Chapter 11 - Current Liabilities and Payroll Accounting

Chapter 11
Chapter 11 - Current Liabilities and Payroll Accounting

EXERCISES
Exercise 11-1 (10 minutes)

1. L 3. L 5. C 7. N 9. C

2. C 4. C 6. C 8. C 10. C

Exercise 11-2 (10 minutes)

[Note: All entries dated December 31, 2015]

1. Cash........................................................................... 10,400,000
Sales.................................................................... 10,000,000
Sales Taxes Payable.......................................... 400,000
To record sales and sales taxes.

Cost of Goods Sold.................................................. 5,000,000

Merchandise Inventory...................................... 5,000,000
To record cost of sales.

2. Unearned Services Revenue................................... 50,000

Earned Services Revenue................................. 50,000
To record revenue earned.

Exercise 11-3 (30 minutes)

1. Maturity date = May 15 + 60 days = July 14, 2015

2a.

May 15 Cash...........................................................................110,000
Notes Payable..................................................... 110,000
Borrowed cash by issuing an interest-bearing note.

2b.

July 14 Interest Expense*..................................................... 2,200

Notes Payable...........................................................110,000
Cash..................................................................... 112,200
Repaid note plus interest.
* Principal.................................
$110,000
x Interest rate......................... 12%
x Fraction of year................... 60/360
Chapter 11 - Current Liabilities and Payroll Accounting

Total interest..........................
$ 2,200
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-4 (30 minutes)

1. Maturity date = November 1 + 90 days = January 30, 2016.

2. Principal $200,000
x Interest rate.............................................. 9%
x Fraction of year (Nov. 1 – Dec. 31)........ 60/360
Total interest in 2015 $ 3,000

3. Principal $200,000
x Interest rate.............................................. 9%
x Fraction of year (Jan. 1 – Jan. 30)......... 30/360
Total interest in 2016 $ 1,500
4a.
2015
Nov. 1 Cash...........................................................................200,000
Notes Payable..................................................... 200,000
Borrowed cash by issuing an interest-bearing note.

4b.

2015
Dec. 31 Interest Expense....................................................... 3,000
Interest Payable.................................................. 3,000
Accrued interest on note payable.

4c.
2016
Jan. 30 Interest Expense....................................................... 1,500
Interest Payable........................................................ 3,000
Notes Payable...........................................................200,000
Cash..................................................................... 204,500
Repaid note plus interest.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-5 (20 minutes)

Subject
to Tax Rate Tax Explanation
a.
FICA--Social Security...... $ 800 6.20% $ 49.60 Full amount is subject to tax.
FICA—Medicare............. 800 1.45 11.60 Full amount is subject to tax.
FUTA.............................. 600 0.60 3.60 $200 is over the maximum.
SUTA.............................. 600 2.90 17.40 $200 is over the maximum.

b.
FICA--Social Security...... $2,100 6.20% $130.20 Full amount is subject to tax.
FICA—Medicare............. 2,100 1.45 30.45 Full amount is subject to tax.
FUTA.............................. 0 0.60 0.00 Full amount is over maximum.
SUTA.............................. 0 2.90 0.00 Full amount is over maximum.

c.
FICA--Social Security...... $6,300 6.20% $390.60 $1,700 is over the maximum.
FICA—Medicare............. 8,000 1.45 116.00 Full amount is subject to tax.
FUTA.............................. 0 0.60 0.00 Full amount is over maximum.
SUTA.............................. 0 2.90 0.00 Full amount is over maximum.

Exercise 11-6 (10 minutes)

Sept. 30 Salaries Expense...................................................... 800.00

FICA—Social Security Taxes Payable.............. 49.60
FICA—Medicare Taxes Payable........................ 11.60
Employee Federal Income Taxes Payable......... 80.00
Accrued Payroll Payable................................... 658.80
To record payroll for pay period ended September 30.

