Chapter 11

Rock On Magazine Co. sold 11,400 annual subscriptions of Rock On for \(\$ 35\) during December 2008. These new subscribers will receive monthly issues, beginning in January 2009. In addition, the business had taxable income of \(\$ 140,000\) during the first calendar quarter of 2009 . The federal tax rate is \(35 \%\). A quarterly tax payment will be made on April 7,2009 . Prepare the Current Liabilities section of the balance sheet for Rock On Magazine Co. on March 31,2009 .

Home Center Warehouse issues a 90 -day note for \(\$ 250,000\) to Gem Lighting Co. for merchandise inventory. Gem Lighting Co. discounts the note at \(5 \%\). a. Journalize Home Center Warehouse's entries to record: 1\. the issuance of the note. 2\. the payment of the note at maturity. b. Journalize Gem Lighting Co.'s entries to record: 1\. the receipt of the note. 2\. the receipt of the payment of the note at maturity.

A borrower has two alternatives for a loan: (1) issue a \(\$ 120,000,90\)-day, \(6 \%\) note or (2) issue a \(\$ 120,000,90\)-day note that the creditor discounts at \(6 \%\). a. Calculate the amount of the interest expense for each option. b. Determine the proceeds received by the borrower in each situation. c. Which alternative is more favorable to the borrower? Explain.

A business issued a 60 -day, \(7 \%\) note for \(\$ 15,000\) to a creditor on account. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest.

A business issued a 90 -day note for \(\$ 80,000\) to a creditor on account. The note was discounted at \(8 \%\). Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity.

On June 30, Mystic Mountain Game Company purchased land for \(\$ 250,000\) and a building for \(\$ 690,000\), paying \(\$ 240,000\) cash and issuing an \(8 \%\) note for the balance, secured by a mortgage on the property. The terms of the note provide for 20 semiannual payments of \(\$ 35,000\) on the principal plus the interest accrued from the date of the preceding payment. Journalize the entry to record (a) the transaction on June 30 , (b) the payment of the first installment on December 31 , and (c) the payment of the second installment the following June 30 .

An employee earns \(\$ 22\) per hour and \(11 / 2\) times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 50 hours during the week, and that the gross pay prior to the current week totaled \(\$ 42,710\). Assume further that the social security tax rate was \(6.0 \%\) (on earnings up to \(\$ 100,000\) ), the Medicare tax rate was \(1.5 \%\), and federal income tax to be withheld was \(\$ 236\). a. Determine the gross pay for the week. b. Determine the net pay for the week.

According to a summary of the payroll of Glitz Publishing Co., \(\$ 350,000\) was subject to the \(6.0 \%\) social security tax and \(\$ 420,000\) was subject to the \(1.5 \%\) Medicare tax. Also, \(\$ 14,000\) was subject to state and federal unemployment taxes. a. Calculate the employer's payroll taxes, using the following rates: state unemployment, \(4.3 \%\); federal unemployment, \(0.8 \%\). b. Journalize the entry to record the accrual of payroll taxes.

The payroll register for Hillsdale Company for the week ended December 14 indicated the following: \(\begin{array}{lr}\text { Salaries } & \$ 690,000 \\ \text { Social security tax withheld } & 32,700 \\ \text { Medicare tax withheld } & 10,350 \\ \text { Federal income tax withheld } & 138,700\end{array}\) In addition, state and federal unemployment taxes were calculated at the rate of \(0.8 \%\) and \(5.2 \%\), respectively, on \(\$ 26,000\) of salaries. a. Journalize the entry to record the payroll for the week of December \(14 .\) b. Journalize the entry to record the payroll tax expense incurred for the week of December 14 .

Dowling Company had gross wages of \(\$ 356,000\) during the week ended December 6 . The amount of wages subject to social security tax was \(\$ 285,000\), while the amount of wages subject to federal and state unemployment taxes was \(\$ 18,000\). Tax rates are as follows: \(\begin{array}{ll}\text { Social security } & 6.0 \% \\ \text { Medicare } & 1.5 \% \\ \text { State unemployment } & 5.4 \% \\ \text { Federal unemployment } & 0.8 \%\end{array}\) The total amount withheld from employee wages for federal taxes was \(\$ 66,900\). a. Journalize the entry to record the payroll for the week of December 6 . b. Journalize the entry to record the payroll tax expense incurred for the week of December 6 .

Handyman's Helper is a small manufacturer of home workshop power tools. The company employs 30 production workers and 10 administrative persons. The following procedures are used to process the company's weekly payroll: a. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department. b. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required when an hourly worker is terminated. Hourly employees only receive a paycheck if their time cards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked. c. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee's wage rate in the payroll system. d. Handyman's Helper maintains a separate checking account for payroll checks. Each week, the total net pay for all employees is transferred from the company's regular bank account to the payroll account. e. Paychecks are signed by using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed. State whether each of the procedures is appropriate or inappropriate after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.

The fiscal year for Super Sale Stores Co. ends on June 30 . In addition, the company computes and reports payroll taxes on a fiscal-year basis. Thus, it applies social security and FUTA maximum earnings limitations to the fiscal- year payroll. What is wrong with these procedures for accounting for payroll taxes?

A business provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year's vacation pay is \(\$ 54,960\). Journalize the adjusting entry required on January 31 , the end of the first month of the current year, to record the accrued vacation pay.

Precious Images Co. operates a chain of photography stores. The company maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Safeguard Funds, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is \(\$ 87,500\) for the quarter ended December 31 , journalize entries to record (a) the accrued pension liability on December 31 and (b) the payment to the funding agent on January \(15 .\)

Audio-Wave Company warrants its products for one year. The estimated product warranty is \(2 \%\) of sales. Assume that sales were \(\$ 85,000\) for January. In February, a customer received warranty repairs requiring \(\$ 210\) of parts and \(\$ 135\) of labor. a. Journalize the adjusting entry required at January 31 , the end of the first month of the current year, to record the accrued product warranty. b. Journalize the entry to record the warranty work provided in February.

Several months ago, Rainbow Paint Company experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company \(\$ 560,000\). The company is contesting the fine. In addition, an employee is seeking \(\$ 275,000\) damages related to the spill. Lastly, a homeowner has sued the company for \(\$ 190,000\). The homeowner lives 25 miles from the plant, but believes that the incident has reduced the home's resale value by \(\$ 190,000\). Rainbow's legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of \(\$ 150,000\) has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Rainbow. Other litigation related to the spill is possible, but the damage amounts are uncertain. a. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account "Damage Awards and Fines" to recognize the expense for the period. b. Prepare a note disclosure relating to this incident.

Urban-Wear Clothes Co. had the following current assets and liabilities for two comparative years: \begin{tabular}{lrr} & Dec. 31, 2008 & Dec. 31, 2007 \\ \hline Current assets: & & \\ Cash & \(\$ 140,000\) & \(\$ 205,000\) \\ Accounts receivable & 250,000 & 245,000 \\ Inventory & 300,000 & 180,000 \\ \(\quad\) Total current assets & \(\$ 690,000\) & \(\$ 630,000\) \\ Current liabilities: & & \\ Current portion of long-term debt & \(\$ 50,000\) & \(\$ 50,000\) \\ Accounts payable & 200,000 & 190,000 \\ Accrued expenses payable & 140,000 & 135,000 \\ \(\quad\) Total current liabilities & \(\$ 390,000\) & \(\$ 375,000\) \\ \hline \end{tabular} a. Determine the quick ratio for December 31, 2008 and \(2007 .\) b. Interpret the change in the quick ratio between the two balance sheet dates.