Solution manual financial accounting 4e by wild chapter09

An employee’s gross earnings along with the number of withholding allowances that an employee claims, as well as whether they are married or single, determine the amount deducted for fe

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3 An estimated liability is an obligation to make a future payment, the exact amount of which is uncertain, but it is capable of being reasonably estimated

4 The amount of the sale for the item only is $950 ($988/1.04)

5 The combined Social Security tax rate (assuming the maximum wage amount is not yet reached) is 12.4% (6.2% + 6.2%) The maximum level of earnings [wage base on which taxes are due] for 2006 is $94,200

6 The Medicare tax rate is 1.45% This rate is applied to all wages earned by an

employee—no maximum limit exists

7 An employee’s gross earnings along with the number of withholding allowances that

an employee claims, as well as whether they are married or single, determine the amount deducted for federal income taxes

8 The employee is responsible for federal income taxes, state income taxes, local income taxes (if any), and the employee portion of the FICA taxes The employer is responsible for both federal and state unemployment taxes and the employer portion of the FICA taxes

9 An unemployment merit rating is based on an evaluation of an employer’s experience in creating or avoiding unemployment with its employees The merit rating affects the state unemployment taxes that the employer must pay Merit ratings cause more of the cost of unemployment benefits to be paid by those who create more unemployment

10 The obligation to correct or replace defective products (or services) is created when the products are sold with the warranties Even though the seller does not know with certainty when the obligation will be paid, to whom it will be paid, or the amount

to be paid, past experience shows that some amount will probably be paid If the

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event, not by a future event If a disaster occurs, the company must report the loss

in the period when it occurs

12. A A wage bracket withholding table shows for a pay period of a given length (weekly, biweekly, semimonthly, monthly), the amounts of federal income taxes to be withheld from the pay of an employee, at varying amounts of gross pay and varying numbers of withholding allowances

13. A Single employee earning $725 with two allowances has $76 taxes withheld

Single employee earning $625 with no allowances has $81 taxes withheld

14 At February 26, 2005, Best Buy reports ―Accrued compensation and related expenses‖ in the amount of $234,000,000

15 Circuit City has two tax-related assets on its balance sheet, and two tax-related liabilities One account is a current Deferred income taxes asset account and another is a noncurrent deferred income taxes asset account Deferred tax assets are accounts that represent income taxes that the company has paid before the taxes have been reported on the income statement as income tax expenses The current liabilities include Deferred income taxes as well These represent income taxes that the company has reported on its income statement as income tax expense before they have paid the taxes The final income-tax-related liability is Accrued income taxes This represents taxes that must be paid to the government in the short term

income-16 At September 25, 2004, Apple reports three current liabilities: Accounts payable, Accrued expenses, and Current debt

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QUICK STUDIES

Quick Study 9-1 (5 minutes)

Items 3, 4, 5 and 6 are current liabilities for this company

Oct 31 Cash 5,000,000

Unearned Ticket Revenue 5,000,000

To record sales in advance of concerts

Nov 5 Unearned Ticket Revenue 1,250,000

Earned Ticket Revenue 1,250,000

To record concert revenues earned

Sept 30 Cash 6,300

Sales 6,000 Sales Taxes Payable 300

To record cash sales and 5% sales tax

Sept 30 Cost of Goods Sold 3,900

Merchandise Inventory 3,900

To record cost of Sept 30 th sales

Oct 15 Sales Taxes Payable 300

Cash 300

To record remittance of sales taxes to govt

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1 Computation of interest payable at December 31, 2008:

Days from November 7 to December 31 54 days

[Note: Two months (January and February) of earnings have

already been recorded for each of the 5 employees.]

Mar 31 Payroll Taxes Expense 1,316.25

FICA—Social Security Taxes Payable 1

775.00 FICA—Medicare Taxes Payable 2

181.25 State Unemployment Taxes Payable 3 280.00 Federal Unemployment Taxes Payable 4 80.00

To record employer payroll taxes

Vacation Benefits Expense 500

Vacation Benefits Payable 500

To record vacation benefits accrued

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Dec 31 Employee Bonus Expense 15,000

Bonus Payable 15,000

To record expected bonus costs

2008

July 24 Estimated Warranty Liability 55

Repair Parts Inventory 55

To record cost of warranty repairs

1 (b); reason—is reasonably estimated but not a probable loss

2 (b); reason—probable loss but cannot be reasonably estimated

3 (a); reason—can be reasonably estimated and loss is probable

Interpretation: This company’s times interest earned ratio of 13 exceeds (is superior to) its competitors’ average ratio of 4.0 Moreover, a times interest earned of 13 suggests sufficient income to cover interest obligations

