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B EXERCISES

1 E13-1B (Balance Sheet Classification of Various Liabilities) How would each of the following items be
reported on the balance sheet?
(a) Gift certificates sold to customers but not yet (i) Accrued vacation pay.
redeemed. (j) Service warranties on appliance sales.
(b) Discount on notes payable. (k) Employee payroll deductions unremitted.
(c) Current maturities of long-term debts to (l) Deposit received from customer to
be paid from current assets. guarantee performance of a contract.
(d) Dividends in arrears on preferred stock. (m) Sales taxes payable.
(e) Loans from officers. (n) Unpaid bonus to officers.
(f) Cash dividends declared but unpaid. (o) Bank overdraft.
(g) Personal injury claim pending. (p) Estimated taxes payable.
(h) Premium offers outstanding.
1 E13-2B (Accounts and Notes Payable) The following are selected 2014 transactions of Palmeiro
Corporation.
Sept. 1 Purchased inventory from Ripken Company on account for $125,000. Palmeiro records purchases
gross and uses a periodic inventory system.
Oct. 1 Issued a $125,000, 12-month, 12% note to Ripken in payment of account.
Oct. 1 Borrowed $125,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $142,000 note.

Instructions
(a) Prepare journal entries for the selected transactions above.
(b) Prepare adjusting entries at December 31. (Use straight-line amortization of the discount.)
(c) Compute the total net liability to be reported on the December 31 balance sheet for:
(1) the interest-bearing note.
(2) the zero-interest-bearing note. (Use straight-line amortization.)
2 E13-3B (Refinancing of Short-Term Debt) On December 31, 2014, Hernandez Company had $3,000,000
of short-term debt in the form of notes payable due February 2, 2015. On January 21, 2015, the company
issued 50,000 shares of its common stock for $50 per share, receiving $2,500,000 proceeds after brokerage
fees and other costs of issuance. On February 2, 2015, the proceeds from the stock sale, supplemented by
an additional $500,000 cash, are used to liquidate the $3,000,000 debt. The December 31, 2014, balance
sheet is issued on February 23, 2015.
Instructions
Show how the $3,000,000 of short-term debt should be presented on the December 31, 2014, balance sheet,
including note disclosure.
2 E13-4B (Refinancing of Short-Term Debt) On December 31, 2014, Gibson Company has $18,200,000
of short-term debt in the form of notes payable to Blue Lagoon State Bank due in 2015. On January 28,
2015, Gibson enters into a refinancing agreement with Blue Lagoon that will permit it to borrow up to
60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of
$15,600,000 in May to a high of $20,800,000 in October during the year 2015. The interest cost of the ma-
turing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime
rate on notes due in 2019. Gibson intends to use the refinancing agreement to the fullest extent possible.
Gibson’s December 31, 2014, balance sheet is issued on February 15, 2015.
Instructions
Prepare a partial balance sheet for Gibson at December 31, 2014, showing how its $18,200,000 of short-
term debt should be presented, including note disclosure.
3 E13-5B (Compensated Absences) Zeile Company began operations on January 2, 2013. It employs
9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and
6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in
which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate.
Additional information is as follows.

Actual Hourly Vacation Days Used Sick Days Used

Wage Rate by Each Employee by Each Employee
2013 2014 2013 2014 2013 2014
$15 $18 0 9 4 5

1
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2 • Chapter 13 Current Liabilities and Contingencies

Zeile Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the
period when earned and to accrue sick pay when earned.
Instructions
(a) Prepare journal entries to record transactions related to compensated absences during 2013 and 2014.
(b) Compute the amounts of any liability for compensated absences that should be reported on the
balance sheet at December 31, 2013 and 2014.
3 E13-6B (Compensated Absences) Assume the facts in the preceding exercise, except that Zeile
Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time
at expected future rates of pay without discounting. The company used the following projected rates to
accrue vacation time.
Year in Which Vacation Projected Future Pay Rates
Time Was Earned Used to Accrue Vacation Pay
2014 $16.00
2015 18.50

