Exercise 9-1 (10 Minutes)

EXERCISES

Exercise 9-1 (10 minutes)

1. / C / 3. / C / 5. / L / 7. / N / 9. / C
2. / L / 4. / C / 6. / C / 8. / C / 10. / C

Exercise 9-2 (15 minutes)

[Note: All entries dated December 31, 2008.]

1. / Warranty Expense...... / 5,440
Estimated Warranty Liability...... / 5,440
To record warranty expense [4,000 units x 8% x $17].

2. No adjusting entry can be made since the loss cannot be reasonably estimated. Disclosure of the suit as a contingent liability should be made in the notes to the financial statements.

3. / Vacation Benefits Expense...... / 3,000
Vacation Benefits Payable...... / 3,000
To record vacation benefits expense
[20 employees x 1 day x $150].

No adjusting entry is required since it is not probable that the supplier will default on the debt. The guarantor, Casco Company, should describe the guarantee in its financial statement notes as a contingent liability.

5. / Cash...... / 787,500
Sales...... / 750,000
Sales Taxes Payable...... / 37,500
To record sales and sales taxes.
Cost of Goods Sold...... / 500,000
Merchandise Inventory...... / 500,000
To record cost of sales.
6. / Unearned Services Revenue...... / 75,000
Earned Services Revenue...... / 75,000
To record product revenue earned.

Exercise 9-3 (15 minutes)

B = 0.03 ($500,000 – B)

B= $15,000 – 0.03B

1.03B= $15,000

B= $14,563 (rounded to nearest dollar)

2008

Dec. 31Employee Bonus Expense...... 14,563

Bonus Payable...... 14,563

To record expected bonus costs.

2009

Jan. 19Bonus Payable...... 14,563

Cash...... 14,563

To record payment of bonus.

Exercise 9-4 (30 minutes)

1.Maturity date = May 15 + 60 days = July 14, 2008

2a.

May 15 / Cash...... / 104,000
Notes Payable...... / 104,000
Borrowed cash by issuing an interest-bearing note.

2b.

July 14 / Interest Expense*...... / 2,080
Notes Payable...... / 104,000
Cash...... / 106,080
Repaid note plus interest.
* Principal...... / $104,000
x Interest rate...... / 12%
x Fraction of year...... / 60/360

Total interest......

/ $ 2,080

Exercise 9-5 (30 minutes)

1.Maturity date = November 1 + 90 days = January 30, 2009.

2. /

Principal......

/ $200,000
x Interest rate...... / 9%
x Fraction of year (Nov. 1 – Dec. 31).... / 60/360

Total interest in 2008......

/ $ 3,000
3. /

Principal......

/ $200,000
x Interest rate...... / 9%
x Fraction of year (Jan. 1 – Jan. 30).... / 30/360

Total interest in 2009......

/ $ 1,500

4a.

2008
Nov. 1 / Cash...... / 200,000
Notes Payable...... / 200,000
Borrowed cash by issuing an interest-bearing note.

4b.

2008
Dec. 31 / Interest Expense...... / 3,000
Interest Payable...... / 3,000
Accrued interest on note payable.

4c.

2009

Jan. 30 / Interest Expense...... / 1,500
Interest Payable...... / 3,000
Notes Payable...... / 200,000
Cash...... / 204,500
Repaid note plus interest.

Exercise 9-6 (20 minutes)

Subject
to Tax /
Rate /
Tax /
Explanation
a.

FICA--Social Security.

/ $ 900 / 6.20% / $ 55.80 / Full amount is subject to tax.
FICA—Medicare..... / 900 / 1.45 / 13.05 / Full amount is subject to tax.
FUTA...... / 200 / 0.80 / 1.60 / $700 is over the maximum.
SUTA...... / 200 / 2.90 / 5.80 / $700 is over the maximum.
b.
FICA--Social Security. / $2,200 / 6.20% / $136.40 / Full amount is subject to tax.
FICA—Medicare..... / 2,200 / 1.45 / 31.90 / Full amount is subject to tax.
FUTA...... / 0 / 0.80 / 0.00 / Full amount is over maximum.
SUTA...... / 0 / 2.90 / 0.00 / Full amount is over maximum.
c.
FICA--Social Security. / $5,000 / 6.20% / $310.00 / $3,000 is over the maximum.
FICA—Medicare..... / 8,000 / 1.45 / 116.00 / Full amount is subject to tax.
FUTA...... / 0 / 0.80 / 0.00 / Full amount is over maximum.
SUTA...... / 0 / 2.90 / 0.00 / Full amount is over maximum.