Quick Study 9-11 B (10 minutes)

Dec 31 Income Taxes Expense 40,000

Income Taxes Payable 34,000 Deferred Income Tax Liability 6,000

To record tax expense and deferred tax liability

$1,885,000

$145,000

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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]

4 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

To record cost of sales

6 Unearned Services Revenue 75,000

Earned Services Revenue 75,000

To record product revenue earned

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

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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

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

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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:

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

Nov 22 Estimated Warranty Liability 209

Repair Parts Inventory 209

To record cost of warranty repairs

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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 9-10 A (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 9-11 A (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

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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

2

Dec 31 Income Tax Expense 3,610

Income Taxes Payable 3,610

To adjust tax expense and liability

Jan 20 Income Taxes Payable 28,300

Cash 28,300

To make the final quarterly payment

of income taxes for 2008

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PROBLEM SET A Problem 9-1A (45 minutes)

Locust Natl Bank Fargo

1 Maturity dates

Date of the note May 19 July 8 Nov 28 Term of the note (in days) 90 120 60 Maturity date Aug 17 Nov 5 Jan 27

2 Interest due at maturity

Principal of the note $35,000 $80,000 $42,000 Annual interest rate 10% 9% 8% Fraction of year 90/360 120/360 60/360 Interest expense $ 875 $ 2,400 $ 560

3 A ccrued interest on Fargo note at the end of 2007

Total interest for note $ 560 Fraction of term in 2007 33/60 Accrued interest expense $ 308

4 Interest on Fargo note in 2008

Total interest for note $ 560 Fraction of term in 2008 27/60 Interest expense in 2008 $ 252

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5

2007

Apr 20 Merchandise Inventory 40,250

Accounts Payable—Locust 40,250

Purchased merchandise on credit

May 19 Accounts Payable—Locust 40,250

Cash 5,250 Notes Payable—Locust 35,000

Paid $5,250 cash and gave a 90-day,

10% note to extend due date on account

July 8 Cash 80,000

Notes Payable—National 80,000

Borrowed cash with a 120-day, 9% note

Aug 17 Interest Expense 875

Notes Payable—Locust 35,000

Cash 35,875

Paid note with interest

Nov 5 Interest Expense 2,400

Notes Payable—National 80,000

Cash 82,400

28 Cash 42,000

Notes Payable—Fargo Bank 42,000

Borrowed cash with 60-day, 8% note

Dec 31 Interest Expense 308

Interest Payable 308

Accrued interest on note payable

2008

Jan 27 Interest Expense 252

Notes Payable—Fargo Bank 42,000

Interest Payable 308

Cash 42,560

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Problem 9-2A (40 minutes)

1

2007

Nov 11 Cash 7,875

Sales 7,875

Sold razors to customers

11 Cost of Goods Sold 2,100

To record cost of November 11 sale (105 x $20)

30 Warranty Expense 630

To record razor warranty expense

and liability at 8% of selling price

Dec 9 Estimated Warranty Liability 300

To record cost of December 16 sale (220 x $20)

29 Estimated Warranty Liability 600

Merchandise Inventory 600

To record cost of razor warranty

replacements (30 x $20)

31 Warranty Expense 1,320

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2008

Jan 5 Cash 11,250

Sales 11,250

To record cost of January 5 sale (150 x $20)

17 Estimated Warranty Liability 1,000

To record cost of razor warranty

replacements (50 x $20)

2 Warranty expense for November 2007 and December 2007

Sales Percent Warranty Expense

November $ 7,875 8% $ 630

December 16,500 8 1,320 Total $24,375 $1,950

3 Warranty expense for January 2008

Sales in January $11,250

Warranty percent 8%

Warranty expense $ 900

4 Balance of the estimated liability as of December 31, 2007

Warranty expense for November $ 630 credit Warranty expense for December 1,320 credit Cost of replacing items in December (45 x $20) (900) debit Estimated Warranty Liability balance $1,050

1,050

credit

5 Balance of the estimated liability as of January 31, 2008

Beginning balance $1,050 credit Warranty expense for January 900 credit Cost of replacing items in January (50 x $20) (1,000) debit Estimated Warranty Liability balance $ 950 credit

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1 Miller Company

2 Weaver Company

3 Sales increase by 30% (multiply prior sales by 1.3)

Miller Co Weaver Co

Sales $1,300,000 $1,300,000

Variable expenses 1,040,000 780,000

Income before interest 260,000 520,000

Interest expense (fixed) 60,000 260,000

Net income $ 200,000 $ 260,000

Net income increases by* 43% 86%

* Computed as the increase in net income divided by prior net income.

