Problem set C
Problem 11-1C
Bush Environmental Corp. (BEC) entered into the following transactions involving short-term liabilities in 2007 and 2008.
2007
Apr. 20Purchased $37,500 of merchandise on credit from Cheny, terms are 1/10, n/30. BEC uses the perpetual inventory system.
May 15Replaced the account payable to Cheny with a 90-day, $30,000 note bearing 12% annual interest along with paying $7,500 in cash.
July 3Borrowed $55,000 cash from U.O. Bank by signing a 60-day interest-bearing note for
$55,000.The note’s annual interest rate is 8%.
?Paid the amount due on the note to Cheny at maturity.
?Paid the amount due on the note to U.O. Bank at maturity.
Nov. 24Borrowed $24,000 cash from IMF Bank by signing a 60-day, 9% interest-bearing note with a face value of $24,360.
Dec. 31Recorded an adjusting entry for the accrual of interest on the note to IMF Bank.
2008
?Paid the amount due on the note to IMF Bank at maturity.
Required
1.Determine the maturity dates for each of the three notes described.
2.Determine the interest due at maturity for the three notes. (Assume a 360-day year.)
3.Determine the interest to be recorded in the adjusting entry at the end of 2007.
4.Determine the interest to be recorded in 2008.
5.Prepare journal entries for all the preceding transactions and events for years 2007–2008.
PROBLEM 11-2C
On June 1, 2007 Francesca Funque’s Frayed Fashions began selling fringed T-shirts for $40 each. The shirt comes with a 30-day warranty against unraveling. When a customer brings back an unraveled shirt Francesca gives the customer a new shirt (no questions asked about the events that led to the unraveling). The company uses the perpetual inventory method and its cost is $10 for each shirt. It is expected that 10% of the shirts sold will be returned for unraveling. The following transactions and events occurred:
2007
Nov. 10 Sold 180 shirts for $7,200 cash.
30 Recognized warranty expense for June with an adjusting entry.
Dec. 3 Replaced 15 shirts that were returned under the warranty.
15 Sold 220 shirts for $8,800cash.
29 Replaced 20 shirts that were returned under the warranty.
31 Recognized warranty expense for July with an adjusting entry.
2008
Jan. 5 Sold 120 shirts for $4,800 cash.
16Replaced 10 shirts that were returned under the warranty.
31 Recognized warranty expense related to January sales with an adjusting entry.
Required
1.Prepare journal entries to record these transactions and adjustments for 2007 and 2008.
2.How much warranty expense is reported for November 2007 and December 2007?
3. How much warranty expense is reported for January 2008?
4.What is the balance of the Estimated Warranty Liability account as of December 31, 2007?
5. What is the balance of the Estimated Warranty Liability account as of January 31, 2008?
PROBLEM 11–3C
Shown here are condensed income statements for two different companies (both are organized as LLC’s and pay no income taxes.)
Dana Company
Sales $2,000,000
Variable expenses (40%) 800,000
Income before interest $1,200,000
Interest expense (fixed) 1,000,000
Net income $ 200,000
Erica Company
Sales $2,000,000
Variable expenses (80%) 1,600,000
Income before interest $ 400,000
Interest expense (fixed) 200,000
Net income $ 200,000
Required
1.Compute times interest earned for Dana Company.
2.Compute times interest earned for Erica Company.
3.What happens to each company’s net income if sales increase by 20%?
4.What happens to each company’s net income if sales increase by 50%?
5. What happens to each company’s net income if sales increase by 80%?
6. What happens to each company’s net income if sales decrease by 10%?
7.What happens to each company’s net income if sales decrease by 20%?
8.What happens to each company’s net income if sales decrease by 50%?
Analysis Component
9.Comment on the results from parts 3 through 8 in relation to the fixed cost strategies of the two companies and the ratio values you computed in parts (1) and (2).