Exercise 11-7 (10 minutes)

Sept. 30 Payroll Taxes Expense............................................ 82.20
FICA—Social Security Taxes Payable.............. 49.60
FICA—Medicare Taxes Payable........................ 11.60
Federal Unemployment Taxes Payable............ 3.60
State Unemployment Taxes Payable................ 17.40
To record employer payroll taxes.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-8 (30 minutes)

1. July 31 Sales Salaries Expense........................................... 200,000

Office Salaries Expense...........................................160,000
FICA—Social Sec. Taxes Payable.................... 22,320
FICA—Medicare Taxes Payable........................ 5,220
Employee Fed. Inc. Taxes Payable................... 90,000
Employee State Inc. Taxes Payable................. 20,000
Employee Medical Insurance Payable*............ 2,800
Employee Life Insurance Payable**................. 1,600
Employee Union Dues Payable......................... 1,000
Salaries Payable................................................. 217,060
To record payroll for period.
* $7,000 x 40% ** $4,000 x 40%
2. July 31 Salaries Payable....................................................... 217,060
Cash..................................................................... 217,060
To record payment of payroll.*
*Check numbers may be entered in the Payroll Register.

3. July 31 Payroll Taxes Expense............................................30,540

FICASocial Sec. Taxes Payable..................... 22,320
FICAMedicare Taxes Payable......................... 5,220
State Unemployment Taxes Payable................ 2,700
Federal Unemployment Taxes Payable............ 300
To record employer payroll taxes.
SUTA = $50,000 x 5.4% = $2,700
FUTA = $50,000 x 0.6% = $300
FICA—Social Sec. & Medicare = Same as employees
July 31 Employee Benefits Expense................................... 6,600
Employee Medical Insurance Payable*............ 4,200
Employee Life Insurance Payable**................. 2,400
To record costs of employee benefits.
* $7,000 x 60% ** $4,000 x 60%
4. July 31 FICASocial Security Taxes Payable....................44,640
FICAMedicare Taxes Payable...............................10,440
Employee Fed. Income Taxes Payable..................90,000
Employee State Income Taxes Payable.................20,000
Employee Medical Insurance Payable................... 7,000
Employee Life Insurance Payable.......................... 4,000
Employee Union Dues Payable............................... 1,000
State Unemployment Taxes Payable...................... 2,700
Federal Unemployment Taxes Payable.................. 300
Cash..................................................................... 180,080
To record payment of FICA, income taxes, SUTA,
FUTA, union dues, and insurance premiums.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-9 (30 minutes)

a.

Pay Subject to Pay Subject Pay Subject Pay Subject

Cumulative FICA Social to FICA to FUTA to SUTA
Employee Pay Security Medicare Taxes Taxes
Ken S...................
$ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000

Tim V....................60,200 60,200 60,200 7,000 7,000

Steve S................87,000 87,000 87,000 7,000 7,000

Ann T...................
146,500 117,000 146,500 7,000 7,000

Kathleen K...........
106,900 106,900 106,900 7,000 7,000

Michelle H............
117,000 117,000 117,000 7,000 7,000

Lori K...................
119,500 117,000 119,500 7,000 7,000

Kitty O..................36,900 36,900 36,900 7,000 7,000

John W................ 4,000 4,000 4,000 4,000 4,000

Totals...................
$684,000 $652,000 $684,000 $59,000 $59,000

b. FICA Social Security taxes

$80,848.00 = $652,000 x 6.2% x 2 (for employer and employee)

FICA Medicare taxes

$19,836.00 = $684,000 x 1.45% x 2 (for employer and employee)

FUTA taxes
$ 354.00 = $59,000 x 0.6%

SUTA taxes
$ 3,186.00 = $59,000 x 5.4%
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-10 (25 minutes)

1. Warranty Expense = 4% of dollar sales = 4% x $6,000 = $240

2. The December 31, 2015, balance of the liability equals the expense
because no repairs are provided in 2015. Therefore, the ending balance
of the Estimated Warranty Liability account is $240.

3. The company should report no additional warranty expense in 2016 for

this copier.

4. The December 31, 2016, balance of the Estimated Warranty Liability

account equals the 2016 beginning balance minus the costs incurred in
2016 to repair the copier:
Ending 2015 balance........................ $240
Less parts cost................................. (209)
Ending 2016 balance........................ $ 31

5. Journal entries

2015 (a)
Aug. 16 Cash........................................................................... 6,000
Sales.................................................................... 6,000
To record cash sale of copier.

Aug. 16 Cost of Goods Sold.................................................. 4,800

Merchandise Inventory...................................... 4,800
To record cost of August 16 sale.

(b)
Dec. 31 Warranty Expense.................................................... 240
Estimated Warranty Liability............................. 240
To record warranty expense for copier sold in 2015.

