History

Chapter11review

11-7dPractice ExercisesPE11-1AProceeds from notes payable1. Obj. 1Example Exercise 11-1On May 15, Maynard Co. borrowed cash from Texas Bank by issuing a 60-day note with a face amount of $100,000.1. Determine the proceeds of the note, assuming that the note carries an interest rate of 6%.2. Determine the proceeds of the note, assuming that the note is discounted at 6%.PE11-1BProceeds from notes payable1. Obj. 1Example Exercise 11-1On January 26, Nyree Co. borrowed cash from Conrad Bank by issuing a 45-day note with a face amount of $150,000.1. Determine the proceeds of the note, assuming that the note carries an interest rate of 10%.2. Determine the proceeds of the note, assuming that the note is discounted at 10%.PE11-2AFederal income tax withholding1. Obj. 2Example Exercise 11-2Tam Worldly’s weekly gross earnings for the present week were $2,000. Worldly has two exemptions. Using the wage bracket withholding table inExhibit 2with a $75 standard withholding allowance for each exemption, what is Worldly’s federal income tax withholding?PE11-2BFederal income tax withholding1. Obj. 2Example Exercise 11-2Marsha Mellow’s weekly gross earnings for the present week were $1,250. Mellow has one exemption. Using the wage bracket withholding table inExhibit 2with a $75 standard withholding allowance for each exemption, what is Mellow’s federal income tax withholding?PE11-3AEmployee net pay1. Obj. 2Example Exercise 11-3Tam Worldly’s weekly gross earnings for the week ended April 22 were $2,000, and her federal income tax withholding was $372.02. Assuming that the social security rate is 6% and Medicare is 1.5% of all earnings, what is Worldly’s net pay?PE11-3BEmployee net pay1. Obj. 2Example Exercise 11-3Marsha Mellow’s weekly gross earnings for the week ended May 23 were $1,250, and her federal income tax withholding was $201.65. Assuming that the social security rate is 6% and Medicare is 1.5% of all earnings, what is Mellow’s net pay?PE11-4AJournalize period payroll1. Obj. 3Example Exercise 11-4The payroll register of Ruggerio Co. indicates $10,500 of social security withheld and $2,625 of Medicare tax withheld on total salaries of $175,000 for the period. Federal withholding for the period totaled $34,650.Provide the journal entry for the period’s payroll.PE11-4BJournalize period payroll1. Obj. 3Example Exercise 11-4The payroll register of Longboat Co. indicates $5,400 of social security withheld and $1,350 of Medicare tax withheld on total salaries of $90,000 for the period. Retirement savings withheld from employee paychecks were $5,400 for the period. Federal withholding for the period totaled $17,820.Provide the journal entry for the period’s payroll.PE11-5AJournalize payroll tax1. Obj. 3Example Exercise 11-5The payroll register of Ruggerio Co. indicates $10,500 of social security withheld and $2,625 of Medicare tax withheld on total salaries of $175,000 for the period. Earnings of $30,000 are subject to state and federal unemployment compensation taxes at the federal rate of 0.6% and the state rate of 5.4%.Provide the journal entry to record the payroll tax expense for the period.PE11-5BJournalize payroll tax1. Obj. 3Example Exercise 11-5The payroll register of Longboat Co. indicates $5,400 of social security withheld and $1,350 of Medicare tax withheld on total salaries of $90,000 for the period. Earnings of $10,000 are subject to state and federal unemployment compensation taxes at the federal rate of 0.6% and the state rate of 5.4%.Provide the journal entry to record the payroll tax expense for the period.PE11-6AVacation pay and pension benefits1. Obj. 4Example Exercise 11-6Fukushima Company provides its employees with vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $19,500 for the period. The pension plan requires a contribution to the plan administrator equal to 6% of employee salaries. Salaries were $260,000 during the period, and the full amount due was contributed to the pension plan administrator.Provide the journal entry for the (a) vacation pay and (b) pension benefit.PE11-6BVacation pay and pension benefits1. Obj. 4Example Exercise 11-6Regling Company provides its employees vacation benefits and a defined benefit pension plan. Employees earned vacation pay of $35,000 for the period. The pension formula calculated a pension cost of $201,250. Only $175,000 was contributed to the pension plan administrator.Provide the journal entry for the (a) vacation pay and (b) pension benefit.PE11-7AEstimated warranty liability1. Obj. 5Example Exercise 11-7EarlKeen Co. sold $260,000 of equipment during January under a one-year warranty. The cost to repair defects under the warranty is estimated at 4% of the sales price. On August 15, a customer required a $100 part replacement plus $50 of labor under the warranty.Provide the journal entry for (a) the estimated warranty expense on January 31 for January sales and (b) the August 15 warranty work.PE11-7BEstimated warranty liability1. Obj. 5Example Exercise 11-7Quantas Industries