Note payable due in 10 equal annual installments

Exercises

1. Prepayments by customers. Greenland Enterprises began a new magazine in the fourth quarter of 20X2. Annual subscriptions, which cost $18 each, were sold as follows:

Number of Subscriptions Sold

October

400

November

700

December

1,000

If subscriptions begin (and magazines are sent) in the month of sale:

a. name the necessary journal entry to record the magazine subscriptions sold during the fourth quarter.

b. determine how much subscription revenue Greenland earned by the end of 20X2.

c. compute Greenland's liability to subscribers at the end of 20X2.

2. Accrued liability: current portion of long-term debt. On July 1, 20X1, Hall Company borrowed $225,000 via a long-term loan. Terms of the loan require that Hall pay interest and $75,000 of principal on July 1, 20X2, 20X3, and 20X4. The unpaid balance of the loan accrues interest at the rate of 10% per year. Hall has a December 31 year-end.

a. Compute Hall's accrued interest as of December 31, 20X1.

b. Present the appropriate balance sheet disclosure for the accrued interest and the current and long-term portion of the outstanding debt as of December 31, 20X1.

c. Repeat parts (a) and (b) using a date of December 31, 20X2, rather than December 31, 20X1. Assume that Hall is in compliance with the terms of the loan agreement.

3. Notes payable. Sentry Security Systems purchased $72,000 of office equipment on April 1, 20X3, by signing a 3-year, 12% note payable to Sharp Inc. One third of the principal, along with interest on the outstanding balance, is payable each April 1 until maturity. (The first payment is due in 20X4.)

a. Fill in the following table to reflect Sentry's liabilities, assuming a March 31 year-end.

20X4

20X5

20X6

Current Liabilities

Current portion of long-term debt

Interest payable

Long-Term Liabilities

Long-term debt

a. Assuming that interest is properly recorded at the end of each year, present the proper journal entry to record the last payment on April 1, 20X6.

4. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:

5. Social Security taxes: 6% on the first $55,000 earned

6. Medicare taxes: 1.5% on the first $130,000 earned

7. Federal income taxes withheld from wages: $7,500

8. State income taxes: 5% of gross earnings

9. Insurance withholdings: 1% of gross earnings

10. State unemployment taxes: 5.4% on the first $7,000 earned

11. Federal unemployment taxes: 0.8% on the first $7,000 earned

The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end.

a. Prepare the necessary entry to record Brookhaven's February payroll that will be paid on March 1.

b. Prepare the journal entry to record Brookhaven's payroll tax expense.

5. Payroll accounting. The following payroll information relates to Viking Company for the month of July:

Total (gross) employee earnings

$150,000

Earnings in excess of Social Security base earnings

18,000

Earnings in excess of Medicare base earnings

2,000

Earnings in excess of unemployment base earnings

94,000

Federal income taxes withheld

14,500

State income taxes withheld

3,000

Employee deductions for medical insurance

2,200

The Social Security tax rate is 6% on the first $55,000 earned per employee; Medicare is 1.5% on the first $130,000 earned. The state and federal unemployment tax rates are 5.4% and 0.8%, respectively, on the first $7,000 earned per employee.

a. Compute the employees' total take-home pay.

b. Compute Viking's total payroll-related expenses.

c. Assuming a stable work force, is total take-home pay likely to increase, decrease, or remain the same in September? Briefly explain.

Problems

1. Current liabilities: recognition and valuation. The seven transactions and events that follow relate to the 20X2 operations of Blue Giant Products.

· On February 1, the company signed a 1-year contract with the food processors union, agreeing to a 6% wage increase for all employees. The cost of the wage increase is estimated to be $100,000 per month.

· A customer slipped on a soft drink that he had spilled while walking through a Blue Giant store. The customer injured his back and has filed a $50,000 damage suit against the company. Blue Giant attorneys feel the suit is uncalled for and without merit.

· Blue Giant purchased merchandise on October 15 for $4,000; terms 5/15, n/60. The company overlooked the discount and intends to pay the supplier in January 20X3.