2016 (c)
Nov. 22 Estimated Warranty Liability................................... 209
Repair Parts Inventory....................................... 209
To record cost of warranty repairs.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-11 (15 minutes)

1. B = 0.03 ($500,000 – B)
B = $15,000 – 0.03B
1.03B = $15,000
B = $14,563 (rounded to nearest dollar)

2.
2015
Dec. 31 Employee Bonus Expense................................. 14,563
Bonus Payable.......................................... 14,563
To record expected bonus costs.
3.
2016
Jan. 19 Bonus Payable.................................................... 14,563
.........................................................................................Cash
.......................................................................................14,563
To record payment of bonus.

Exercise 11-12 (10 minutes)

[Note: All entries dated December 31, 2015.]

1. Vacation Benefits Expense........................................... 3,200

Vacation Benefits Payable...................................... 3,200
To record vacation benefits expense
[20 employees x 1 day x $160].

2. Warranty Expense.......................................................... 18,000

Estimated Warranty Liability................................... 18,000
To record warranty expense [12,000 units x 10% x $15].

Exercise 11-13 (10 minutes)

[Note: All entries dated December 31, 2015.]

1. No adjusting entry is required since it is not probable that the supplier will
default on the debt. The guarantor, Melbourn Company, should describe
the guarantee in its financial statement notes as a contingent liability.

2. No adjusting entry can be made since the loss cannot be reasonably

estimated. Disclosure of the suit as a contingent liability should be made
in the notes to the financial statements.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-14 (15 minutes)

(a) (b) (c) (d) (e) (f)

Numerator
Income before
interest & taxes.....$194,000 $176,000 $182,000 $379,000 $103,000 $ 5,000

Denominator
Interest expense......$ 44,000 $ 16,000 $ 12,000 $ 14,000 $ 14,000 $10,000

Ratio....................... 4.41 11.00 15.17 27.07 7.36 0.50

Analysis: Company (d) has the strongest ability to pay interest expense as it
comes due as evidenced by the company’s times interest earned (coverage)
ratio of 27.07 times.

Exercise 11-15B (25 minutes)

1. Income Taxes Payable (target balance)...............................................

$28,300
Total accrued [($28,600 + $19,100 + $34,600) x .30]............................ 24,690
Adjustment (additional expense)..........................................................
$ 3,610

2.
2015 (a)
Dec. 31 Income Tax Expense................................................ 3,610
Income Taxes Payable....................................... 3,610
To adjust tax expense and liability.

2016 (b)
Jan. 20 Income Taxes Payable............................................. 28,300
Cash..................................................................... 28,300
To make the final quarterly payment
of income taxes for 2015.

Exercise 11-16A (15 minutes)

Regular pay (40 hours @ $14)........................................... $560.00
Overtime premium pay (8 hours @ [$14 x 150%])........... 168.00
Gross pay.......................................................................... 728.00
FICA—Social Security tax deduction (6.2%).................... $ 45.14
FICA—Medicare tax deduction (1.45%)............................ 10.56
Income tax deduction (from Exhibit 11A.6)...................... 76.00
Total deductions............................................................... 131.70
Chapter 11 - Current Liabilities and Payroll Accounting

Net pay................................................................................. $596.30

 Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-17 (30 minutes)

(a)
FICA Employee—
FIT FICA S.S.
Current Period Gross Pay FUTA Medicare Benefits Plan
Cumulative Withholding Employee
Employee Employee Withholding Employee
Pay (Excludes
FICA Employer— Net Pay
Current Period) Pay Pay SIT FICA S.S.
Gross Pay SUTA Medicare Benefits Plan
Type Hours Withholding Employer
Employer Expense

2,000.00 0.00 111.60 101.50 350.00

Kathleen 115,200.00 Salary --- 7,000.00 4,136.90
300.00 0.00 111.60 101.50 700.00

80.00 1.20 31.00 7.25 25.00

Anthony 6,800.00 Salary --- 500.00 336.75
20.00 10.80 31.00 7.25 50.00

Regular 80 800.00 110.00 0.00 57.04 13.34 46.00

Nichole 15,000.00 668.62
Overtime 8 120.00 25.00 0.00 57.04 13.34 92.00
920.00

Regular 80 800.00 100.00 3.00 53.32 12.47 43.00

Zoey 6,500.00 629.21
Overtime 4 60.00 22.00 27.00 53.32 12.47 86.00
860.00

Regular 74 740.00 90.00 4.44 45.88 10.73 37.00

Gracie 5,000.00 535.39
Overtime 0 0.00 21.00 39.96 45.88 10.73 74.00
740.00

2,380.00 8.64 298.84 145.29 501.00

Totals 148,500.00 10,020.00 6,306.87
388.00 77.76 298.84 145.29 1,002.00
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-17 (concluded)