sold $325,000 of consumer electronics during July under a nine-month warranty. The cost to repair defects under the warranty is estimated at 4.5% of the sales price. On November 11, a customer was given $220 cash under terms of the warranty.Provide the journal entry for (a) the estimated warranty expense on July 31 for July sales and (b) the November 11 cash payment.PE11-8AQuick ratio1. Obj. 6Example Exercise 11-8Nabors Company reported the following current assets and liabilities for December 31 for two recent years:1. Compute the quick ratio on December 31 of both years.2. Interpret the company’s quick ratio. Is the quick ratio improving or declining?PE11-8BQuick ratio1. Obj. 6Example Exercise 11-8Adieu Company reported the following current assets and liabilities for December 31 for two recent years:1. Compute the quick ratio on December 31 of both years.2. Interpret the company’s quick ratio. Is the quick ratio improving or declining?11-7eExercisesEX11-1Current liabilities1. Obj. 1Bon Nebo Co. sold 25,000 annual subscriptions ofMagazine 20XXfor $85 during December 20Y8. These new subscribers will receive monthly issues, beginning in January 20Y9. In addition, the business had taxable income of $840,000 during the first calendar quarter of 20Y9. The federal tax rate is 40%. A quarterly tax payment will be made on April 12, 20Y9.Prepare the Current liabilities section of the balance sheet for Bon Nebo Co. on March 31, 20Y9.AnswerCheck Figure:Total current liabilities, $1,929,750EX11-2Entries for notes payable1. Obj. 1Cosimo Enterprises issues a $260,000, 45-day, 5% note to Dixon Industries for merchandise inventory.1. Journalize Cosimo Enterprises’ entries to record:1. the issuance of the note.2. the payment of the note at maturity.2. Journalize Dixon Industries’ entries to record:1. the receipt of the note.2. the receipt of the payment of the note at maturity.EX11-3Entries for discounting notes payable1. Obj. 1Ramsey Company issues an $800,000, 45-day note to Buckner Company for merchandise inventory. Buckner discounts the note at 7%.1. Journalize Ramsey’s entries to record:1. the issuance of the note.2. the payment of the note at maturity.2. Journalize Buckner’s entries to record:1. the receipt of the note.2. the receipt of the payment of the note at maturity.EX11-4Evaluating alternative notes1. Obj. 1A borrower has two alternatives for a loan: (1) issue a $360,000, 60-day, 5% note or (2) issue a $360,000, 60-day note that the creditor discounts at 5%.1. Calculate the amount of the interest expense for each option.2. Determine the proceeds received by the borrower in each situation.3. Which alternative is more favorable to the borrower? Explain.EX11-5Entries for notes payable1. Obj. 1A business issued a 45-day, 6% note for $210,000 to a creditor on account. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest.EX11-6Entries for discounted note payable1. Obj. 1A business issued a 45-day note for $80,000 to a creditor on account. The note was discounted at 5%. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity.EX11-7Entries for notes payable1. Obj. 1Bull City Industries is considering issuing a $100,000, 7% note to a creditor on account.1. If the note is issued with a 45-day term, journalize the entries to record:1. the issuance of the note,2. the payment of the note at maturity.2. If the note is issued with a 90-day term, journalize the entries to record:1. the issuance of the note,2. the payment of the note at maturity.EX11-8Current portion of long-term debt1. Obj. 1PepsiCo, Inc., reported the following information about its long-term debt in the notes to a recent financial statement (in millions):1. How much of the long-term debt was disclosed as a current liability on the current year’s December 31 balance sheet?2. How much did the total current liabilities change between the preceding year and the current year as a result of the current portion of long-term debt?3. If PepsiCo did not issue additional long-term debt next year, what would be the total long-term debt on December 31 of the upcoming year?EX11-9Calculate payroll1. Obj. 2An employee earns $25 per hour and 2 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 48 hours during the week. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and federal income tax to be withheld was $239.15.1. Determine the gross pay for the week.2. Determine the net pay for the week.AnswerCheck Figure:Net pay, $1,055.85EX11-10Calculate payroll1. Obj. 2Breakin Away Company has three employees—a consultant, a computer programmer, and an administrator. The following payroll information is available for each employee:For the current pay period, the computer programmer worked 50 hours and the administrator worked 48 hours. The federal income tax withheld for all three employees, who are single, can be determined from the wage bracket withholding table inExhibit 2in the chapter. