Current Liabilities and Payroll

Question:Abernathy Electronics reported the following amounts on its 2018 income statement: Year Ended December 31, 2018 Net income $ 45,000 Income tax expense 6,750 Interest expense 3,750 What is Abernathy’s times-interest-earned ratio for 2018? (Round to two decimals.)

Consider the following transactions of Sapphire Software: Mar. 31 Recorded cash sales of $230,000, plus sales tax of 7% collected for the state of New Jersey. Apr. 6 Sent March sales tax to the state. Journalize the transactions for the company. Ignore cost of goods sold.

Consider the following note payable transactions of Creative Video Productions. 2017 Aug. 1 Purchased equipment costing $16,000 by issuing a one-year, 9% note payable. Dec. 31 Accrued interest on the note payable. 2018 Aug. 1 Paid the note payable plus interest at maturity. Journalize the transactions for the company.

Watson Publishing completed the following transactions during 2018: Oct. 1 Sold a six-month subscription (starting on November 1), collecting cash of $240, plus sales tax of 8%. Nov. 15 Remitted (paid) the sales tax to the state of Tennessee. Dec. 31 Made the necessary adjustment at year-end to record the amount of subscription revenue earned during the year. Journalize the transactions (explanations are not required). Round to the nearest dollar.

Erin O’Neil Associates reported short-term notes payable and salaries payable as follows:

During 2018, O’Neil paid off both current liabilities that were left over from 2017, borrowed cash on short-term notes payable, and accrued salaries expense.  Journalize all four of these transactions for O’Neil during 2018. Assume no interest on short-term notes payable of $16,000.

Hugh Stanley manages a Dairy House drive-in. His straight-time pay is \(12 per hour, with time-and-a-half for hours in excess of 40 per week. Stanley’s payroll deductions include withheld income tax of 20%, FICA tax, and a weekly deduction of \)5 for a charitable contribution to United Way. Stanley worked 58 hours during the week. 

Requirements 

1. Compute Stanley’s gross pay and net pay for the week. Assume earnings to date are $18,000. 
2. Journalize Dairy Houses wages expense accrual for Stanley’s work. An explanation is not required. 
3. Journalize the subsequent payment of wages to Stanley.

Question: Recording employee and employer payroll taxes County Company had the following partially completed payroll register:

Requirements 

1. Complete the payroll register. Round to two decimals. 
2. Journalize County Company’s salaries and wages expense accrual for the current pay period. 
3. Journalize County Company’s expenses for employer payroll taxes for the current pay period. 
4. Journalize the payment to employees. 
5. Journalize the payment for withholdings and employer payroll taxes.

Accounting for warranties, vacancies and bonuses

McNight Industries completed the following transactions during 2008:

Journalize the transactions. Explanations are not required. Round to the nearest dollar.

Accounting treatment for contigencies

Analyze the following independent situations.

1. Weaver, Inc. is being sued by a former employee.  Weaver believes that there is a remote chance that the employee will win. The employee is suing weaver for damages of \(40.000.
2. Gulf Oil Refinery had a gas explosion on one of its oil rigs. Gulf believes it is likely that it will have to pay environmental clean-up costs and damages in the future due to the gas explosion. Gulf cannot estimate the amount of the damages.
3.  Lawson Enterprises estimates that it will have to pay \)75,000 in warranty repairs next year.

Determine how each contingency should be treated.

The following financial information was obtained from the year ended 2018 income statements for Cash Automotive and Pennington Automotive:

                                                                  Cash                       Pennington

Net income                                          \( 26,070                        \) 74,188

Income tax expense                                9,270                           27,080

Interest expense                                         300                             2,900

Requirements

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

2. Which company was better able to cover its interest expense?

The general ledger of Seal-N-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                                            \( 114,000

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                                        7,200

Long-term Notes Payable                                  210,000

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 \)42,000, with the next installment due on July 31. On that date, Seal-N-Ship will also pay one year’s interest at 9%. 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 \(4,700. Assume that employee income taxes withheld are \)910 and that all earnings are subject to OASDI.

c. Record the associated employer taxes payable for the last payroll of the fiscal year, \(4,700. Assume that the earnings are not subject to unemployment compensation taxes

d. On February 1, the company collected one year’s rent of \)7,200 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.

Logan White is general manager of Valuepoint Salons. During 2018, White worked for the company all year at a \(13,600 monthly salary. He also earned a year-end bonus equal to 15% of his annual salary.

