Chapter 11

QS 11-3
1. Record entries for selling merchandises
30-Sep Cash
Sales
Sales tax payables

Cost of goods sold

Merchandise inventory

2. Record entries for remittance of the 6% tax

15-Oct Sales tax payables
Cash

QS 11-4
Record note in 2009
7-Nov Cash
Note payable

End-of-period interest adjustment

31-Dec Interest expense
Interest payable

Payment of note at maturity in 2010

5-Feb Note payable
Interest payable
Interest expense
Cash

QS 11-5
Number of employees 5
Employement from Jan 1
Each earned per month 3,000
FICA social security tax 6.20% on the first $102,000 paid to each emplo
FICA medical tax 1.45% on gross pay per month
FUTA tax 0.80% on the first $7,000 paid to each employe
SUTA tax 5.40% on the first $7,000 paid to each employe

Prepare March 31 journal entries to record the March payroll tax expense
31-Mar Payroll tax expenses
FICA social security tax payable
FICA medical tax payable
FUTA tax payable
SUTA tax payable

QS 11-6
Total weekly expenses 3,250
Total weekly cash paid 3,000
(the staff worked for 48 weeks in a year, however, receiving cash for full 52 weeks)

Weekly vacation benefit expense

Weekly vacation benefit payable

QS 11-8
2009
24-Jul Estimated warranty liability
Repair part inventory

QS 11-9
1. b
2. b
3. a

QS 11-10
Times interest earned = 7.2

Intepretation: the firm's ratio is higher than the competitor average, the firm has sufficient income to co

Exercise 11-4
1. Date the note matures
Maturity date: 11-Nov-09

2. Prepare journal entries

15-May Cash
Note payable

11-Nov Note payable

Interest expense
Cash

Problem 11-3A
1. Times interest earned for Milo Company
Times interest earned = Income before interest & tax/ Interest expense
= 4.83

2. Times interest earned for Warner Company

Times interest earned = Income before interest & tax/ Interest expense
= 1.66

3-8. If sales increase or decrease

Milo Warner
Initial NI 230,000 230,000
If sales increase by 40%
Sales 2,030,000 2,030,000
Variable expenses 1,624,000 1,218,000
Income before interest 406,000 812,000
Interest expense 60,000 350,000
Net income (NI) 346,000 462,000

NI increases by 50% 101%

If sales increase by 50%
Sales 2,175,000 2,175,000
Variable expenses 1,740,000 1,305,000
Income before interest 435,000 870,000
Interest expense 60,000 350,000
Net income (NI) 375,000 520,000

NI increases by 63% 126%

If sales increase by 80%
Sales 2,610,000 2,610,000
Variable expenses 2,088,000 1,566,000
Income before interest 522,000 1,044,000
Interest expense 60,000 350,000
Net income (NI) 462,000 694,000

NI increases by 101% 202%

If sales decrease by 20%
Sales 1,160,000 1,160,000
 Variable expenses 928,000 696,000
Income before interest 232,000 464,000
Interest expense 60,000 350,000
Net income (NI) 172,000 114,000

NI decreases by -25% -50%

If sales decrease by 30%
Sales 1,015,000 1,015,000
Variable expenses 812,000 609,000
Income before interest 203,000 406,000
Interest expense 60,000 350,000
Net income (NI) 143,000 56,000

NI decreases by -38% -76%

If sales decrease by 40%
Sales 870,000 870,000
Variable expenses 696,000 522,000
Income before interest 174,000 348,000
Interest expense 60,000 350,000
Net income (NI) 114,000 (2,000)

NI decreases by -50% -101%

9. Analysis
The higher fixed-cost strategy (having more fixed interest expense) of Warner Co.
accentuates the effects of increases and decreases in sales. That is, increases
in sales produce greater increases in net income and decreases in sales
produce greater decreases in net income. The higher fixed-cost strategy of
Warner Co. is indicated by a lower value of the times interest earned ratio

Problem 11-4A
1. Each employee’s FICA withholdings for Social Security
Dahlia Trey Kiesha
Maximum base 102,000 102,000 102,000
Earned through 8/18 100,500 31,850 6,260
Amount subject to tax 1,500 70,150 95,740

Earned this week 3,600 1,275 1,440

Pay subject to tax 1,500 1,275 1,440

Tax rate 6.20% 6.20% 6.20%
FICA - Social Security tax 93 79 89
2. Each employee’s FICA withholdings for Medicare (no limits)
Dahlia Trey Kiesha
Earned this week 3,600 1,275 1,440
Tax rate 1.45% 1.45% 1.45%
FICA - medical tax 52 18 21

3. Employer’s FICA taxes for Social Security (equal to amount withheld from employee's pay)
Dahlia Trey Kiesha
FICA - Social Security tax 93 79 89