Exercise 9-7 (20 minutes)

(1)
Sept. 30 / Salaries Expense...... / 900.00
FICA—Social Security Taxes Payable...... / 55.80
FICA—Medicare Taxes Payable...... / 13.05
Employee Federal Income Taxes Payable... / 150.00
Accrued Payroll Payable...... / 681.15
To record payroll for pay period ended September 30.
(2)
Sept. 30 / Payroll Taxes Expense...... / 76.25
FICA—Social Security Taxes Payable...... / 55.80
FICA—Medicare Taxes Payable...... / 13.05
Federal Unemployment Taxes Payable..... / 1.60
State Unemployment Taxes Payable...... / 5.80
To record employer payroll taxes.

Exercise 9-8 (25 minutes)

1.Warranty Expense = 4% of dollar sales = 4% x $6,000 = $240

2.The December 31, 2008, balance of the liability equals the expense because no repairs are provided in 2008. Therefore, the ending balance of the Estimated Warranty Liability account is $240.

3.The company should report no additional warranty expense in 2009 for this copier.

4.The December 31, 2009, balance of the Estimated Warranty Liability account equals the 2009 beginning balance minus the costs incurred in 2009 to repair the copier:

Ending 2008 balance...... / $240
Less parts cost...... / (209)
Ending 2009 balance...... / $ 31

5.Journal entries

2008 / (a)
Aug. 16 / Cash...... / 6,000
Sales...... / 6,000
To record cash sale of copier.
Aug. 16 / Cost of Goods Sold...... / 4,800
Merchandise Inventory...... / 4,800
To record cost of August 16 sale.
(b)
Dec. 31 / Warranty Expense...... / 240
Estimated Warranty Liability...... / 240
To record warranty expense for copier sold in 2008.
2009 / (c)
Nov. 22 / Estimated Warranty Liability...... / 209
Repair Parts Inventory...... / 209
To record cost of warranty repairs.

Exercise 9-9 (15 minutes)

(a) / (b) / (c) / (d) / (e) / (f)
Numerator
Income before interest & taxes /
$194,000 /
$176,000 /
$182,000 /
$379,000 /
$103,000 /
$ 5,000
Denominator
Interest expense... / $ 44,000 / $ 16,000 / $ 12,000 / $ 14,000 / $ 14,000 / $10,000
Ratio...... / 4.41 / 11.00 / 15.17 / 27.07 / 7.36 / 0.50

Analysis: Company (d) has the strongest ability to pay interest expense as it comes due as evidenced by the company’s times interest earned (coverage) ratio of 27.07 times.

Exercise 9-10A (15 minutes)

Gross Pay......

/ $725.00
Social Security tax deduction (6.2%)...... / $ 44.95
Medicare tax deduction (1.45%)...... / 10.51
Income tax deduction (from Exhibit 9A.6)...... / 91.00
Total deductions...... / 146.46
Net Pay...... / $578.54

Note: Keisha LeShon is not subject to state income tax because her cumulative earnings from the previous pay period exceed the $9,000 maximum.

Exercise 9-11A (15 minutes)

Regular pay (48 hours @ $14)...... / $672.00
Overtime premium pay (8 hours @ $7.00)...... / 56.00
Gross pay...... / 728.00
FICA—Social Security tax deduction (6.2%)...... / $45.14
FICA—Medicare tax deduction (1.45%)...... / 10.56
Income tax deduction (from Exhibit 9A.6)...... / 76.00
Total deductions...... / 131.70
Net pay...... / $596.30

Exercise 9-12B (25 minutes)

1. / Income Taxes Payable (target balance)...... / $28,300
Total accrued [($28,600 + $19,100 + $34,600) x .30]...... / 24,690
Adjustment (additional expense)...... / $ 3,610

2008 / (a)
Dec. 31 / Income Tax Expense...... / 3,610
Income Taxes Payable...... / 3,610
To adjust tax expense and liability.
2009 / (b)
Jan. 20 / Income Taxes Payable...... / 28,300
Cash...... / 28,300
To make the final quarterly payment
of income taxes for 2008.

Solutions Manual, Chapter 9