White’s federal income tax withheld during 2018 was \)1,360 per month, plus \(4,876 on his bonus check. State income tax withheld came to \)150 per month, plus \(60 on the bonus. FICA tax was withheld on the annual earnings. White authorized the following payroll deductions: Charity Fund contribution of 1% of total earnings and life insurance of \)40 per month.

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

Requirements

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

2. Compute Valuepoint’s total 2018 payroll tax expense for White.

3. Make the journal entry to record Valuepoint’s expense for White’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 Valuepoint’s payroll tax expense for White’s total earnings.

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

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

2017

Jan. 9 Purchased computer equipment at a cost of \(12,000, signing a six-month, 9% note payable for that amount.

29 Recorded the week’s sales of \)63,000, three-fourths on credit and onefourth 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, 9% note, plus interest, at maturity.

Aug. 31 Purchased merchandise inventory for \(9,000, signing a six-month, 10% note payable. The company uses the perpetual inventory system.

Dec. 31 Accrued warranty expense, which is estimated at 4% 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. Round to the nearest dollar.

The following transactions of Jasmine Reef occurred during 2018:

Apr. 30 Reef is party to a patent infringement lawsuit of \(190,000. Reef’sattorney is certain it is remote that Reef will lose this lawsuit.

Jun. 30 Estimated warranty expense at 2% of sales of \)350,000.

Jul. 28 Warranty claims paid in the amount of \(5,500.

Sep. 30 Reef is party to a lawsuit for copyright violation of \)80,000. Reef’sattorney advises that it is probable Reef will lose this lawsuit. Theattorney estimates the loss at \(80,000.

Dec. 31 Reef estimated warranty expense on sales for the second half of the yearof \)510,000 at 2%.

Requirements

1. Journalize required transactions, if any, in Reef ’s general journal. Explanations arenot required.

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

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 areas 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 30balances.

2. Journalize and post the June 30 payroll and adjusting entries to the accounts thatyou 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?

Question: The income statement for Vermont Communications follows. Assume VermontCommunications signed a 3-month, 3%, \(6,000 note on June 1, 2018, and that thiswas the only note payable for the company.

Requirements

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

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

This problem continues the Canyon Canoe Company situation from Chapter 10. Amber and Zack Wilson are continuing their analysis of the company’s position and believe the company will need to borrow \(15,000 in order to expand operations. They consult Rivers Nation Bank and secure a 6%, one-year note on September 1, 2019, with interest due at maturity. Additionally, the company hires an employee, John Vance, on September 1. John will receive a salary of \)3,000 per month. Payroll deductions include federal income tax at 25%, OASDI at 6.2%, Medicare at 1.45%, and monthly health insurance premium of \(250. The company will incur matching FICA taxes, FUTA tax at 0.6%, and SUTA tax at 5.4%. Round calculations to two decimals. Omit explanations on journal entries.

Requirements 

1. Record the issuance of the \)15,000 note payable on September 1, 2019. 
2. Record the employee payroll and employer payroll tax entries on September 30, 2019. 
3. Record all payments related to September’s payroll. Payments are made on October 15, 2019. 
4. Record the entry to accrue interest due on the note at December 31, 2019. 

Record the entry Canyon Canoe Company would make to record the payment to the bank on September 1, 2020.

Golden Bear Construction operates throughout California. The owner, Gaylan Beavers, employs 15 work crews. Construction supervisors report directly to Beavers, and the supervisors are trusted employees. The home office staff consists of an accountant and an office manager.

Because employee turnover is high in the construction industry, supervisors hire and fire their own crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee W-4 forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their crews, and the accountant prepares the payroll. At noon on Friday, the supervisors come to the office to get paychecks for distribution to the workers at 5 p.m.

The company accountant prepares the payroll, including the paychecks. Beavers signs all paychecks. To verify that each construction worker is a bona fide employee, the accountant matches the employee’s endorsement signature on the back of the canceled paycheck with the signature on that employee’s W-4 form.

Requirements 

Discuss a control feature that the company can use to safeguard against the fraud you identified in Requirement 1.

Many small businesses have to squeeze down costs any way they can just to survive. One way many businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20-factor test” that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find themselves subject to “self-employment” taxes, by which they bear the brunt of both the employee’s and the employer’s shares of FICA taxes. 

Requirements 

If a business takes an aggressive position—that is, interprets the law in a very slanted way—is there an ethical issue involved? Who is hurt?

In 150 words or fewer, explain how contingent liabilities are accounted for.

Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. SellSoft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.

Requirements 

1. Why would a company prefer not to disclose its contingent liabilities? 
2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities. 
3. What ethical tightrope must companies walk when they report contingent liabilities?