(b)
Aug 31 Salaries (or Wages) Expense.................................. 10,020.00
FICA—Social Sec. Taxes Payable.................... 298.84
FICA—Medicare Taxes Payable........................ 145.29
Employee Fed. Inc. Taxes Payable................... 2,380.00
Employee State Inc. Taxes Payable................. 388.00
Employee Benefits Plan Payable...................... 501.00
Salaries Payable................................................. 6,306.87
To record payroll for period.

(c)
Aug 31 Salaries (or Wages) Payable................................... 6,306.87
Cash..................................................................... 6,306.87
To record payment of payroll.
(d)
Aug 31 Payroll Taxes Expense............................................530.53
FICASocial Sec. Taxes Payable..................... 298.84
FICAMedicare Taxes Payable......................... 145.29
Federal Unemployment Taxes Payable............ 8.64
State Unemployment Taxes Payable................ 77.76
To record employer payroll taxes.
Aug 31 Employee Benefits Expense...................................
1,002.00
Employee Benefits Plan Payable...................... 1,002.00
To record costs of employee benefits.
(e)
Aug 31 FICASocial Security Taxes Payable....................597.68
FICAMedicare Taxes Payable...............................290.58
Employee Fed. Income Taxes Payable.................. 2,380.00
Employee State Income Taxes Payable.................388.00
Employee Benefits Plan Payable............................ 1,503.00
Federal Unemployment Taxes Payable.................. 8.64
State Unemployment Taxes Payable...................... 77.76
Cash..................................................................... 5,245.66
To record payment of FICA, income taxes,
SUTA, FUTA, and benefit plan contributions.
Chapter 11 - Current Liabilities and Payroll Accounting

Exercise 11-18 (25 minutes)

(in SEK millions)

1. Warranty Expense.................................................... 7,706

Estimated Warranty Liability............................. 7,706
To record warranty expense and liability.

2. Estimated Warranty Liability................................... 6,677

Inventory............................................................. 6,677
To record cost of warranty replacements.

3. Volvo would report warranty expense of SEK 7,706 million for 2013.
Chapter 11 - Current Liabilities and Payroll Accounting

PROBLEM SET A
Problem 11-1A (45 minutes)

Locust Natl. Bank Fargo

1. Maturity dates
Date of the note..............................May 19 July 8 Nov. 28
Term of the note (in days)............. 90 120 60
Maturity date...................................Aug. 17 Nov. 5 Jan. 27

2. Interest due at maturity

Principal of the note.......................$35,000 $80,000 $42,000
Annual interest rate....................... 10% 9% 8%
Fraction of year.............................. 90/360 120/360 60/360
Interest expense.............................$ 875 $ 2,400 $ 560

3. Accrued interest on Fargo note at the end of 2014

Total interest for note.................................................... $ 560
Fraction of term in 2014................................................. 33/60
Accrued interest expense............................................. $ 308
.........................................................................................

4. Interest on Fargo note in 2015

Total interest for note.................................................... $ 560
Fraction of term in 2015................................................. 27/60
Interest expense in 2015................................................ $ 252
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-1A (Concluded)

5.
2014
Apr. 20 Merchandise Inventory............................................ 40,250
Accounts Payable—Locust............................... 40,250
Purchased merchandise on credit.

May 19 Accounts Payable—Locust..................................... 40,250

Cash..................................................................... 5,250
Notes Payable—Locust..................................... 35,000
Paid $5,250 cash and gave a 90-day,
10% note to extend due date on account.

July 8 Cash........................................................................... 80,000

Notes Payable—National................................... 80,000
Borrowed cash with a 120-day, 9% note.

Aug. 17 Interest Expense....................................................... 875

Notes Payable—Locust........................................... 35,000
Cash..................................................................... 35,875
Paid note with interest.

Nov. 5 Interest Expense....................................................... 2,400

Notes Payable—National Bank............................... 80,000
Cash..................................................................... 82,400
Paid note with interest.

28 Cash........................................................................... 42,000
Notes Payable—Fargo Bank............................. 42,000
Borrowed cash with 60-day, 8% note.

