Question & Answer

Sycamore Candy Company offers an MP3 download (seven-single medley) as a premium for every five candy bar wrappers presented by customers together with $2.50. The candy bars are sold by the company to distributors for 30 cents each.

The purchase price of each download code to the company is $2.25. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2014 and 2015 are as follows. (All purchases and sales are for cash.) 2014 2015

MP3 codes purchased 250,000 330,000

Candy bars sold 2,895,400 2,743,600

Wrappers redeemed 1,200,000 1,500,000

2014 wrappers expected to be redeemed in 2015 290,000

2015 wrappers expected to be redeemed in 2016 350,000

Instructions

(a) Prepare the journal entries that should be made in 2014 and 2015 to record the transactions related to the premium plan of the Sycamore Candy Company.

(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2014 and 2015.

To stimulate the sales of its Alladin breakfast cereal, Loptien Company places 1 coupon in each box. Five coupons are redeemable for a premium consisting of a children’s hand puppet. In 2015, the company purchases 40,000 puppets at $1.50 each and sells 480,000 boxes of Alladin at $3.75 a box. From its experience with other similar premium offers, the company estimates that 40% of the coupons issued will be mailed back for redemption. During 2015, 115,000 coupons are presented for redemption.

Instructions

Prepare the journal entries that should be recorded in 2015 relative to the premium plan.

Alvarado Company sells a machine for $7,400 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2014 (warranty expense is incurred half in 2014 and half in 2015). As a result of product testing, the company estimates that the warranty cost is $390 per machine ($170 parts and $220 labor).

Instructions

Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

(a) Under application of the expense warranty accrual method for:

(1) Sale of machinery in 2014.

(2) Warranty costs incurred in 2014.

(3) Warranty expense charged against 2014 revenues.

(4) Warranty costs incurred in 2015.

(b) Under application of the cash-basis method for:

(1) Sale of machinery in 2014.

(2) Warranty costs incurred in 2014.

(3) Warranty expense charged against 2014 revenues.

(4) Warranty costs incurred in 2015.

(c) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2014, under each method?

(d) Which method best reflects the income in 2014 and 2015 of Alvarado Company? Why?

Dos Passos Company sells televisions at an average price of $900 and also offers to each customer a separate 3-year warranty contract for $90 that requires the company to perform periodic services and to replace defective parts. During 2014, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warranty costs as $20 for parts and $40 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2014, and straight-line recognition of warranty revenues occurs.

Instructions

(a) Record any necessary journal entries in 2014.

(b) What liability relative to these transactions would appear on the December 31, 2014, balance sheet and how would it be classified?

In 2015, Dos Passos Company incurred actual costs relative to 2014 television warranty sales of $2,000 for parts and $4,000 for labor.

(c) Record any necessary journal entries in 2015 relative to 2014 television warranties.

(d) What amounts relative to the 2014 television warranties would appear on the December 31, 2015, balance sheet and how would they be classified?

Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2014, the corporation sells for cash 400 computers at a unit price of $2,500. On the basis of past experience, the 2-year warranty costs are estimated to be $155 for parts and $185 for labor per unit.

(For simplicity, assume that all sales occurred on December 31, 2014.) The warranty is not sold separately from the computer.

Instructions

(a) Record any necessary journal entries in 2014, applying the cash-basis method.

(b) Record any necessary journal entries in 2014, applying the expense warranty accrual method.

(c) What liability relative to these transactions would appear on the December 31, 2014, balance sheet and how would it be classified if the cash-basis method is applied?

(d) What liability relative to these transactions would appear on the December 31, 2014, balance sheet and how would it be classified if the expense warranty accrual method is applied?

In 2015, the actual warranty costs to Brooks Corporation were $21,400 for parts and $39,900 for labor.

(e) Record any necessary journal entries in 2015, applying the cash-basis method.

(f) Record any necessary journal entries in 2015, applying the expense warranty accrual method.