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and one withholding allowance is $75.Determine the gross pay and the net pay for each of the three employees for the current pay period.AnswerCheck Figure:Consultant net pay, $2,760.48EX11-11Summary payroll data1. Obj. 2,3In the following summary of data for a payroll period, some amounts have been intentionally omitted:1. Calculate the amounts omitted in lines (1), (3), (8), and (12).AnswerCheck Figure:Total earnings, $540,0002. Journalize the entry to record the payroll accrual.3. Journalize the entry to record the payment of the payroll.EX11-12Payroll tax entries1. Obj. 3According to a summary of the payroll of Guthrie Co., $560,000 was subject to the 6.0% social security tax and the 1.5% Medicare tax. Also, $60,000 was subject to state and federal unemployment taxes.1. Calculate the employer’s payroll taxes, using the following rates: state unemployment, 5.4%; federal unemployment, 0.6%.AnswerCheck Figure:$45,6002. Journalize the entry to record the accrual of payroll taxes.EX11-13Payroll entries1. Obj. 3The payroll register for Gamble Company for the week ended April 29 indicated the following:In addition, state and federal unemployment taxes were calculated at the rate of 5.4% and 0.6%, respectively, on $225,000 of salaries.1. Journalize the entry to record the payroll for the week of April 29.2. Journalize the entry to record the payroll tax expense incurred for the week of April 29.EX11-14Payroll entries1. Obj. 3Urban Window Company had gross wages of $320,000 during the week ended July 15. The amount of wages subject to social security tax was $320,000, while the amount of wages subject to federal and state unemployment taxes was $40,000. Tax rates are as follows:The total amount withheld from employee wages for federal taxes was $75,200.1. Journalize the entry to record the payroll for the week of July 15.2. Journalize the entry to record the payroll tax expense incurred for the week of July 15.EX11-15Payroll internal control procedures1. Obj. 3Big Howie’s Hot Dog Stand is a fast-food restaurant specializing in hot dogs and hamburgers. The store employs 8 full-time and 12 part-time workers. The store’s weekly payroll averages $5,600 for all 20 workers.Big Howie’s Hot Dog Stand uses a personal computer to assist in preparing paychecks. Each week, the store’s accountant collects employee time cards and enters the hours worked into the payroll program. The payroll program calculates each employee’s pay and prints a paycheck. The accountant uses a check-signing machine to sign the paychecks. Next, the restaurant’s owner authorizes the transfer of funds from the restaurant’s regular bank account to the payroll account.For the week of May 12, the accountant accidentally recorded 100 hours worked instead of 40 hours for one of the full-time employees.Does Big Howie’s Hot Dog Stand have internal controls in place to catch this error? If so, how will this error be detected?EX11-16Internal control procedures1. Obj. 3Dave’s Scooters is a small manufacturer of specialty scooters. The company employs 14 production workers and four administrative persons. The following procedures are used to process the company’s weekly payroll:1. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee’s wage rate in the payroll system.2. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department.3. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required whenan hourly worker is fired. Hourly employees only receive a paycheck if their time cards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked.4. Paychecks are signed using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed.5. Dave’s Scooters maintains a separate checking account for payroll checks. Each week the total net pay for all employees is transferred from the company’s regular bank account to the payroll account.State whether each of the procedures is appropriate or inappropriate, after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.EX11-17Accrued vacation pay1. Obj. 4A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $54,000.1. Journalize the adjusting entry required on January 31, the end of the first month of the current year, to record the accrued vacation pay.2. How is the vacation pay reported on the company’s balance sheet? When is this amount removed from the company’s balance sheet?EX11-18Pension plan entries1. Obj. 4Yuri Co. operates a chain of gift shops. The company maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Whims Funds, by the fifteenth of the month following the end of each quarter. Assume that the pension cost is $365,000 for the quarter ended December 31.1. Journalize the entries to record the accrued pension liability on December 31 and the payment to the funding agent on January 15.2. How does a defined contribution plan differ from a defined benefit plan?EX11-19Defined benefit pension plan terms1. Obj. 4In a recent year’s financial statements,Procter & Gambleshowed an unfunded pension liability of $5,599 million and a periodic pension cost of $434 million.Explain the meaning of the $5,599 million unfunded pension liability