Current Liabilities and Payroll

On August 10, Swanson Company recorded sales of merchandise inventory on account, \(4,000. The sales were subject to sales tax of 4%. The company uses the perpetual inventory system. On September 30, Swanson paid \)500 of sales tax to the state. 

1. Journalize the transaction to record the sale on August 10. Ignore cost of goods sold.

On July 5, Williams Company recorded sales of merchandise inventory on account, $55,000. The sales were subject to sales tax of 4%. On August 15, Williams Company paid the sales tax owed to the state from the July 5 transaction. Requirements 1. Journalize the transaction to record the sale on July 5. Ignore cost of goods sold. 2. Journalize the transaction to record the payment of sales tax to the state on August 15.

: On June 1, Hunting Man Magazine collected cash of $63,000 on future annual subscriptions starting on July 1. Requirements

 1. Journalize the transaction to record the collection of cash on June 1.

 2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no revenue earned has been recorded. (Round adjustment to the nearest whole dollar.)

: O’Conner guarantees its vacuums for four years. Prior experience indicates that warranty costs will be approximately 6% of sales. Assume that O’Conner made sales totaling $200,000 during 2018. Record the warranty expense for the year.

Lucy Rose works at College of Fort Worth and is paid $12 per hour for a 40-hour workweek and time-and-a-half for hours above 40. 

Requirements 

1. Compute Rose’s gross pay for working 60 hours during the first week of February. 

2. Rose is single, and her income tax withholding is 15% of total pay. Rose’s only payroll deductions are payroll taxes. Compute Rose’s net (take-home) pay for the week. Assume Rose’s earnings to date are less than the OASDI limit. 

3. Journalize the accrual of wages expense and the payment related to the employment of Lucy Rose.

Recording employer payroll taxes and employee benefits Ricardo’s Mexican Restaurant incurred salaries expense of \(62,000 for 2018. The payroll expense includes employer FICA tax, in addition to state unemployment tax and federal unemployment tax. Of the total salaries, \)22,000 is subject to unemployment tax. Also, the company provides the following benefits for employees: health insurance (cost to the company, \(3,000), life insurance (cost to the company, \)330), and retirement benefits (cost to the company, 10% of salaries expense). 

Requirements 

1. Journalize Ricardo’s expenses for employee benefits and for payroll taxes. Explanations are not required. 
2. What was Ricardo’s total expense for 2018 related to payroll?

Accounting for warranty expense and warranty payable 

The accounting records of Sculpted Ceramics included the following at January 1, 2018:

In the past, Sculpted’s warranty expense has been 9% of sales. During 2018, Sculpted made sales of \(113,000 and paid \)7,000 to satisfy warranty claims. Requirements 

1. Journalize Sculpted’s warranty expense and warranty payments during 2018.   Explanations are not required. 
2. What balance of Estimated Warranty Payable will Sculpted report on its balance sheet at December 31, 2018?

The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, \(3,000 note on June 1, 2018, and that this was the only note payable for the company.

Requirements

1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.

2. Compute the times-interest-earned ratio for the company. Round to two decimals.

The general ledger of Prompt Ship at June 30, 2018, the end of the company’s fiscal year, includes the following account balances before payroll and adjusting entries.

Accounts Payable                                            \( 118,000

Interest Payable                                                             0

Salaries Payable                                                            0

Employee Income Taxes Payable                                0

FICA—OASDI Taxes Payable                                       0

FICA—Medicare Taxes Payable                                   0

Federal Unemployment Taxes Payable                       0

State Unemployment Taxes Payable                           0

Unearned Rent Revenue                                        5,400

Long-term Notes Payable                                  198,000

The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:

a. The long-term debt is payable in annual installments of \)39,600, with the next installment due on July 31. On that date, Prompt Ship will also pay one year’s interest at 10%. Interest was paid on July 31 of the preceding year. Make the adjusting entry to accrue interest expense at year-end.

b. Gross unpaid salaries for the last payroll of the fiscal year were \(4,800. Assume that employee income taxes withheld are \)920 and that all earnings are subject to OASDI.

c. Record the associated employer taxes payable for the last payroll of the fiscal year, \(4,800. Assume that the earnings are not subject to unemployment compensation taxes

d. On February 1, the company collected one year’s rent of \)5,400 in advance.