Below is a payroll sheet for Otis Import Company for the month of September

2014. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is $7,000. Assume a 10% federal income tax rate for all employees and a 7.65% FICA tax on employee and employer on a maximum of $113,700. In addition, 1.45% is charged both employer and employee for an employee’s wages in excess of $113,700 per employee.

Income

Unemployment Tax

Earnings September Tax

Name to Aug. 31 Earnings Withholding FICA State Federal

B.D. Williams $ 6,800 $ 800

D. Raye 6,500 700

K. Baker 7,600 1,100

F. Lopez 13,600 1,900

A. Daniels 107,000 13,000

B. Kingston 112,000 16,000

Instructions

(a) Complete the payroll sheet and make the necessary entry to record the payment of the payroll.

(b) Make the entry to record the payroll tax expenses of Otis Import Company.

(c) Make the entry to record the payment of the payroll liabilities created. Assume that the company pays all payroll liabilities at the end of each month.

Cedarville Company pays its office employee payroll weekly. Below is a partial list of employees and their payroll data for August. Because August is their vacation period, vacation pay is also listed.

Earnings to Weekly Vacation Pay to Be

Employee July 31 Pay Received in August

Mark Hamill $4,200 $200 —

Karen Robbins 3,500 150 $300

Brent Kirk 2,700 110 220

Alec Guinness 7,400 250 —

Ken Sprouse 8,000 330 660

Assume that the federal income tax withheld is 10% of wages. Union dues withheld are 2% of wages. Vacations are taken the second and third weeks of August by Robbins, Kirk, and Sprouse. The state unemployment tax rate is 2.5% and the federal is 0.8%, both on a $7,000 maximum. The FICA rate is 7.65% on employee and employer on a maximum of $113,700 per employee. In addition, a 1.45% rate is charged both employer and employee for an employee’s wages in excess of $113,700.

Instructions

Make the journal entries necessary for each of the four August payrolls. The entries for the payroll and for the company’s liability are made separately. Also make the entry to record the monthly payment of accrued payroll liabilities.

Listed below are selected transactions of Schultz Department Store for the current year ending December 31.

1. On December 5, the store received $500 from the Selig Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15.

2. During December, cash sales totaled $798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month.

3. On December 10, the store purchased for cash three delivery trucks for $120,000. The trucks were purchased in a state that applies a 5% sales tax.

4. The store determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Schultz estimates the fair value of the obligation at December 31 is $84,000.

Instructions

Prepare all the journal entries necessary to record the transactions noted above as they occurred and any adjusting journal entries relative to the transactions that would be required to present fair financial statements at December 31. Date each entry. For simplicity, assume that adjusting entries are recorded only once a year on December 31.

Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system.

1. On February 2, the corporation purchased goods from Martin Company for $70,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.

2. On April 1, the corporation bought a truck for $50,000 from General Motors Company, paying

$4,000 in cash and signing a one-year, 12% note for the balance of the purchase price.

3. On May 1, the corporation borrowed $83,000 from Chicago National Bank by signing a $92,000 zero-interest-bearing note due one year from May 1.

4. On August 1, the board of directors declared a $300,000 cash dividend that was payable on September 10 to stockholders of record on August 31.

Instructions

(a) Make all the journal entries necessary to record the transactions above using appropriate dates.

(b) Edwardson Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Presented below is information related to Carver Inc.

Instructions

(a) Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.

(1) Current ratio.

(2) Inventory turnover.

(3) Accounts receivable turnover.

(4) Earnings per share.

(5) Profit margin on sales.

(6) Return on assets on December 31, 2014.

(b) Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2014.

(1) Write off an uncollectible account receivable, $2,200.

(2) Purchase additional capital stock for cash.

(3) Pay $40,000 on notes payable (short-term).

(4) Collect $23,000 on accounts receivable.

(5) Buy equipment on account.

(6) Give an existing creditor a short-term note in settlement of account.

Prior Company’s condensed financial statements provide the following information.

Instructions

(a) Determine the following for 2014.

