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 depreciates a building with a book value of $12,000, using straight-line depreciation, no salvage value, and a remaining useful life of six years.
- An organization has a line of credit with a supplier. The company purchases $35,500 worth of inventory on credit. Terms of purchase are 3/20, n/60.
- An employee earns $1,000 in pay and the employer withholds $46 for federal income tax.
- A customer pays $4,000 in advance for legal services. The lawyer has previously recognized 30% of the services as revenue. The remainder is outstanding.
LO 12.1Perfume Depot sells two different tiers of perfume products to customers. They charge $30 for tier 1 perfume and $100 for tier 2 perfume. The sales tax rate is 4.5%. During the month of October, Perfume Depot sells 75 tier 1 perfumes, and 60 tier 2 perfumes.
- What is the total tax charged to the customer per tier 1 perfume? What is the overall charge per tier 1 category perfume?
- What is the total tax charged to the customer per tier 2 perfume? What is the overall charge per tier 2 category perfume?
- How much sales tax liability does Perfume Depot have for the month of October?
- What account is used to recognize this tax situation for the month of October?
- When Perfume Depot 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 Sewing Masters Inc.
- On October 3, Sewing Masters Inc. purchases 800 yards of fabric (Fabric Inventory) at $9.00 per yard from a supplier, on credit. Terms of the purchase are 1/5, n/40 from the invoice date of October 3.
- On October 8, Sewing Masters Inc. purchases 300 more yards of fabric from the same supplier at an increased price of $9.25 per yard, on credit. Terms of the purchase are 5/10, n/20 from the invoice date of October 8.
- On October 18, Sewing Masters pays cash for the amount due to the fabric supplier from the October 8 transaction.
- On October 23, Sewing Masters pays cash for the amount due to the fabric supplier from the October 3 transaction.
LO 12.2Review the following transactions and prepare any necessary journal entries for Woodworking Magazine. Woodworking Magazine provides one issue per month to subscribers for a service fee of $240 per year. Assume January 1 is the first day of operations for this company, and no new customers join during the year.
- On January 1, Woodworking Magazine receives advance cash payment from forty customers for magazine subscription services. Handyman had yet to provide subscription services as of January 1.
- On April 30, Woodworking recognizes subscription revenues earned.
- On October 31, Woodworking recognizes subscription revenues earned.
- On December 31, Woodworking recognizes subscription revenues earned.
LO 12.2Review the following transactions and prepare any necessary journal entries.
- On January 5, Bunnet Co. purchases 350 aprons (Supplies) at $25 per apron from a supplier, on credit. Terms of the purchase are 3/10, n/30 from the invoice date of January 5.
- On February 18, Melon Construction receives advance cash payment from a client for construction services in the amount of $20,000. Melon had yet to provide construction services as of February 18.
- On March 21, Noonan Smoothies sells 875 smoothies for $4 cash per smoothie. The sales tax rate is 6.5%.
- On June 7, Organic Methods paid a portion of their noncurrent note in the amount of $9,340 cash.
LO 12.3Roundhouse Tools has several potential warranty claims as a result of damaged tool kits. 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.
- Roundhouse Tools has several claims for replacement of another tool kit not listed as one of their damaged tool kits. The honored warranty for these tool kits is not likely but is not remote. It is possible.
- A pending warranty claim has been received with the projected cost to be $450. Roundhouse Tools believes honoring that warranty claim is likely to occur and that figure is reasonably estimated.
- Roundhouse Tools believes other potential warranties may have to be honored outside of the warranty period, but this is unlikely to occur.
- Warranty replacements will cost the company a percentage of sales for the period. This amount allotted for warranty replacements cannot be reasonably estimated but is likely to occur.
LO 12.3Shoe Hut sells custom, handmade shoes. It offers a one-year warranty on all shoes for repair or replacement. Review each of the transactions and prepare any necessary journal entries for each situation.
- May 31: Shoe Hut sells 100 pairs of shoes during the month of May at a sales price per pair of shoes of $240 cash. Shoe Hut records warranty estimates when sales are recognized and bases warranty estimates on 4% of sales.
- June 2: A customer files a warranty claim that Shoe Hut honors in the amount of $30 for repair to laces. Laces Inventory corresponds to shoelace inventory used for repairs.
- June 4: Another customer files a warranty claim that Shoe Hut honors. Shoe Hut replaces the damaged shoes at a cost of $200, affecting their Shoe Replacement Inventory account.
- August 10: Shoe Hut explores the possibility of bankruptcy, given the current economic conditions (recession). It determines the bankruptcy is unlikely to occur (remote).
LO 12.4Air Compressors Inc. purchases compressor parts for its inventory from a supplier. The following transactions take place during the current year:
- On April 5, the company purchases 400 parts for $8.30 per part, on credit. Terms of the purchase are 4/10, n/30, invoice dated April 5.
- On May 5, Air Compressors does not pay the amount due and renegotiates with the supplier. The supplier agrees to $400 cash immediately as partial payment on note payable due, converting the debt owed into a short-term note, with a 7% annual interest rate, payable in three months from May 5.
- On August 5, Air Compressors pays its account in full.
Record the journal entries to recognize the initial purchase, the conversion plus cash, and the payment.
LO 12.4Pickles R Us is a pickle farm located in the Northeast. The following transactions take place:
- On November 6, Pickles borrows $820,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in six months from November 6, and annual interest rate of 3%.
- On December 12, Pickles borrows an additional $200,000 with payment due in three months from December 12, and an annual interest rate of 10%.
- Pickles pays its accounts in full on March 12, for the December 12 loan, and on May 6 for the November 6 loan.
Record the journal entries to recognize the initial borrowings, and the two payments for Pickles.
LO 12.5Use Figure 12.15 to complete the following problem. Roland Inc. employees’ monthly gross pay information and their W-4 Form withholding allowances follow.
Roland’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 (based on withholdings table) of gross pay, state income tax at 3% of gross pay, and health insurance coverage premiums of $1,000 split 50% employees and 50% employer. Assume each employee files as single, gross income is the same amount each month, October is the first month of business operation for the company, and salaries have yet to be paid.
Record the entry or entries for accumulated employee and employer payroll for the month of October; dated October 31.
LO 12.5Use the information from Exercise 12.10 to complete this problem. Record entries for each transaction listed.
|Nov. 1||Paid cash to a federal depository for FICA Social Security and FICA Medicare; paid accumulated salaries|
|Nov. 3||Remitted cash payment for FUTA and SUTA to federal and state unemployment agencies|
|Nov. 10||Issued a check to an IRS-approved bank for federal and state income taxes|
|Nov. 12||Paid cash to health insurance carrier for total outstanding health insurance liability|