Instructions
(a) Prepare journal entries to record transactions related to compensated absences during 2014 and 2015.
(b) Compute the amounts of any liability for compensated absences that should be reported on the
balance sheet at December 31, 2014, and 2015.
1 E13-7B (Adjusting Entry for Sales Tax) During the month of June, Bench Co. had cash sales of $300,000
and credit sales of $180,000, both of which include the 8% sales tax that must be remitted to the state by
July 15.
Instructions
Prepare the adjusting entry that should be recorded to fairly present the June 30 financial statements.
3 E13-8B (Payroll Tax Entries) The payroll of Grich Company for September 2014 is as follows.
Total payroll was $960,000, of which $220,000 is exempt from Social Security tax because it represented
amounts paid in excess of $102,000 to certain employees. The amount paid to employees in excess of
$7,000 was $800,000. Income taxes in the amount of $180,000 were withheld, as was $18,000 in union dues.
The state unemployment tax is 3.5%, but Grich Company is allowed a credit of 2.3% by the state for its
unemployment experience. Also, assume that the current F.I.C.A. tax is 7.65% on an employee’s wages to
$102,000 and 1.45% in excess of $102,000. No employee for Grich makes more than $250,000. The federal
unemployment tax rate is 0.8% after state credit.
Instructions
Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are
recorded separately.
3 E13-9B (Payroll Tax Entries) Bastop Company’s payroll for August 2014 is summarized below.
Amount Subject to Payroll Taxes
Unemployment Tax
Payroll Wages Due F.I.C.A. Federal State
Warehouse $206,000 $206,000 $60,000 $60,000
Sales 184,000 184,000 5,000 5,000
Administrative 51,000 51,000 — —
Total $441,000 $441,000 $65,000 $65,000

At this point in the year some employees have already received wages in excess of those to which payroll
taxes apply. Assume that the state unemployment tax is 2.5%. The F.I.C.A. rate is 7.65% on an employee’s
wages to $102,000 and 1.45% in excess of $102,000. Of the $441,000 wages subject to F.I.C.A. tax, $30,000
of the sales wages and $25,000 of administrative wages are in excess of $102,000. Federal unemployment
tax rate is 0.8% after credits. Income tax withheld amounts to $28,000 for factory, $31,000 for sales, and
$9,000 for administrative.
Instructions
(a) Prepare a schedule showing the employer’s total cost of wages for August by function.
(b) Prepare the journal entries to record the factory, sales, and administrative payrolls including the
employer’s payroll taxes.
5 E13-10B (Warranties) Incaviglia Company sold 400 copy-making machines in 2014 for $3,000 apiece, to-
gether with a one-year warranty. Maintenance on each machine during the warranty period averages $330.
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B Exercises • 3

Instructions
(a) Prepare entries to record the sale of the copiers and the related warranty costs, assuming that the
accrual method is used. Actual warranty costs incurred in 2014 were $24,000.
(b) On the basis of the data above, prepare the appropriate entries, assuming that the cash basis method
is used.

5 E13-11B (Warranties) Gonzalez Equipment Company sold 600 Rollomatics during 2014 at $4,000 each.
During 2014, Gonzalez spent $30,000 servicing the 2-year warranties that accompany the Rollomatic. All
applicable transactions are on a cash basis.

Instructions
(a) Prepare 2014 entries for Gonzalez using the expense warranty approach. Assume that Gonzalez
estimates the total cost of servicing the warranties will be $150,000 for 2 years.
(b) Prepare 2014 entries for Gonzalez assuming that the warranties are not an integral part of the sale.
Assume that of the sales total, $200,000 relates to sales of warranty contracts. Gonzalez estimates
the total cost of servicing the warranties will be $150,000 for 2 years. Estimate revenues earned on
the basis of costs incurred and estimated costs.

5 E13-12B (Premium Entries) Edmonds Company includes 1 coupon in each box of soap powder that it
packs, and 5 coupons are redeemable for a premium (a kitchen utensil). In 2014, Edmonds Company pur-
chased 10,000 premiums at 50 cents each and sold 55,000 boxes of soap powder at $3.75 per box; 28,000
coupons were presented for redemption in 2014. It is estimated that 60% of the coupons will eventually
be presented for redemption.

Instructions
Prepare all the entries that would be made relative to sales of soap powder and to the premium plan in
2014.

4 5 E13-13B (Contingencies) Presented below are three independent situations. Answer the question at the
end of each situation.
1. During 2014, Santiago Inc. became involved in a tax dispute with the IRS. Santiago’s attorneys
have indicated that they believe it is probable that Santiago will lose this dispute. They also be-
lieve that Santiago will have to pay the IRS between $225,000 and $350,000. After the 2014 finan-
cial statements were issued, the case was settled with the IRS for $300,000. What amount, if any,
should be reported as a liability for this contingency as of December 31, 2014?
2. On October 1, 2014, Washington Chemical was identified as a potentially responsible party by the
Environmental Protection Agency. Washington Chemical’s management and its counsel have con-
cluded that it is probable that Washington will be responsible for damages, and a reasonable es-
timate of these damages is $1,250,000. Washington Chemical’s insurance policy of $2,250,000 has
a deductible clause of $125,000. How should Washington Chemical report this information in its
financial statements at December 31, 2014?
3. Sandberg Inc. had a manufacturing plant in Bosnia, which was destroyed in the civil war there. It
is not certain who will compensate Sandberg for this destruction, but Sandberg has been assured
by governmental officials that it will receive a definite amount for this plant. The amount of the
compensation will be less than the fair value of the plant, but more than its book value. How should
the contingency be reported in the financial statements of Sandberg Inc.?