Dec. 31 Interest Expense....................................................... 308

Interest Payable.................................................. 308
Accrued interest on note payable.

2015
Jan. 27 Interest Expense....................................................... 252
Notes Payable—Fargo Bank................................... 42,000
Interest Payable ....................................................... 308
Cash..................................................................... 42,560
Paid note with interest.
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-2A (25 minutes)

Part 1
Jan. 8 Office Salaries Expense...........................................
22,760.00
Sales Salaries Expense...........................................65,840.00
FICA—Social Sec. Taxes Payable*................... 5,493.20
FICA—Medicare Taxes Payable**..................... 1,284.70
Employee Fed. Inc. Taxes Payable................... 12,860.00
Employee Medical Insurance Payable............. 1,340.00
Employee Union Dues Payable......................... 840.00
Salaries Payable................................................. 66,782.10
To record payroll for period.
* $88,600 x 6.2%
**$88,600 x 1.45%

Part 2
Jan. 8 Payroll Taxes Expense............................................
10,853.50
FICA—Social Sec. Taxes Payable.................... 5,493.20
FICA—Medicare Taxes Payable........................ 1,284.70
State Unemployment Taxes Payable*.............. 3,544.00
Federal Unemployment Taxes Payable**........... 531.60
To record employer payroll taxes.
* $88,600 x .04 = $3,544.00
**$88,600 x .006 = $531.60
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-3A (60 minutes)

1. Each employee’s FICA withholdings for Social Security

Dahlia Trey Kiesha Chee Total

Maximum base............... $117,000 $117,000 $117,000 $117,000
Earned through 8/18...... 115,900 116,100 7,100 1,050
Yet under maximum...... $ 1,100 $ 900 $109,900 $115,950

Earned this week........... $ 2,000 $ 900 $ 450 $ 400

Subject to tax................. 1,100 900 450 400

Tax rate........................... 6.20% 6.20% 6.20% 6.20%
Social Security tax......... $ 68.20 $ 55.80 $ 27.90 $ 24.80 $176.70

2. Each employee’s FICA withholdings for Medicare (no limits)

Dahlia Trey Kiesha Chee Total

Earned this week.......... $ 2,000 $ 900 $ 450 $ 400
Tax rate......................... 1.45% 1.45% 1.45% 1.45%
Medicare tax................. $ 29.00 $ 13.05 $ 6.53 $ 5.80 $ 54.38

3. Employer’s FICA taxes for Social Security

Dahlia Trey Kiesha Chee Total

Amount from part 1...... $ 68.20 $ 55.80 $ 27.90 $ 24.80 $176.70

4. Employer’s FICA taxes for Medicare

Dahlia Trey Kiesha Chee Total

Amount from part 2...... $ 29.00 $ 13.05 $ 6.53 $ 5.80 $ 54.38
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-3A (Concluded)

5. Employer’s FUTA taxes

Dahlia Trey Kiesha Chee Total

Maximum base................. $ 7,000 $ 7,000 $ 7,000 $ 7,000
Earned through 8/18........ 115,900 116,100 7,100 1,050
Yet under maximum......... 0 0 0 5,950

Earned this week.............. $ 2,000 $ 900 $ 450 $ 400

Subject to tax.................... 0 0 0 400
Tax rate............................. 0.6% 0.6% 0.6% 0.6%
FUTA tax........................... $ 0.00 $ 0.00 $ 0.00 $ 2.40 $ 2.40

6. Employer’s SUTA taxes

Dahlia Trey Kiesha Chee Total

Subject to tax (from 5).... $ 0 $ 0 $ 0 $ 400
Tax rate............................ 2.15% 2.15% 2.15% 2.15%
SUTA tax.......................... $ 0.00 $ 0.00 $ 0.00 $ 8.60 $ 8.60
10.60
7. Each employee’s net (take-home) pay

Dahlia Trey Kiesha Chee Total

Gross earnings.............. $2,000.00 $ 900.00 $450.00 $400.00 $3,750.00
Less
FICA Social Sec. tax...... (68.20) (55.80) (27.90) (24.80) (176.70)
FICA Medicare taxes..... (29.00) (13.05) (6.53) (5.80) (54.38)
Withholding taxes......... (284.00) (145.00) (39.00) (30.00) (498.00)
Health insurance........... (30.00) (30.00) (30.00) (30.00) (120.00)
Take-home pay.............. $1,588.80 $ 656.15 $346.57 $309.40 $2,900.92