Sales $1,500,000 $1,500,000

Variable expenses 1,200,000 900,000

Net income $ 240,000 $ 340,000

Net income increases by 71% 143%

Sales $1,800,000 $1,800,000

Variable expenses 1,440,000 1,080,000

Net income $ 300,000 $ 460,000

Net income increases by 114% 229%

Income before interest & taxes

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6 Sales decrease by 10% (multiply prior sales by 0.9)

Sales $900,000 $900,000

Variable expenses 720,000 540,000

Net income $120,000 $100,000

Net income decreases by -14% -29%

Sales $800,000 $800,000

Net income $100,000 $ 60,000

Sales $600,000 $600,000

Net income $ 60,000 $ (20,000)

9 The higher fixed cost strategy (having more fixed interest expense) of Weaver Co accentuates the effects of increases and decreases in sales That is, increases in sales produce greater increases in net income and decreases in sales produce greater decreases in net income The higher fixed cost strategy of Weaver Co is indicated by a lower value of the times interest earned ratio

The higher fixed cost strategy works fine if the sales level increases Weaver Co enjoys greater percent increases in its net income because

it has made this choice (see parts 3, 4, and 5)

The lower fixed cost strategy protects the company if the sales level decreases Miller Co experiences smaller percent decreases in its net income because it has made this choice (see parts 6, 7, and 8)

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1 Each employee’s FICA withholdings for Social Security

Maximum base $94,200 $94,200 $94,200 $94,200

Earned through 8/18 93,400 31,700 6,850 1,250

W ould-be subject to tax $ 800 $62,500 $87,350 $92,950

Earned this week $ 2,800 $ 1,000 $ 550 $ 500

Pay subject to tax 800 1,000 550 500

Tax rate 6.20% 6.20% 6.20% 6.20%

Social Security tax $ 49.60 $ 62.00 $ 34.10 $ 31.00 $176.70

2 Each employee’s FICA withholdings for Medicare (no limits)

Earned this week $ 2,800 $ 1,000 $ 550 $ 500

Tax rate 1.45% 1.45% 1.45% 1.45%

Medicare tax $ 40.60 $ 14.50 $ 7.98 $ 7.25 $ 70.33

3 Employer’s FICA taxes for Social Security

Amount from part 1 $ 49.60 $ 62.00 $ 34.10 $ 31.00 $176.70

4 Employer’s FICA taxes for Medicare

Amount from part 2 $ 40.60 $ 14.50 $ 7.98 $ 7.25 $ 70.33

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5 Employer’s FUTA taxes

Dahlia Trey Kiesha Chee Total

Maximum base $ 7,000 $ 7,000 $ 7,000 $ 7,000

Earned through 8/18 93,400 31,700 6,850 1,250

Earned this week $ 2,800 $ 1,000 $ 550 $ 500

Tax rate 0.8% 0.8% 0.8% 0.8%

FUTA tax $ 0.00 $ 0.00 $ 1.20 $ 4.00 $ 5.20

6 Employer’s SUTA taxes

Subject to tax (from 5) $ 0 $ 0 $ 150 $ 500

7 Each employee’s net (take-home) pay

Gross earnings $2,800.00 $1,000.00 $550.00 $500.00 $4,850.00 Less

FICA Social Sec tax (49.60) (62.00) (34.10) (31.00) (176.70)

FICA Medicare taxes (40.60) (14.50) (7.98) (7.25) (70.33) Withholding taxes (284.00) (145.00) (39.00) (30.00) (498.00) Health insurance (17.00) (17.00) (17.00) (17.00) (68.00) Take-home pay $2,408.80 $ 761.50 $451.92 $414.75 $4,036.97

8 Employer’s total payroll-related expense for each employee

Gross earnings $2,800.00 $1,000.00 $550.00 $500.00 $4,850.00 Plus

FICA Social Sec tax 49.60 62.00 34.10 31.00 176.70

FICA Medicare taxes 40.60 14.50 7.98 7.25 70.33 FUTA tax 0.00 0.00 1.20 4.00 5.20 SUTA tax 0.00 0.00 3.23 10.75 13.98 Health insurance 17.00 17.00 17.00 17.00 68.00 Pension contrib (8%) 224.00 80.00 44.00 40.00 388.00 Total payroll expense $3,131.20 $1,173.50 $657.51 $610.00 $5,572.21