5 E13-14B (Asset Retirement Obligation) Oil Products Company purchases an oil tanker depot on Jan-
uary 1, 2014, at a cost of $2,400,000. Oil Products expects to operate the depot for 10 years, at which
time it is legally required to dismantle the depot and remove the underground storage tanks. It is es-
timated that it will cost $300,000 to dismantle the depot and remove the tanks at the end of the depot’s
useful life.

Instructions
(a) Prepare the journal entries to record the depot and the asset retirement obligation for the depot on
January 1, 2014. Based on an effective interest rate of 6%, the present value of the asset retirement
obligation on January 1, 2014, is $167,516.
(b) Prepare any journal entries required for the depot and the asset retirement obligation at Decem-
ber 31, 2014. Oil Products uses straight-line depreciation; the estimated residual value for the de-
pot is zero.
(c) On December 31, 2023, Oil Products pays a demolition firm to dismantle the depot and remove
the tanks at a price of $320,000. Prepare the journal entry for the settlement of the asset retirement
obligation.
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4 • Chapter 13 Current Liabilities and Contingencies

5 E13-15B (Premiums) Presented below are three independent situations.

1. X&Z Stamp Company records stamp service revenue and provides for the cost of redemptions in
the year stamps are sold to licensees. X&Z’s past experience indicates that only 60% of the stamps
sold to licensees will be redeemed. X&Z’s liability for stamp redemptions was $6,000,000 at
December 31, 2013. Additional information for 2014 is as follows.
Stamp service revenue from stamps
sold to licensees $15,500,000
Cost of redemptions (stamps
sold prior to 1/1/14) 3,000,000
If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would
be $9,800,000. What amount should X&Z report as a liability for stamp redemptions at Decem-
ber 31, 2014?
2. In packages of its products, Wolf Corp. includes coupons that may be presented at retail stores to
obtain discounts on other Wolf products. Retailers are reimbursed for the face amount of coupons
redeemed plus 10% of that amount for handling costs. Wolf honors requests for coupon redemp-
tion by retailers up to 3 months after the consumer expiration date. Wolf estimates that 30% of all
coupons issued will ultimately be redeemed. Information relating to coupons issued by Wolf dur-
ing 2014 is as follows.
Consumer expiration date 12/31/10
Total face amount of coupons issued $500,000
Total payments to retailers as of 12/31/14 115,000
What amount should Wolf report as a liability for unredeemed coupons at December 31, 2014?
3. Tiger Company sold 1,000,000 boxes of cereal under a new sales promotional program. Each box
contains one coupon, which submitted with $2.00, entitles the customer to a stuffed animal. Tiger
pays $4.00 per stuffed animal and $1.20 for handling and shipping. Tiger estimates that 40% of the
coupons will be redeemed, even though only 100,000 coupons had been processed during 2014.
What amount should Tiger report as a liability for unredeemed coupons at December 31, 2014?
(AICPA adapted)
6 E13-16B (Financial Statement Impact of Liability Transactions) Presented below is a list of possible
transactions.
1. Accrued accumulated vacation pay.
2. Recorded sales of product and related warranties (assume sales warranty approach).
3. Recorded estimated liability for premium claims outstanding.
4. Borrowed $200,000 from the bank by signing a 1-year, $220,000, zero-interest-bearing note.
5. Recognized 3 months’ interest expense on the note from item 4 above.
6. Accrued warranty expense (assume expense warranty approach).
7. Issued an $55,000 note payable in payment on account.
8. Recorded accrued interest on a $55,000 note payable.
9. Paid warranty costs that were accrued in item 6 above.
10. Recorded a contingent loss on a lawsuit that the company will probably lose.
11. Recognized warranty revenue (see item 2).
12. Purchased inventory for $120,000 on account (assume perpetual system is used).
13. Paid warranty costs under contracts from item 2.
14. Recorded employer’s payroll taxes.
15. Recorded an asset retirement obligation.
16. Recorded wage expense of $12,000. The cash paid was $9,000; the difference was due to various
amounts withheld.
17. Recorded bonuses due to employees.
18. Recorded cash sales of $26,000, plus 5% sales tax.
Instructions
Set up a table using the format shown below and analyze the effect of the 18 transactions on the finan-
cial statement categories indicated.