4. Employer’s FICA taxes for Medicare (equal to amount withheld from employee's pay)
Dahlia Trey Kiesha
FICA - medical tax 52 18 21

5. Employer’s FUTA taxes

Dahlia Trey Kiesha
Maximum base per year 7,000 7,000 7,000
Earned through 8/18 100,500 31,850 6,260
Amount subject to tax - - 740

Earned this week 3,600 1,275 1,440

Pay subject to tax - - 740

Tax rate 0.80% 0.80% 0.80%
FUTA taxes - - 6

6. Employer’s SUTA taxes

Dahlia Trey Kiesha
Maximum base per year 7,000 7,000 7,000
Earned through 8/18 100,500 31,850 6,260
Amount subject to tax - - 740

Earned this week 3,600 1,275 1,440

Pay subject to tax - - 740

Tax rate 2.15% 2.15% 2.15%
SUTA taxes - - 16

7. Each employee’s net (take-home) pay

Dahlia Trey Kiesha
Gross pay 3,600 1,275 1,440
Less:
FICA - Social Security tax 93 79 89
FICA - medical tax 52 18 21
Income tax withholding 450 140 173
 Health insurance 11 11 11
Net take-home pay 2,994 1,026 1,146

8. Employer’s total payroll expenses for each employee

Dahlia Trey Kiesha
Gross pay 3,600 1,275 1,440
Plus:
FICA - Social Security tax 93 79 89
FICA - medical tax 52 18 21
FUTA taxes - - 6
SUTA taxes - - 16
Health insurance 11 11 11
Pension plan 288 102 115
Total payroll expenses 4,044 1,486 1,698
 12,720
12,000
720

7,800
7,800

720
720

80,000
80,000

960 54 days
960

80,000
960
640 36 days
81,600

t $102,000 paid to each employee

pay per month
t $7,000 paid to each employee for a year
t $7,000 paid to each employee for a year
 1,457.50
930.00
217.50
40.00
270.00

52 weeks)

250
250

55
55

rm has sufficient income to cover interest obligation

 137,000
137,000

137,000
6,165
143,165

nterest expense

nterest expense
 Chee Total
102,000
1,000
101,000

400

400
6.20%
25 286
 Chee Total
400
1.45%
6 97

ployee's pay)
Chee Total
25 286

Chee Total
6 97

Chee Total
7,000
1,000
6,000

400

400
0.80%
3 9

Chee Total
7,000
1,000
6,000

400

400
2.15%
9 25

Chee Total
400 6,715

25 286
6 97
36 799
 11 44
322 5,488.5

Chee Total
400 6,715

25 286
6 97
3 9
9 25
11 44
32 537
485 7,713
Chapter 14

QS 14-1
Par value 150,000
Selling price 93 1⁄4
Interest rate 7% semiannual interest payment
Bond life 10 years
Annual market rate 8%

1. Bond’s cash proceeds

Percentage of par value 93.25%
Bond's cash proceeds (selling price) 139,875 (bond issued at discount)

2. Bond interest expenses over bond life

Interest per payment date 5,250
Total interest payments over the bond life 105,000 (semiannual payment)
Bond discount 10,125

Bond interest expense over bond life 115,125 including interest expense + amortisatio

3. Bond interest expense on 1st payment date - using straight-line method to allocate interest expense)
Interest per payment date 5,250
Amortised bond discount each interest payment date 506

Bond interest expense on the 1st payment date 5,756 including interest expense + amortisatio

QS 14-2
Par value 350,000
Selling price 109 3⁄4
Interest rate 7% semiannual interest payment
Bond life 15 years
Annual market rate 6%

1. Bond’s cash proceeds

Percentage of par value 110%
Bond's cash proceeds (selling price) 384,125 (bond issued at premium)

2. Bond interest expenses over bond life

Interest per payment date 12,250
Total interest payments over the bond life 367,500 (semiannual payment)
Bond premium 34,125

Bond interest expense over bond life 333,375

3. Bond interest expense on 1st payment date - using effective interest amortization - see Appendix B)

Bond interest expense on the 1st payment date 11,524

Note: see Appendix B for effective interest amortisation:

The effective interest method, or simply interest method, allocates total bond interest expense over the bonds’ l
rate of interest. This constant rate of interest is the market rate at the issue date. Thus, bond interest expense for
value of the bond at the beginning of that period multiplied by the market rate when issued.