and the $434 million periodic pension cost.EX11-20Accrued product warranty1. Obj. 5Parker Manufacturing Co. warrants its products for one year. The estimated product warranty is 2.5% of sales. Assume that sales were $600,000 for January. In February, a customer received warranty repairs requiring $200 of parts and $110 of labor.1. Journalize the adjusting entry required at January 31, the end of the first month of the current fiscal year, to record the accrued product warranty.2. Journalize the entry to record the warranty work provided in February.EX11-21Accrued product warranty1. Obj. 5General Motors Corporation (GM)disclosed estimated product warranty payable for comparative years as follows:Presume that GM’s sales were $135,592 million in Year 2 and that the total paid on warranty claims during Year 2 was $3,000 million.1. Why are short- and long-term estimated warranty liabilities disclosed separately?2. Provide the journal entry for the Year 2 product warranty expense.3. What two conditions must be met in order for a product warranty liability to be reported in the financial statements?EX11-22Contingent liabilities1. Obj. 5Several months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $240,000. The company is contesting the fine. In addition, an employee is seeking $220,000 in damages related to the spill. Finally, a homeowner has sued the company for $310,000. The homeowner lives 35 miles from the plant but believes that the incident has reduced the home’s resale value by $310,000.Ayers’ legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $125,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner’s case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain.1. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.2. Prepare a note disclosure relating to this incident.EX11-23Quick ratio1. Obj. 6Gmeiner Co. had the following current assets and liabilities on December 31 of two recent years:1. Determine the quick ratio for December 31 of both years.AnswerCheck Figure:Current year: 1.22. Interpret the change in the quick ratio between the two balance sheet dates.EX11-24Quick ratio1. Obj. 6The current assets and current liabilities forApple Inc.andHP, Inc., are as follows at the end of a recent fiscal period:1. Determine the quick ratio for both companies. Round to one decimal place.AnswerCheck Figure:Apple, 1.02. Interpret the quick ratio difference between the two companies.11-7fProblems: Series APR11-1ALiability transactionsObj. 1,5The following items were selected from among the transactions completed by O’Donnel Co. during the current year: Jan. 10. Purchased merchandise on account from Laine Co., $240,000, terms n/30. Feb. 9. Issued a 30-day, 4% note for $240,000 to Laine Co., on account. Mar. 11. Paid Laine Co. the amount owed on the note of February 9. May 1. Borrowed $160,000 from Tabata Bank, issuing a 45-day, 5% note. June 1. Purchased tools by issuing a $180,000, 60-day note to Gibala Co., which discounted the note at the rate of 5%. 15. Paid Tabata Bank the interest due on the note of May 1 and renewed the loan by issuing a new 45-day, 7% note for $160,000. (Journalize both the debit and credit to the notes payable account.) July 30. Paid Tabata Bank the amount due on the note of June 15. 30. Paid Gibala Co. the amount due on the note of June 1. Dec. 1. Purchased office equipment from Warick Co. for $400,000, paying $100,000 and issuing a series of ten 5% notes for $30,000 each, coming due at 30-day intervals. 15. Settled a product liability lawsuit with a customer for $260,000, payable in January. O’Donnel accrued the loss in a litigation claims payable account. 31. Paid the amount due Warick Co. on the first note in the series issued on December 1. Instructions1. Journalize the transactions.2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year:1. Product warranty cost, $23,000.2. Interest on the nine remaining notes owed to Warick Co.PR11-2AEntries for payroll and payroll taxesObj. 2,3The following information about the payroll for the week ended December 30 was obtained from the records of Pharrell Co.:Instructions1. Assuming that the payroll for the last week of the year is to be paid on December 31, journalize the following entries:1. December 30, to record the payroll.2. December 30, to record the employer’s payroll taxes on the payroll to be paid on December 31. Of the total payroll for the last week of the year, $40,000 is subject to unemployment compensation taxes.AnswerCheck Figure:Dr. Payroll Tax Expense, $60,6752. Assuming that the payroll for the last week of the year is to be paid on January 5 of the following fiscal year, journalize the following entries:1. December 30, to record the payroll.2. January 5, to record the employer’s payroll taxes on the payroll to be paid on January 5. Because it is a new fiscal year, all salaries are subject to unemployment compensation taxes.PR11-3AWage and tax statement data on employer FICA taxObj. 2,3Ehrlich Co. began business on January 2, 20Y8. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in 20Y9, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5%. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:Instructions1. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-2) for 20Y8, arranging the data in the following form:2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 5.4% on the first $10,000 of each employee’s earnings; (d) federal unemployment compensation at 0.6% on the first $10,000 of each employee’s earnings; (e) total.AnswerCheck Figure:$28,450.80PR11-4APayroll registerObj. 2,3The following data for Throwback Industries Inc. relate to the payroll for the week ended December 9, 20Y8:Employees Mantle and Williams are office staff, and all of the other employees are sales personnel. All sales personnel are paid 1½ times the regular rate for all hours in excess of 40 hours per week. The social security tax rate is 6.0%, and Medicare tax is 1.5% of each employee’s annual earnings. The next payroll check to be used is No. 901.Instructions1. Prepare a payroll register for Throwback Industries Inc. for the week ended December 9, 20Y8. Use the following columns for the payroll register: Employee, Total Hours, Regular Earnings, Overtime Earnings, Total Earnings, Social Security Tax, Medicare Tax, Federal Income Tax, Retirement Savings, Total Deductions, Net Pay, Ck. No., Sales Salaries Expense, and Office Salaries Expense.AnswerCheck Figure:Total net pay $15,424.122. Journalize the entry to record the payroll for the week.PR11-5APayroll accounts and year-end entriesObj. 2,3,4The following accounts, with the balances indicated, appear in the ledger of Garcon Co. on December 1 of the current year:The following transactions relating to payroll, payroll deductions, and payroll taxes occurred during December:Instructions1. Journalize the transactions.2. Journalize the following adjusting entries on December 31:1. Salaries accrued: operations salaries, $8,560; officers salaries, $5,600; office salaries, $1,400. The payroll taxes are immaterial and are not accrued.2. Vacation pay, $15,000.11-7gProblems: Series BPR11-1BLiability transactionsObj. 1,5The following items were selected from among the transactions completed by Aston Martin Inc. during the current year: Apr. 15. Borrowed $225,000 from Audi Company, issuing a 30-day, 6% note for that amount. May 1. Purchased equipment by issuing a $320,000, 180-day note to Spyder Manufacturing Co., which discounted the note at the rate of 6%. 15. Paid Audi Company the interest due on the note of April 15 and renewed the loan by issuing a new 60-day, 8% note for $225,000. (Record both the debit and credit to the notes payable account.) July 14. Paid Audi Company the amount due on the note of May 15. Aug. 16. Purchased merchandise on account from Exige Co., $90,000, terms, n/30. Sept. 15. Issued a 45-day, 6% note for $90,000 to Exige Co., on account. Oct. 28. Paid Spyder Manufacturing Co. the amount due on the note of May 1. 30. Paid Exige Co. the amount owed on the note of September 15. Nov. 16. Purchased store equipment from Gallardo Co. for $450,000, paying $50,000 and issuing a series of twenty 9% notes for $20,000 each, coming due at 30-day intervals. Dec. 16. Paid the amount due Gallardo Co. on the first note in the series issued on November 16. 28. Settled a personal injury lawsuit with a customer for $87,500, to be paid in January. Aston Martin Inc. accrued the loss in a litigation claims payable account. Instructions1. Journalize the transactions.2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year:1. Product warranty cost, $26,800.2. Interest on the 19 remaining notes owed to Gallardo Co.PR11-2BEntries for payroll and payroll taxesObj. 2,3The following information about the payroll for the week ended December 30 was obtained from the records of Saine Co.:Instructions1. Assuming that the payroll for the last week of the year is to be paid on December 31, journalize the following entries:1. December 30, to record the payroll.2. December 30, to record the employer’s payroll taxes on the payroll to be paid on December 31. Of the total payroll for the last week of the year, $30,000 is subject to unemployment compensation taxes.AnswerCheck Figure:Dr. Payroll Tax Expense, $90,6752. Assuming that the payroll for the last week of the year is to be paid on January 4 of the following fiscal year, journalize the following entries:1. December 30, to record the payroll.2. January 4, to record the employer’s payroll taxes on the payroll to be paid on January 4. Because it is a new fiscal year, all $1,185,000 in salaries is subject to unemployment compensation taxes.PR11-3BWage and tax statement data and employer FICA taxObj. 2,3Jocame Inc. began business on January 2, 20Y7. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for thecalendar year. Early in 20Y8, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5% on salary. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:Instructions1. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-2) for 20Y7, arranging the data in the following form:2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 5.4% on the first $10,000 of each employee’s earnings; (d) federal unemployment compensation at 0.6% on the first $10,000 of each employee’s earnings; (e) total.AnswerCheck Figure:$25,017.38PR11-4BPayroll registerObj. 2,3The following data for Flexco Inc. relate to the payroll for the week ended December 9, 20Y8:Employees Grove and Seaver are office staff, and all of the other employees are sales personnel. All sales personnel are paid 1½ times the regular rate for all hours in excess of 40 hours per week. The social security tax rate is 6.0% of each employee’s annual earnings, and Medicare tax is 1.5% of each employee’s annual earnings. The next payroll check to be used is No. 328.Instructions1. Prepare a payroll register for Flexco Inc. for the week ended December 9, 20Y8. Use the following columns for the payroll register: Employee, Total Hours, Regular Earnings, Overtime Earnings, Total Earnings, Social Security Tax, Medicare Tax, Federal Income Tax, Retirement Savings, Total Deductions, Net Pay, Ck. No., Sales Salaries Expense, and Office Salaries Expense.AnswerCheck Figure:Total net pay, $16,592.582. Journalize the entry to record the payroll for the week.PR11-5BPayroll accounts and year-end entriesObj. 2,3,4The following accounts, with the balances indicated, appear in the ledger of Codigo Co. on December 1 of the current year:The following transactions relating to payroll, payroll deductions, and payroll taxes occurred during December:Instructions1. Journalize the transactions.2. Journalize the following adjusting entries on December 31:1. Salaries accrued: sales salaries, $4,275; officers salaries, $2,175; office salaries, $825. The payroll taxes are immaterial and are not accrued.2. Vacation pay, $13,350.11-7hComprehensive Problem 3Selected transactions completed by Kornett Company during its first fiscal year ended December 31, 20Y8, were as follows:Instructions1. Journalize the selected transactions.2. Based on the following data, prepare a bank reconciliation for December of the current year:1. Balance according to the bank statement at December 31, $283,000.2. Balance according to the ledger at December 31, $245,410.3. Checks outstanding at December 31, $68,540.4. Deposit in transit, not recorded by bank, $29,500.5. Bank debit memo for service charges, $750.6. A check for $12,700 in payment of an invoice was incorrectly recorded in the accounts as $12,000.3. Based on the bank reconciliation prepared in (2), journalize the entry or entries to be made by Kornett Company.4. Based on the following selected data, journalize the adjusting entries as of December 31 of the current year:1. Estimated uncollectible accounts at December 31, $16,000, based on an aging of accounts receivable. The balance of Allowance for Doubtful Accounts at December 31 was $2,000 (debit).2. The physical inventory on December 31 indicated an inventory shrinkage of $3,300.3. Prepaid insurance expired during the year, $22,820.4. Office supplies used during the year, $3,920.5. Depreciation is computed as follows:6. A patent costing $48,000 when acquired on January 2 has a remaining legal life of 10 years and is expected to have value for eight years.7. The cost of mineral rights was $546,000. Of the estimated deposit of 910,000 tons of ore, 50,000 tons were mined and sold during the year.8. Vacation pay expense for December, $10,500.9. A product warranty was granted beginning December 1 and covering a one-year period. The estimated cost is 4% of sales, which totaled $1,900,000 in December.10.Interest was accrued on the note receivable received on October 17.5. Based on the following information and the post-closing trial balance that follows, prepare a balance sheet in report form at December 31 of the current year:AnswerCheck Figure:Total assets, $3,569,29011-7iCases & ProjectsCP11-1Ethics in ActionTonya Latirno is a staff accountant for Cannally and Kennedy, a local CPA firm. For the past 10 years, the firm has given employees a year-end bonus equal to two weeks’ salary. On November 15, the firm’s management team announced that there would be no annual bonus this year. Because of the firm’s long history of giving a year-end bonus, Tonya and her coworkers had come to expect the bonus and believed that Cannally and Kennedy had breached an implicit agreement by discontinuing the bonus. As a result, Tonya decided that she would make up for the lost bonus by working an extra six hours of overtime per week for the rest of the year. Cannally and Kennedy’s policy is to pay overtime at 150% of straight time.Tonya’s supervisor was surprised to see overtime being reported, because there is generally very little additional or unusual client service demands at the end of the calendar year. However, the overtime was not questioned, because employees are on the “honor system” in reporting their work hours.1. Is Cannally and Kennedy acting in an ethical manner by eliminating the bonus? Explain