(1) Current ratio at December 31.

(2) Acid-test ratio at December 31.

(3) Accounts receivable turnover.

(4) Inventory turnover.

(5) Return on assets.

(6) Profit margin on sales.

(b) Prepare a brief evaluation of the financial condition of Prior Company and of the adequacy of its profits.

Sprague Company has been operating for several years, and on December 31, 2014, presented the following balance sheet.

The net income for 2014 was $25,000. Assume that total assets are the same in 2013 and 2014.

Instructions

Compute each of the following ratios. For each of the four, indicate the manner in which it is computed and its significance as a tool in the analysis of the financial soundness of the company.

(a) Current ratio. (c) Debt to assets.

(b) Acid-test ratio. (d) Return on assets.

Presented below is a list of possible transactions.

1. Purchased inventory for $80,000 on account (assume perpetual system is used).

2. Issued an $80,000 note payable in payment on account (see item 1 above).

3. Recorded accrued interest on the note from item 2 above.

4. Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note.

5. Recognized 4 months’ interest expense on the note from item 4 above.

6. Recorded cash sales of $75,260, which includes 6% sales tax.

7. Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld.

8. Recorded employer’s payroll taxes.

9. Accrued accumulated vacation pay.

10. Recorded an asset retirement obligation.

11. Recorded bonuses due to employees.

12. Recorded a contingent loss on a lawsuit that the company will probably lose.

13. Accrued warranty expense (assume expense warranty approach).

14. Paid warranty costs that were accrued in item 13 above.

15. Recorded sales of product and related warranties (assume sales warranty approach).

16. Paid warranty costs under contracts from item 15 above.

17. Recognized warranty revenue (see item 15 above).

18. Recorded estimated liability for premium claims outstanding.

Instructions

Set up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated

Presented below and on page 740 are three independent situations.

1. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairston’s past experience indicates that only 80% of thestamps sold to licensees will be redeemed. Hairston’s liability for stamp redemptions was $13,000,000 at December 31, 2013. Additional information for 2014 is as follows.

Stamp service revenue from stamps sold to licensees $9,500,000

Cost of redemptions (stamps sold prior to 1/1/14) 6,000,000

If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,200,000. What amount should Hairston report as a liability for stamp redemptions at

December 31, 2014?

2. In packages of its products, Burnitz Inc. includes coupons that may be presented at retail stores to obtain discounts on other Burnitz products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Burnitz honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Burnitz estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Burnitz during 2014 is as follows.

Consumer expiration date 12/31/14

Total face amount of coupons issued $800,000

Total payments to retailers as of 12/31/14 330,000

What amount should Burnitz report as a liability for unredeemed coupons at December 31, 2014?

3. Roland Company sold 700,000 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.00, entitles the customer to a baking pan. Roland pays $6.00 per pan and $0.50 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?

Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $600,000. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $75,000 to dismantle the depot and remove the tanks at the end of the depot’s useful life.

Instructions

(a) Prepare the journal entries to record the depot and the asset retirement obligation for the depot on

January 1, 2014. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2014, is $41,879.

(b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2014. Oil Products uses straight-line depreciation; the estimated salvage value for the depot is zero.

(c) On December 31, 2023, Oil Products pays a demolition firm to dismantle the depot and remove the tanks at a price of $80,000. Prepare the journal entry for the settlement of the asset retirement obligation.

Presented below are three independent situations. Answer the question at the end of each situation.

1. During 2014, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa’s attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and $1,400,000. After the 2014 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2014?

2. On October 1, 2014, Alan Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson’s management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. Jackson’s insurance policy of $9,000,000 has a deductible clause of $500,000.

How should Alan Jackson Chemical report this information in its financial statements at December 31, 2014?

3. Melissa Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the financial statements of Etheridge Inc.?

Question:

No Doubt Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2014, No Doubt Company purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at $3.30 per box; 44,000 coupons were presented for redemption in 2014. It is estimated that 60% of the coupons will eventually be presented for redemption.