QS 14-3
1. From QS 14-1
1-Jan Cash
Discount on bond
Bond payable

2. From QS 14-2
1-Jan Cash
Bond payable
Premium on bond

QS 14-5
Par value 100,000
Interest rate 8% semiannual interest payment
Bond life 5 years

a. Bond issuance
2008
31-Dec Cash
Discount on bond
Bond payable

2009
30-Jun Interst expense
Discount on bond
Cash

31-Dec Interst expense

 Discount on bond
Cash

QS 14-6
Journal entry to record bond retirement by call option
1-Jul Bond payable
Premium on bond
Gain on bond retirement
Cash

Note: using call option $4000 => the company has to pay bondholder $4,000 (early charge) for retiring the bond befo

QS 14-7
Record bond retirement by stock conversion
1-Jan Bond payable
Common stock
Paid-in capital in excess of Par
al interest payment

ued at discount)

ual payment)

nterest expense + amortisation of bond discount

ocate interest expense)

nterest expense + amortisation of bond discount

al interest payment

ued at premium)
ual payment)

tion - see Appendix B)

rest expense over the bonds’ life in a way that yields a constant
, bond interest expense for a period equals the carrying
hen issued.

139,875
10,125
150,000

384,125
350,000
34,125

al interest payment

92,277
7,723
100,000

4,772
772
4,000

4,772
 772
4,000

200,000
8,000
4,000
204,000

arge) for retiring the bond before maturity

1,000,000
500,000
500,000
Chapter 13

Question 1
A company had a beginning balance in retained earnings of $43,000. It
had net income of $6,000 and paid out cash dividends of $5,625 in the
current period. The ending balance in retained earnings equals:

RE - beginning balance 43,000.00

NI 6,000.00
Cash dividend 5,625.00
RE - ending balance 43,375.00

Question 2
Shamrock Company had net income of $30,000. On January 1, the
number of shares of common stock outstanding were 8,000. There
were no other stock transactions. The company's earnings per share
is:

NI 30,000.00
Common shares outstanding 8,000.00
EPS 3.75

Question 3
A company paid $0.75 in cash dividends per share. Its earnings per
share is $3.50, and its market price per share is $37.50. Its dividend
yield equals:

Cash dividend 0.75

EPS 3.50
Market price per share 37.50
Dividend yield 2%

Question 4
A company has 40,000 shares of common stock outstanding. The
stockholders' equity applicable to common shares is $470,000, and the
par value per common share is $10. The book value per share is:

Common shares outstanding 40,000.00

stockholders' equity applicable to common shares 470,000.00
Par value 10.00
Book value per share 11.75

Question 5
A bond traded at 104½ means that:
The bond traded at $1,045 per $1,000 bond or at $104.5 per $100 bond
(depend on the par value of the bond)

Question 6
Bonds owned by investors whose names and addresses are recorded
by the issuing company, and for which interest payments are made
with checks to the bondholders, are called:

Registered bonds
(Also read the callable bond FYI)

Question 7
A company must repay the bank $10,000 cash in 3 years for a loan it
entered into. The loan is at 8% interest compounded annually. The
present value factor for 3 years at 8% is 0.7938. The present value of
the loan is:

Future value 10,000.00

Loan term 3.00
IR 8%
PV factor 0.7938
PV of the loan 7,938.00

Question 8
A company borrowed $300,000 cash from the bank by signing a 5-year,
8% installment note. The present value of an annuity at 8% for 5 years
is 3.9927. Each annuity payment equals $75,137. The present value of
the note is:

Amount borrowed 300,000.00

Term 5.00
IR 8%
PV factor 3.9927
Each annuity payment 75,137.00
PV of the note 299,999.50
Question 9
A company issued 5-year, 7% bonds with a par value of $100,000. The
company received $97,947 for the bonds. Using the straight-line
method, the amount of interest expense for the first semiannual
interest period is:

Par value 100,000.00

Term 5.00
IR/ coupon rate 7%
Bond's selling price/issue price 97,947.00
Interst expense for the 1st semiannual interest period 3,705.30
Bond interest each payment date 3,500.00
Discount on bond 2,053.00
Number of interest payment period 10.00
Bond amortization each interest payment date 205.30
Interst expense for the 1st semiannual interest period 3,705.30

Question 10
A company issued 7%, 5-year bonds with a par value of $100,000. The
market rate when the bonds were issued was 7.5%. The company
received $97,947 cash for the bonds. Using the effective interest
method, the amount of interest expense for the first semiannual
interest period is:

Par value 100,000.00

Term 5.00
IR/ coupon rate 7%
Market rate 7.5%
Bond's selling price/issue price 97,947.00
Interest expense for the 1st semiannual interest period 3,673.01
(See Appendix B - Chapter 14: the effective interest method, or simply
interest method, allocates total bond interest expense over the bonds’ life in
a way that yields a constant rate of interest. This constant rate of interest is
the market rate at the issue date. Thus, bond interest expense for a period
equals the carrying value of the bond at the beginning of that period (in the
above case carrying value = current selling price) multiplied by the market
rate when issued.)
years
compounded annually

Present value = Present value factor*Future value

years
Installment note (pay both interest and a portion of the principal periodically)

Present value of the note = annuity payment*present value of an annuity

years

check again Chapter 14 (compute interest expense when the bond is issued at a discount)

years
d at a discount)