# Assets Liabilities Owners’ Equity Net Income

1

Use the following code:

I: Increase D: Decrease NE: No net effect
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B Exercises • 5

6 E13-17B (Ratio Computations and Discussion) Singleton Company has been operating for several years,
and on December 31, 2014, presented the following balance sheet.

SINGLETON COMPANY
BALANCE SHEET
DECEMBER 31, 2014
Cash $ 20,000 Accounts payable $ 40,000
Receivables 37,500 Mortgage payable 70,000
Inventories 47,500 Common stock ($1 par) 75,000
Plant assets (net) 110,000 Retained earnings 30,000
$215,000 $215,000

The net income for 2014 was $12,500. Assume that total assets are the same in 2013 and 2014.
Instructions
Compute each of the following ratios. For each of the four, indicate the manner in which it is computed
and its significance as a tool in the analysis of the financial soundness of the company.
(a) Current ratio. (c) Debt to total assets.
(b) Acid-test ratio. (d) Rate of return on assets.
6 E13-18B (Ratio Computations and Analysis) HQ Company’s condensed financial statements provide
the following information.

HQ COMPANY
BALANCE SHEET
Dec. 31, 2014 Dec. 31, 2013
Cash $ 8,000 $ 25,000
Accounts receivable (net) 151,000 112,000
Short-term investments 50,000 31,000
Inventories 300,000 268,000
Prepaid expenses 12,000 9,000
Total current assets $521,000 $445,000
Property, plant, and equipment (net) 460,000 420,000
Total assets $981,000 $865,000
Current liabilities 277,000 201,000
Bonds payable 250,000 260,000
Common stockholders’ equity 454,000 404,000
Total liabilities and stockholders’ equity $981,000 $865,000

INCOME STATEMENT
FOR THE YEAR ENDED 2014

Sales $2,608,000
Cost of goods sold (1,673,000)
Gross profit 935,000
Selling and administrative expense (581,000)
Interest expense (26,000)
Net income $ 328,000

Instructions
(a) Determine the following for 2014.
(1) Current ratio at December 31.
(2) Acid-test ratio at December 31.
(3) Accounts receivable turnover.
(4) Inventory turnover.
(5) Rate of return on assets.
(6) Profit margin on sales.
(b) Prepare a brief evaluation of the financial condition of HQ Company and of the adequacy of its
profits.
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6 • Chapter 13 Current Liabilities and Contingencies

6 E13-19B (Ratio Computations and Effect of Transactions) Presented below is information related to
Lakeland Inc.

LAKELAND INC.
BALANCE SHEET
DECEMBER 31, 2014
Cash $ 8,000 Notes payable (short-term) $ 92,000
Receivables $175,000 Accounts payable 163,000
Less: Allowance 20,000 155,000 Accrued liabilities 18,000
Inventories 271,000 Capital stock (par $1) 72,000
Prepaid insurance 6,000 Retained earnings 298,000
Land 50,000
Equipment (net) 153,000
$643,000 $643,000

LAKELAND INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
Sales $2,800,000
Cost of goods sold
Inventory, Jan. 1, 2012 $ 200,000
Purchases 2,031,000
Cost of goods available for sale 2,231,000
Inventory, Dec. 31, 2012 271,000
Cost of goods sold 1,960,000
Gross profit on sales 840,000
Operating expenses 506,000
Net income $ 334,000

Instructions
(a) Compute the following ratios or relationships of Lakeland Inc. Assume that the ending account
balances are representative unless the information provided indicates differently.
(1) Current ratio.
(2) Inventory turnover.
(3) Receivables turnover.
(4) Earnings per share.
(5) Profit margin on sales.
(6) Rate of return on assets on December 31, 2014.
(b) Indicate for each of the following transactions whether the transaction would improve, weaken,
or have no effect on the current ratio of Lakeland Inc. at December 31, 2014.
(1) Write off an uncollectible account receivable, $6,800.
(2) Repurchase capital stock for cash.
(3) Pay $46,000 on notes payable (short-term).
(4) Collect $70,000 on accounts receivable.
(5) Buy equipment on account.
(6) Give an existing creditor a short-term note in settlement of account.