LO 12.1Consider the following situations and determine (1) which type of liability should be recognized (specific account), and (2) how much should be recognized in the current period (year).
- A business sets up a line of credit with a supplier. The company purchases $10,000 worth of equipment on credit. Terms of purchase are 5/10, n/30.
- A customer purchases a watering hose for $25. The sales tax rate is 5%.
- Customers pay in advance for season tickets to a soccer game. There are fourteen customers, each paying $250 per season ticket. Each customer purchased two season tickets.
- A company issues 2,000 shares of its common stock with a price per share of $15.
LO 12.1Stork Enterprises delivers care packages for special occasions. They charge $45 for a small package, and $80 for a large package. The sales tax rate is 6%. During the month of May, Stork delivers 38 small packages and 22 large packages.
- What is the total tax charged to the customer per small package? What is the overall charge per small package?
- What is the total tax charged to the customer per large package? What is the overall charge per large package?
- How much sales tax liability does Stork Enterprises have for the month of May?
- What account is used to recognize this tax situation for the month of May?
- When Stork remits payment to the sales tax governing body, what happens to the sales tax liability?
LO 12.2Review the following transactions, and prepare any necessary journal entries for Renovation Goods.
- On May 12, Renovation Goods purchases 750 square feet of flooring (Flooring Inventory) at $3.00 per square foot from a supplier, on credit. Terms of the purchase are 2/10, n/30 from the invoice date of May 12.
- On May 15, Renovation Goods purchases 200 measuring tapes (Tape Inventory) at $5.75 per tape from a supplier, on credit. Terms of the purchase are 4/15, n/60 from the invoice date of May 15.
- On May 22, Renovation Goods pays cash for the amount due to the flooring supplier from the May 12 transaction.
- On June 3, Renovation Goods pays cash for the amount due to the tape supplier from the May 15 transaction.
LO 12.2Review the following transactions, and prepare any necessary journal entries for Juniper Landscaping Services.
- On November 5, Juniper receives advance cash payment from a customer for landscaping services in the amount of $3,500. Juniper had yet to provide landscaping services as of November 5.
- On December 11, Juniper provides all of the landscaping services to the customer from November 5.
- On December 14, Juniper receives advance payment from another customer for landscaping services in the amount of $4,400. Juniper has yet to provide landscaping services as of December 14.
- On January 19 of the following year, Juniper provides and recognizes 80% of landscaping services to the customer from December 14.
LO 12.2Review the following transactions, and prepare any necessary journal entries.
- On July 16, Arrow Corp. purchases 200 computers (Equipment) at $500 per computer from a supplier, on credit. Terms of the purchase are 4/10, n/50 from the invoice date of July 16.
- On August 10, Hondo Inc. receives advance cash payment from a client for legal services in the amount of $9,000. Hondo had yet to provide legal services as of August 10.
- On September 22, Jack Pies sells thirty pies for $25 cash per pie. The sales tax rate is 8%.
- On November 8, More Supplies paid a portion of their noncurrent note in the amount of $3,250 cash.
LO 12.3Machine Corp. has several pending lawsuits against its company. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability.
- A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated.
- Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur.
- A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated.
- Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win.
LO 12.3Emperor Pool Services provides pool cleaning and maintenance services to residential clients. It offers a one-year warranty on all services. Review each of the transactions, and prepare any necessary journal entries for each situation.
- March 31: Emperor provides cleaning services for fifteen pools during the month of March at a sales price per pool of $550 cash. Emperor records warranty estimates when sales are recognized and bases warranty estimates on 2% of sales.
- April 5: A customer files a warranty claim that Emperor honors in the amount of $100 cash.
- April 13: Another customer, J. Jones, files a warranty claim that Emperor does not honor due to customer negligence.
- June 8: J. Jones files a lawsuit requesting damages related to the dishonored warranty in the amount of $1,500. Emperor determines that the lawsuit is likely to end in the plaintiff’s favor and the $1,500 is a reasonable estimate for damages.
LO 12.4Serene Company purchases fountains for its inventory from Kirkland Inc. The following transactions take place during the current year.
- On July 3, the company purchases thirty fountains for $1,200 per fountain, on credit. Terms of the purchase are 2/10, n/30, invoice dated July 3.
- On August 3, Serene does not pay the amount due and renegotiates with Kirkland. Kirkland agrees to convert the debt owed into a short-term note, with an 8% annual interest rate, payable in two months from August 3.
- On October 3, Serene Company pays its account in full.
Record the journal entries to recognize the initial purchase, the conversion, and the payment.
LO 12.4Mohammed LLC is a growing consulting firm. The following transactions take place during the current year.
- On June 10, Mohammed borrows $270,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in four months from June 10, and annual interest rate of 5%.
- On July 9, Mohammed borrows an additional $100,000 with payment due in four months from July 9, and an annual interest rate of 12%.
- Mohammed pays their accounts in full on October 10 for the June 10 loan, and on November 9 for the July 9 loan.
Record the journal entries to recognize the initial borrowings, and the two payments for Mohammed.
LO 12.5Lemur Corp. is going to pay three employees a year-end bonus. The amount of the year-end bonus and the amount of federal income tax withholding are as follows.
Lemur’s payroll deductions include FICA Social Security at 6.2%, FICA Medicare at 1.45%, FUTA at 0.6%, SUTA at 5.4%, federal income tax as previously shown, state income tax at 5% of gross pay, and 401(k) employee contributions at 2% of gross pay.
Record the entry for the employee payroll on December 31.
LO 12.5Record the journal entries for each of the following payroll transactions.
|Apr. 2||Paid $650 and $340 cash to a federal depository for FICA Social Security and FICA Medicare, respectively|
|Apr. 4||Paid accumulated employee salaries of $15,220|
|Apr. 11||Issued checks in the amounts of $480 for federal income tax and $300 for state income tax to an IRS-approved bank|
|Apr. 14||Paid cash to health insurance carrier for total outstanding health insurance liability of $800|
|Apr. 22||Remitted cash payments for FUTA and SUTA to federal and state unemployment agencies in the amounts of $130 and $250, respectively|