Requirements

1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.

2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened. Identify each adjusting entry by letter. Round to the nearest dollar.

3. Prepare the current liabilities section of the balance sheet at June 30, 2018.

Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company all year at a \(13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.

Wallace’s federal income tax withheld during 2018 was \)2,010 per month, plus \(1,608 on his bonus check. State income tax withheld came to \)110 per month, plus \(80 on the bonus. FICA tax was withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 2% of total earnings and life insurance of \)15 per month.

Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state unemployment tax and federal unemployment tax.

Requirements

1. Compute Wallace’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.

2. Compute Moonwalk’s total 2018 payroll tax expense for Wallace.

3. Make the journal entry to record Moonwalk’s expense for Wallace’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.

4. Make the journal entry to record the accrual of Moonwalk’s payroll tax expense for Wallace’s total earnings.

5. Make the journal entry for the payment of the payroll withholdings and taxes.

The following transactions of Philadelphia Pharmacies occurred during 2017 and 2018:

2017

Jan. 9 Purchased computer equipment at a cost of \(7,000, signing a six-month, 8% note payable for that amount.

29 Recorded the week’s sales of \)68,000, three-fourths on credit and one-fourth for cash. Sales amounts are subject to a 6% state sales tax. Ignore cost of goods sold.

Feb. 5 Sent the last week’s sales tax to the state.

Jul. 9 Paid the six-month, 8% note, plus interest, at maturity.

Aug. 31 Purchased merchandise inventory for \(3,000, signing a six-month, 10% note payable. The company uses the perpetual inventory system.

Dec. 31 Accrued warranty expense, which is estimated at 2% of sales of \)609,000.

31 Accrued interest on all outstanding notes payable.

2018

Feb. 28 Paid the six-month 10% note, plus interest, at maturity.

Journalize the transactions in Plymouth’s general journal. Explanations are not required.

The following transactions of Belkin Howe occurred during 2018:

Apr. 30  Howe is party to a patent infringement lawsuit of \(230,000. Howe’s attorney is certain it is remote that Howe will lose this lawsuit.

Jun. 30  Estimated warranty expense at 3% of sales of \)390,000.

Jul. 28   Warranty claims paid in the amount of \(6,300.

Sep. 30  Howe is party to a lawsuit for copyright violation of \)90,000. Howe’s attorney advises that it is probable Howe will lose this lawsuit. The attorney estimates the loss at \(90,000.

Dec. 31 Howe estimated warranty expense on sales for the second half of the year of \)520,000 at 3%.

Requirements

1. Journalize required transactions, if any, in Howe’s general journal. Explanations are not required.

2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?

Theodore Simpson works for Blair Company all year and earns a monthly salary of \(4,000. There is no overtime pay.

Based on Theodore’s W-4, Blair withholds income taxes at 15% of his gross pay. As of July 31, Theodore had \)28,000 ofcumulative earnings.

Journalize the accrual of salary expense for Blair Company related to the employment of Theodore Simpson for the month ofAugust.

O’Conner guarantees its vacuums for four years. Prior experience indicates that warranty costs will be approximately 6%ofsales. Assume that O’Conner made sales totaling $200,000 during 2018. Record the warranty expense for the year.

Match the likelihood of a future event with the reporting of the contingency. An answer may be selected more than once. 

What are the three main characteristics of liabilities?

What is a current liability? Provide some examples of current liabilities. 

How is sales tax recorded? Is it considered an expense of a business? Why or why not?

How do unearned revenues arise?

What do short-term notes payable represent?

Coltrane Company has a \(5,000 note payable that is paid in \)1,000 installments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?

Coltrane Company has a \(5,000 note payable that is paid in \)1,000 instalments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?