Instructions

Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in

2014.

Sheryl Crow Equipment Company sold 500 Rollomatics during 2014 at $6,000 each.

During 2014, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.

Instructions

(a) Prepare 2014 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years.

(b) Prepare 2014 entries for Crow assuming that the warranties are not an integral part of the sale.

Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues to be recognized on the basis of costs incurred and estimated costs.

Soundgarden Company sold 200 color laser copiers in 2014 for $4,000 apiece, together with a one-year warranty. Maintenance on each copier during the warranty period averages $330.

Instructions

(a) Prepare entries to record the sale of the copiers and the related warranty costs, assuming that the accrual method is used. Actual warranty costs incurred in 2014 were $17,000.

(b) On the basis of the data above, prepare the appropriate entries, assuming that the cash-basis method is used.

Green Day Hardware Company’s payroll for November 2014 is summarized below.

Amount Subject to Payroll Taxes

Unemployment Tax

Payroll Wages Due FICA Federal State

Factory $120,000 $120,000 $40,000 $40,000

Sales 32,000 32,000 4,000 4,000

Administrative 36,000 36,000 — —

Total $188,000 $188,000 $44,000 $44,000

At this point in the year, some employees have already received wages in excess of those to which payroll taxes apply. Assume that the state unemployment tax is 2.5%. The FICA rate is 7.65% on an employee’s wages to $113,700 and 1.45% in excess of $113,700. Of the $188,000 wages subject to FICA tax, $20,000 of the sales wages is in excess of $113,700. Federal unemployment tax rate is 0.8% after credits. Income tax withheld amounts to $16,000 for factory, $7,000 for sales, and $6,000 for administrative.

Instructions

(a) Prepare a schedule showing the employer’s total cost of wages for November by function. (Round allcomputations to nearest dollar.)

(b) Prepare the journal entries to record the factory, sales, and administrative payrolls including the employer’s payroll taxes.

The payroll of YellowCard Company for September 2013 is as follows.

Total payroll was $480,000, of which $110,000 is exempt from Social Security tax because it represented amounts paid in excess of $113,700 to certain employees. The amount paid to employees in excess of $7,000 was $400,000. Income taxes in the amount of $80,000 were withheld, as was $9,000 in union dues. The state unemployment tax is 3.5%, but YellowCard Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee’s wages to $113,700 and 1.45% in excess of $113,700. No employee for YellowCard makes more than $125,000. The federal unemployment tax rate is 0.8% after state credit.

Instructions

Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.

During the month of June, Rowling Boutique had cash sales of $233,200 and credit sales of $153,700, both of which include the 6% sales tax that must be remitted to the state by July 15.

Instructions

Prepare the adjusting entry that should be recorded to fairly present the June 30 financial statements.

Assume the facts in E13-5 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time.

Year in Which Vacation Projected Future Pay Rates

Time Was Earned Used to Accrue Vacation Pay

2013 $10.75

2014 11.60

Instructions

(a) Prepare journal entries to record transactions related to compensated absences during 2013 and

2014.

(b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013, and 2014.

Matt Broderick Company began operations on January 2, 2013. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows.

Actual Hourly Vacation Days Used Sick Days Used

Wage Rate by Each Employee by Each Employee

2013 2014 2013 2014 2013 2014

$10 $11 0 9 4 5

Matt Broderick Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when earned and to accrue sick pay when earned.

Instructions

(a) Prepare journal entries to record transactions related to compensated absences during 2013 and

2014.

(b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013 and 2014.

On December 31, 2014, Kate Holmes Company has $7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2015. On January 28, 2015, Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $6,000,000 in May to a high of $8,000,000 in October during the year 2015. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2019. Holmes’s December 31, 2014, balance sheet is issued on February 15, 2015.

Instructions

Prepare a partial balance sheet for Holmes at December 31, 2014, showing how its $7,000,000 of short-term debt should be presented, including footnote disclosure.