· Equipment that cost $12,000 was acquired on November 1 by issuing a 3-month, 10%, $12,000 note payable.

· Office furniture that cost $4,000 was purchased on December 1, with Blue Giant signing a $4,240, 12-month note payable. Interest is included in the note's face value.

· The company operates in a state that has a 6% sales tax. Sales of merchandise on account during December amounted to $300,000.

· On the last day of 20X2, Blue Giant borrowed $1 million from Monticello Bank. The loan's principal is due in 10 equal annual installments of $100,000 each, with each installment payable on December 31. The loan has a 9% interest rate.

Instructions

a. Indicate which of the seven transactions and events would appear in the Current Liability section of the firm's December 31, 20X2, balance sheet.

b. Show how the items in part (a) would be disclosed. Use proper dollar amounts.

c. Indicate how the transactions and events that are not current liabilities would be handled for accounting purposes.

2. Current liabilities: entries and disclosure. A review of selected financial activities of Visconti's during 20XX disclosed the following:

12/1: Borrowed $20,000 from the First City Bank by signing a 3- month, 15% note payable. Interest and principal are due at maturity.

2/10: Established a warranty liability for the XY-80, a new product. Sales are expected to total 1,000 units during the month. Past experience with similar products indicates that 2% of the units will require repair, with warranty costs averaging $27 per unit.

12/22: Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10, n/30.

12/26: Borrowed $5,000 from First City Bank; signed a $5,120 note payable due in 60 days.

12/31: Repaired six XY-80s during the month at a total cost of $162.

12/31: Accrued 3 days of salaries at a total cost of $1,400.

12/31: Accrued vacation pay amounting to 6% of December's $36,000 total wage and salary expense.

Instructions

a. Prepare journal entries to record the preceding transactions and events.

b. Determine accrued interest as of December 31, 20XX, and prepare the necessary adjusting entry or entries.

c. Prepare the current liability section of Visconti's December 31, 20XX balance sheet.

2. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:

8/2: Borrowed $75,000 from the Bank of Kingsville by signing a 120-day note for $79,000.

8/20: Issued a $40,000 note to Harris Motors for the purchase of a $40,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.

9/10: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.

9/11: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.

10/10: The note to Paris Enterprises was paid in full.

10/11: The note to Datatex Equipment was due today, but insufficient funds were available for payment. Management authorized the issuance of a new 20-day, 18% note for $60,700, the maturity value of the original obligation.

10/31: The new note to Datatex Equipment was paid in full.

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on October 31 to record accrued interest.

c. Prepare the Current Liability section of Red Bank's balance sheet as of October 31. Assume that the Accounts Payable account totals $203,600 on this date.

4. Payroll journal entries. The following tax rates and payroll information pertain to the Syracuse operations of IMS Company for November:

5. Social Security taxes: 6% on the first $55,000 earned

6. Medicare taxes: 1.5% on the first $130,000 earned

7. Federal income taxes withheld from wages: $4,400

8. State income taxes: 6% of gross earnings

9. Insurance withholdings: 1% of gross earnings

10. Pension contributions: 2.5% of gross earnings

11. State unemployment taxes: 5.4% on the first $7,000 earned

12. Federal unemployment taxes: 0.8% on the first $7,000 earned

Sales staff salaries amounted to $26,000, $3,000 of which is over the unemployment earnings base but subject to all other appropriate taxes. The company's branch manager, Tracy Smith, earned her regular salary of $9,000 during the month.

Instructions

a. Prepare the journal entry to record the November payroll. Smith's salary is classified as an administrative expense by the company.

b. IMS matches employees' insurance and pension contributions. Prepare a journal entry to record the firm's payroll taxes and other related payroll costs. Assume that these amounts will be remitted to the proper authorities in December.

c. The owner of IMS asked the firm's accountant to reclassify all personnel as independent contractors. The accountant explained that such a reclassification would not be appropriate because, by law, the personnel were considered employees. Briefly comment on the probable reasoning behind the owner's request