What is the difference between gross pay and net pay?

What is the difference between gross pay and net pay?

List the required employee payroll withholding deductions, and provide the tax rate for each.

List the required employee payroll withholding deductions, and provide the tax rate for each.

Rios Raft Company had the following liabilities. 

a. Accounts Payable

b. Note Payable due in 3 years

c. Salaries Payable

d. Note Payable due in 6 months

e. Sales Tax Payable

f. Unearned Revenue due in 8 months

g. Income Tax Payable

Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL).

Rios Raft Company had the following liabilities. 

a. Accounts Payable

b. Note Payable due in 3 years

c. Salaries Payable

d. Note Payable due in 6 months

e. Sales Tax Payable

f. Unearned Revenue due in 8 months

g. Income Tax Payable

Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL).

How might a business use a payroll register?

How might a business use a payroll register?

What payroll taxes is the employer responsible for paying?

What payroll taxes is the employer responsible for paying?

What are the two main controls for payroll? Provide an example of each.

What are the two main controls for payroll? Provide an example of each.

When do businesses record warranty expenses, and why?

When do businesses record warranty expenses, and why?

What is a contingent liability? Provide some examples of contingencies.

What is contingent liability? Provide some examples of contingencies.

Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?

Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?

How is the times-interest-earned ratio calculated, and what does it evaluate?

How is the times-interest-earned ratio calculated, and what does it evaluate?

:On December 31, 2017, Franklin purchased $13,000 of merchandise inventory on a one-year, 9% note payable. Franklin uses a perpetual inventory system. Requirements

 1. Journalize the company’s purchase of merchandise inventory on December 31, 2017.

 2. Journalize the company’s accrual of interest expense on June 30, 2018, its fiscal year-end.

 3. Journalize the company’s payment of the note plus interest on December 31, 2018

On January 1, Irving Company purchased equipment of \(280,000 with a long-term note payable. The debt is payable in annual installments of \)56,000 due on December 31 of each year. At the date of purchase, how will Irving Company report the note payable?

Lily Carter works for JDK all year and earns a monthly salary of \(12,100. There is no overtime pay. Lily’s income tax withholding rate is 10% of gross pay. In addition to payroll taxes, Lily elects to contribute 5% monthly to United Way. JDK also deducts \)250 monthly for co-payment of the health insurance premium. As of September 30, Lily had $108,900 of cumulative earnings. Requirements 

1. Compute Lily’s net pay for October. 

2. Journalize the accrual of salaries expense and the payment related to the employment of Lily Carter.

Macintosh Company has monthly salaries of \(26,000. Assume Macintosh pays all the standard payroll taxes, no employees have reached the payroll tax limits, total income tax withheld is \)2,000, and the only payroll deductions are payroll taxes. Journalize the accrual of salaries expense, accrual of employer payroll taxes, and payment of employee and employer payroll taxes for Macintosh Company.

On December 31, Weston Company estimates that it will pay its employees a 5% bonus on net income after deducting the bonus. The company reports net income of $64,000 before the calculation of the bonus. The bonus will be paid on January 15 of the next year.Requirements 

1. Journalize the December 31 transaction for Weston. 

2. Journalize the payment of the bonus on January 15.

Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays each employee a weekly salary of $1,250 for a five-day workweek. Requirements

1. Determine the amount of vacation expense for one month.

2. Journalize the entry to accrue the vacation expense for the month.

Runner guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be approximately 5% of sales. Assume that the Trail Runner dealer in Colorado Springs made sales totaling \(600,000 during 2018. The company received cash for 20% of the sales and notes receivable forthe remainder. Warranty payments totaled \)10,000 during 2018.

Requirements

Record the sales, warranty expense, and warranty payments for the company.

Ignore cost of goods sold.

Freeman Motors, a motorcycle manufacturer, had the following contingencies. 

a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be \(4,500,000. 

b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous. 

c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be \)75,000. 

Determine the appropriate accounting treatment for each of the situations Freeman is facing.