PROBLEM 11-4C
Templin Company pays its employees each week. Its employees’ gross pay is subject to these taxes:
TaxRateApplied To
FICA—Social Security6.20%First $94,200
FICA—Medicare 1.45%All gross pay
FUTA 0.80%First $7,000
Suta 2.15%First $7,000
The company is preparing its payroll calculations for the week ended August 12. Payroll records show the following information for the company’s four employees:
This WeekName / Gross Pay - YTD / Gross Pay / Income Tax Withholding
Jasper / $56,400 / $2,500 / $1,040
Matilda / 93,400 / 1,750 / 350
Homer / 16,020 / 600 / 100
Gertrude / 6,070 / 1,200 / 220
In addition to gross pay, the company must pay one-half of the $20 per employee weekly health insurance; each employee pays the remaining one-half. The company also contributes an extra 6% of each employee’s gross pay (at no cost to employees) to a pension fund.
Required
Compute the following for the week ended August 12 (round amounts to the nearest cent):
1.Each employee’s FICA withholdings for Social Security.
2.Each employee’s FICA withholdings for Medicare.
3.Employer’s FICA taxes for Social Security.
4.Employer’s FICA taxes for Medicare.
5.Employer’s FUTA taxes.
6.Employer’s SUTA taxes.
7.Each employee’s net (take-home) pay.
8.Employer’s total payroll-related expense for each employee.
PROBLEM 11-5C
On May 7, the end of the first weekly pay period of the summer season, Wild Ride Amusement Park’s payroll register showed that its employees earned $68,160 of sales salaries and $84,740 of park attendants salaries. Withholdings from the employees’ salaries include FICA Social Security taxes at the rate of 6.2%, FICA Medicare taxes at the rate of 1.45%, $16,560 of federal income taxes, $860 of medical insurance deductions, and $2,660 of pension fund deductions. No employee earned more than $7,000 in this first period.
Required
1.Calculate FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record Wild Ride Amusement Park’s May 7 (employee) payroll expenses and liabilities.
2.Prepare the journal entry to record Wild Ride Amusement Park’s (employer) payroll taxes resulting from the May 7 payroll. Wild Ride Amusement Park’s merit rating reduces its state unemployment tax rate to 4.0% of the first $7,000 paid each employee. The federal unemployment tax rate is 0.8%.
PROBLEM 11-6C
Jimmo Company has 10 employees, each of whom earns $1,500 per month and is paid on the last day of each month. All 10 have been employed continuously at this amount since January 1. Jimmo uses a payroll bank account and special payroll checks to pay its employees. On March 1, the following accounts and balances exist in its general ledger:
a.FICA—Social Security Taxes Payable, $1,860; FICA—Medicare Taxes Payable, $435 (The balances of these accounts represent total liabilities for both the employer’s and employees’ FICA taxes for the February payroll only.)
b.Employees’ Federal Income Taxes Payable, $2,142 (liability for February only).
c.Federal Unemployment Taxes Payable, $240 (liability for January and February together).
d.State Unemployment Taxes Payable, $1,200 (liability for January and February together).
During March and April, the company had the following payroll transactions:
Mar. 15Issued check payable to Sleet Bank, a federal depository bank authorized to accept employers’ payments of FICA taxes and employee income tax withholdings. The $6,230 check is in payment of the February FICA and employee income taxes.
31Recorded the March payroll and transferred funds from the regular bank account to the payroll bank account. Issued checks payable to each employee in payment of the March payroll The payroll register shows the following summary totals for the March pay period:
Salaries and WagesFederal
Office Shop Gross FICA Income Net
Salaries Wages Pay Taxes* Taxes Pay
$4,500 $10,500 $15,000 $930 $2,142$11,711
$217
* FICA taxes are Social Security and Medicare, respectively.
31Recorded the employer’s payroll taxes resulting from the March payroll. The company has a merit rating that reduces its state unemployment tax rate to 4.0% of the first $7,000 paid each employee. The federal rate is 0.8%.
Apr. 15Issued check to Sleet Bank in payment of the March FICA and employee income taxes.
15Issued check to the State Tax Commission for the January, February, and March state unemployment taxes. Mailed the check and the first quarter tax return to the Commission.
30Issued check payable to Sleet Bank in payment of the employer’s FUTA taxes for the first quarter of the year.
30Mailed Form 941 to the IRS, reporting the FICA taxes and the employees’ federal income tax withholdings for the first quarter.
Required
Prepare journal entries to record the transactions and events for both March and April.