreciation for January)
($500 = [$15,000−$3,000] / 24 months)
(b) January 31
Debit
Credit
Bad Debt Expense
Allowance for Uncollectible Accounts
(c) January 31
Debit
Credit
Interest Expense
250
Interest Payable
250
(Adjust interest expense)
($250 = $50,000 × 6% × 1/12)
(d) January 31
Debit
Credit
Income Tax Expense
(Adjust income taxes)
(e) January 31
Debit
Credit
Deferred Revenue
Sales Revenue
(Adjust revenue for gift cards redeemed)
Exercise 8-18 (continued)
Requirement 3
ACME Fireworks
Adjusted Trial Balance
January 31, 2021
Accounts
Debit
Credit
Cash
$ 27,500
Accounts Receivable
183,000
Inventory
13,700
Land
46,000
Equipment
15,000
Allowance for Uncollectible Accounts
$ 11,900
Accumulated Depreciation
Accounts Payable
85,500
Deferred Revenue (gift cards liability)
Interest Payable
Income Tax Payable
13,000
Notes Payable
50,000
Common Stock
35,000
Retained Earnings
33,100
Sales Revenue
281,000
Cost of Goods Sold
153,300
Salaries Expense
52,000
Bad Debt Expense
12,500
Depreciation Expense
Interest Expense
Income Tax Expense
13,000
Totals
$516,750
$516,750
Exercise 8-18 (continued)
Requirement 3 (concluded)
Accounts
Ending
Balance
Beginning balance in bold, entries during January in blue,
and adjusting entries in red.
Cash
$ 27,500
=
25,100+8,000+125,400−90,000+11,000−52,000
Accounts Receivable
183,000
=
46,200+135,000−125,400−4,800+132,000
Inventory
13,700
=
20,000+147,000−73,800−79,500
Land
46,000
=
46,000
Equipment
15,000
=
15,000
Allow for Unc. Accounts
11,900
=
4,200−4,800+12,500
Accumulated Depreciation
=
1,500+500
Accounts Payable
85,500
=
28,500+147,000−90,000
Deferred Revenue
=
Interest Payable
=
Income Tax Payable
13,000
=
Notes Payable
50,000
=
50,000
Common Stock
35,000
=
35,000
Retained Earnings
33,100
=
33,100
Sales Revenue
281,000
=
Cost of Goods Sold
153,300
=
Salaries Expense
52,000
=
Bad Debt Expense
12,500
=
Depreciation Expense
=
Interest Expense
=
Income Tax Expense
13,000
=
8-30 Financial Accounting, 5e
Exercise 8-18 (continued)
Requirement 4
ACME Fireworks
Multiple-Step Income Statement
For the year ended January 31, 2021
Sales revenue
$281,000
Cost of goods sold
153,300
Gross profit
$127,700
Bad debt expense
Depreciation expense
Total operating expenses
Interest expense
Income tax expense
$ 49,450
Requirement 5
ACME Fireworks
Classified Balance Sheet
January 31, 2021
Assets
Liabilities
Accounts payable
$ 85,500
Cash
$ 27,500
Deferred revenue
5,000
Accounts receivable
183,000
Interest payable
250
Less: Allowance
(11,900)
171,100
Income tax payable
13,000
Inventory
13,700
212,300
Notes payable
50,000
46,000
Equipment
15,000
Common stock
35,000
Less: Accumulated Depreciation
(2,000)
Retained earnings
82,550
*
Total assets
$271,300
$271,300
Exercise 8-18 (concluded)
Requirement 6
January 31, 2021
Debit
Credit
Sales Revenue
281,000
Retained Earnings
281,000
Retained Earnings
231,550
Cost of Goods Sold
153,300
Salaries Expense
Bad Debt Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Requirement 7
(a) The current ratio is:
(b) The acid-test ratio is:
(c) The current ratio, assuming the notes payable are current liabilities, is:
Assuming the notes payable were due on April 1, 2021, they would be included in total current
PROBLEMS: SET A
Problem 8-1A
List A
List B
_i__
1. An IOU promising to repay the amount
borrowed plus interest.
a. Recording of a
contingent liability
_d__
_a__
4. Payment amount is probable and is reasonably
d. Disclosure of a
_b__
5. A liability that requires the sacrifice of
e. Interest on debt
_j__
6. Long-term debt maturing within one year.
f. Payroll taxes
_f__
7. FICA and FUTA.
g. Line of credit
_g__
8. Informal agreement that permits a company to
borrow up to a prearranged limit
h. Capital structure
_c__
9. Classifying liabilities as either current or long-
i. Notes payable
_e__
10. Amount of note payable x annual interest rate
x fraction of the year.
j. Current portion of
long-term debt
2. Payment amount is reasonably possible and is
b. Deferred revenue
8-34 Financial Accounting, 5e
Problem 8-2A
Requirement 1
(a). October 1, 2021
41,000,000
41,000,000
Requirement 2
(a). December 31, 2021
Interest Expense ($41 million × 9% × 3/12)
922,500
Interest Payable
922,500
(Interest expense incurred, but not paid)
(b). December 31, 2021
922,500
(Interest revenue earned, but not received)
Requirement 3
(a) September 30, 2022
Notes Payable
41,000,000
Interest Payable ($41 million × 9% × 3/12)
(Payment of notes payable and interest)
(b). September 30, 2022
Cash
44,690,000
8-36 Financial Accounting, 5e
Problem 8-3A
Requirement 1
January 31
Salaries Expense
600,000
Requirement 2
January 31
Salaries Expense (fringe benefits)
34,800
Requirement 3
January 31
Payroll Tax Expense (total)
83,100
Problem 8-4A
Requirement 1
February 14
Salaries Expense
1,500,000
Requirement 2
February 14
Salaries Expense (fringe benefits)
100,500
Requirement 3
February 14
Payroll Tax Expense (total)
207,750
Problem 8-5A
Requirement 1
$102,600,000
Requirement 2
Cash
102,600,000
Deferred Revenue
Requirement 3
Deferred Revenue
17,100,000
Problem 8-6A
Requirement 1
Cash
3,500
Deferred Revenue
3,500
(Sale of gift cards)
Requirement 2
Deferred Revenue
728
Sales Taxes Payable
Deferred Revenue
Balance
8-40 Financial Accounting, 5e
Problem 8-7A
Requirement 1
The likelihood of loss is reasonably possible rather than probable, so no journal entry
Requirement 2
Environmental Printing has a contingent gain that is probable, and is reasonably
Requirement 3
Environmental Printing should record a loss and a liability for the minimum amount