your answer.2. Is Tonya behaving ethically by making up the bonus with unnecessary overtime? Why or why not?CP11-2Ethics in ActionMarvin Turner was discussing summer employment with Tina Song, president of Motown Construction Service:Tina:I’m glad you’re thinking about joining us for the summer. We certainly can use the help.Marvin:Sounds good. I enjoy outdoor work, and I could use the money to help with next year’s school expenses.Tina:I’ve got a plan that can help you out on that. As you know, I’ll pay you $14 per hour, but in addition, I’d like to pay you with cash. Since you’re only working for the summer, it really doesn’t make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy just to pay you that way.Marvin:Well, that’s a bit unusual, but I guess money is money.Tina:Yeah, not only that, it’s tax-free!Marvin:What do you mean?Tina:Didn’t you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn’t know about the income—hence, it’s the same as tax-free earnings.1. Why does Tina Song want to conduct business transactions using cash (not check or credit card)?2. How should Marvin respond to Tina’s suggestion?CP11-3Team ActivityIn teams, select a public company that interests you. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found atwww.sec.gov/edgar/searchedgar/companysearch.html.Based on the information in the company’s annual report, answer the following questions:1. What amount of current liabilities does the company report on its balance sheet at the end of the most recent year? What types of current liabilities does the company report?2. Have current liabilities increased or decreased from the prior year? If so, by what amount?3. Does the company disclose any contingent liabilities in the notes to the financial statements? If so, briefly describe the nature of these contingent liabilities.4. How much of the company’s long-term debt will come due in the coming year?CP11-4Payroll formsPayroll accounting involves the use of government-supplied forms to account for payroll taxes. Three common forms are the W-2, Form 940, and Form 941. Form a team with three of your classmates and retrieve copies of each of these forms. They may be obtained from a local IRS office, a library, or the Internet atwww.irs.gov(go to forms and publications).1. Briefly describe the purpose of each of the three forms.CP11-5CommunicationWBM Motorworks is a manufacturer of high-end touring and off-road motorcycles. On November 30, the company was sued by a customer who was injured when the front shock absorber on the WBM Series 3 motorcycle cracked during use. The company conducted a preliminary investigation into the matter during December and found evidence of a manufacturing defect in the shock absorber. While it is uncertain whether the manufacturing defect is the source of the product failure, the company has voluntarily recalled the front shock absorbers on the Series 3 motorcycles. The company is uncertain how the lawsuit will be resolved. Similar lawsuits against other manufacturers have been settled for approximately $2,000,000.1. Write a brief memo to the president of WBM Motorworks, U. D. Mach III, discussing how the lawsuit might be reported in the financial statements.CP11-6Recognizing pension expenseThe annual examination of Felton Company’s financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana):Sumana:You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved.Francie:What’s that?Sumana:Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees.Francie:Wait a minute. I think you have it all wrong. The company doesn’t have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of these employees may not reach retirement, and if they don’t, the company doesn’t owe them anything.Sumana:You’re not really seeing this the right way. The pension is earned by your employees during their working years. You actually make the payment much later—when they retire. It’s like one long accrual—much like incurring wages in one period and paying them in the next. Thus, I think you should recognize the expense in the period the pension is earned by the employees.Francie:Let me see if I’ve got this straight. I should recognize an expense this period for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties: salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don’t think an amount can be determined even if I accepted your arguments.1. Evaluate Sumana’s position. Is she right, or is Francie correct?CP11-7Contingent liabilitiesReynolds American, Inc., has numerous pages dedicated to describing contingent liabilities in the notes to recent financial statements. These pages include extensive descriptions of multiple contingent liabilities. Use the Internet to research Reynolds American, Inc., atwww.reynoldsamerican.com.1. What are the major business units of Reynolds American Inc.?2. Based on your understanding of this company, why would Reynolds American require so many pages of contingency disclosure? 

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