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Part 1

Jan 8 Office Salaries Expense 22,760.00

Sales Salaries Expense 65,840.00

FICA—Social Sec Taxes Payable* 5,493.20 FICA—Medicare Taxes Payable** 1,284.70

Employee Fed Inc Taxes Payable 12,860.00 Employee Medical Insurance Payable 1,340.00 Employee Union Dues Payable 840.00 Accrued Payroll Payable 66,782.10

To record payroll for period

* $88,600 x 6.2%

** $88,600 x 1.45%

Part 2

Jan 8 Payroll Taxes Expense 11,030.70

FICA—Social Sec Taxes Payable 5,493.20 FICA—Medicare Taxes Payable 1,284.70

State Unemployment Taxes Payable* 3,544.00

F ederal Unemployment Taxes Payable ** 708.80

* $88,600 x 04 = $3,544.00

**$88,600 x 008 = $708.80

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Mar 15 FICASocial Security Taxes Payable 3,472

FICAMedicare Taxes Payable 812

Employee Fed Income Taxes Payable 4,000

Cash 8,284

To record payment of FICA and federal

income taxes

31 Office Salaries Expense 11,200

Shop Wages Expense 16,800

FICASocial Sec Taxes Payable 1,736 FICAMedicare Taxes Payable 406 Employee Fed Income Taxes Payable 4,000 Accrued Payroll Payable 21,858

To record payroll for period

31 Accrued Payroll Payable 21,858

Cash 21,858

To record payment of payroll.*

*The check numbers may be entered in the Payroll Register

31 Payroll Taxes Expense * 2,814

FICASocial Sec Taxes Payable 1,736 FICAMedicare Taxes Payable 406

State Unemployment Taxes Payable 560 Federal Unemployment Taxes Payable 112

* Amount earned through 2/28 = 2 x $2,800 = $5,600 Subject to SUTA/FUTA in March = $7,000 - $5,600 = $1,400 SUTA = $1,400 x 10 employees x 4.0% = $560

FUTA = $1,400 x 10 employees x 0.8% = $112 FICASocial Security Taxes = $1,736 (same as employees) FICAMedicare Taxes = $406 (same as employees)

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Problem 9-6A A (Concluded)

Apr 15 FICASocial Security Taxes Payable 3,472

FICAMedicare Taxes Payable 812

Employee Fed Income Taxes Payable 4,000

Cash 8,284

To record payment of FICA and

federal income taxes

15 State Unemployment Taxes Payable 2,800

Cash 2,800

To record payment of SUTA taxes [$2,240 + $560]

30 Federal Unemployment Taxes Payable 560

Cash 560

To record payment of FUTA taxes [$448 + $112]

30 No entry required upon mailing Form 941

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PROBLEM SET B

Problem 9-1B (45 minutes)

Fox Products

Spring Bank

City Bank

1 Maturity dates

Date of the note May 23 July 15 Dec 6 Term of the note (in days) 60 120 45 Maturity date July 22 Nov 12 Jan 20

2 Interest due at maturity

Principal of the note $4,600 $12,000 $8,000 Annual interest rate 15% 10% 9% Fraction of year 60/360 120/360 45/360 Interest expense $ 115 $ 400 $ 90

3 Accrued interest on City Bank note at the end of 2007

Total interest for note $ 90 Fraction of term in 2007 25/45 Accrued interest expense $ 50

4 Interest in 2008

Total interest for note $ 90 Fraction of term in 2008 20/45 Interest expense in 2008 $ 40

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Problem 9-1B (Concluded)

5

2007

Apr 22 Merchandise Inventory 5,000

Accounts PayableFox Products 5,000

Purchased merchandise on credit

May 23 Accounts PayableFox Products 5,000

Cash 400 Notes PayableFox Products 4,600

Paid $400 cash and gave a 60-day, 15% note to extend due date on account

July 15 Cash 12,000

Notes PayableSpring Bank 12,000

22 Interest Expense 115

Notes PayableFox Products 4,600 Cash 4,715

Nov 12 Interest Expense 400

Notes PayableSpring Bank 12,000 Cash 12,400

Dec 6 Cash 8,000

Notes PayableCity Bank 8,000

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1

2007

Nov 16 Cash 2,500

Sales 2,500

Sold coffee grinders to customers

To record cost of November 16 sale (50 x $24)

To record coffee grinder warranty expense

Dec 12 Estimated Warranty Liability 144

Sold coffee grinders to customers

To record cost of December 18 sale (200 x $24)

28 Estimated Warranty Liability 408

Merchandise Inventory 408

To record cost of coffee grinder

warranty replacements (17 x $24)

31 Warranty Expense 1,000

To record coffee grinder warranty expense

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