8. Employer’s total payroll-related expense for each employee

Dahlia Trey Kiesha Chee Total

Gross earnings............... $2,000.00 $ 900.00 $450.00 $400.00 $3,750.00
Plus
FICA Social Sec. tax....... 68.20 55.80 27.90 24.80 176.70
FICA Medicare taxes....... 29.00 13.05 6.53 5.80 54.38
FUTA tax......................... 0.00 0.00 0.00 2.40 2.40
SUTA tax......................... 0.00 0.00 0.00 8.60 8.60
Health insurance............. 30.00 30.00 30.00 30.00 120.00
Pension contrib. (8%)..... 160.00 72.00 36.00 32.00 300.00
Chapter 11 - Current Liabilities and Payroll Accounting

Total payroll expense..... $2,287.20 $1,070.85 $550.43 $503.60 $4,412.08

Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-4A (40 minutes)

1.
2014
Nov. 11 Cash........................................................................... 7,875
Sales.................................................................... 7,875
Sold razors to customers.

11 Cost of Goods Sold.................................................. 2,100

Merchandise Inventory...................................... 2,100
To record cost of November 11 sale (105 x $20).

30 Warranty Expense.................................................... 630

Estimated Warranty Liability............................. 630
To record razor warranty expense
and liability at 8% of selling price.

Dec. 9 Estimated Warranty Liability................................... 300

Merchandise Inventory...................................... 300
To record cost of razor warranty
replacements (15 x $20).

16 Cash........................................................................... 16,500
Sales.................................................................... 16,500
Sold razors to customers.

16 Cost of Goods Sold.................................................. 4,400

Merchandise Inventory...................................... 4,400
To record cost of December 16 sale (220 x $20).

29 Estimated Warranty Liability................................... 600

Merchandise Inventory...................................... 600
To record cost of razor warranty
replacements (30 x $20).

31 Warranty Expense.................................................... 1,320

Estimated Warranty Liability............................. 1,320
To record razor warranty expense
and liability at 8% of selling price.
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-4A (Concluded)

2015
Jan. 5 Cash........................................................................... 11,250
Sales.................................................................... 11,250
Sold razors to customers.

5 Cost of Goods Sold.................................................. 3,000

Merchandise Inventory...................................... 3,000
To record cost of January 5 sale (150 x $20).

17 Estimated Warranty Liability................................... 1,000

Merchandise Inventory...................................... 1,000
To record cost of razor warranty
replacements (50 x $20).

31 Warranty Expense.................................................... 900

Estimated Warranty Liability............................. 900
To record razor warranty expense
and liability at 8% of selling price.

2. Warranty expense for November 2014 and December 2014

Sales Percent Warranty Expense
November.................. $ 7,875 8% $ 630
December.................. 16,500 8 1,320
Total........................... $24,375 $1,950

3. Warranty expense for January 2015

Sales in January...............................$11,250
Warranty percent............................. 8%
Warranty expense............................$ 900

4. Balance of the estimated liability as of December 31, 2014

Warranty expense for November.................................... $ 630 credit
Warranty expense for December.................................... 1,320 credit
Cost of replacing items in December (45 x $20)............ (900) debit
Estimated Warranty Liability balance............................. $1,050 credit
1,050
5. Balance of the estimated liability as of January 31, 2015
Beginning balance.......................................................... $1,050 credit
Warranty expense for January....................................... 900 credit
Cost of replacing items in January (50 x $20).............. (1,000) debit
Estimated Warranty Liability balance........................... $ 950 credit
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-5A (60 minutes)

1. Miller Company
Income before interest & taxes $200,000
Interest expense = $60,000 = 3.33

2. Weaver Company
Income before interest & taxes $400,000
Interest expense = $260,000 = 1.54

3. Sales increase by 30% (multiply prior sales by 1.3)

Miller Co. Weaver Co.
Sales............................................. $1,300,000 $1,300,000
Variable expenses....................... 1,040,000 780,000
Income before interest................ 260,000 520,000
Interest expense (fixed).............. 60,000 260,000
Net income................................... $ 200,000 $ 260,000
Net income increases by*.......... 43% 86%
* Computed as the increase in net income divided by prior net income.

4. Sales increase by 50% (multiply prior sales by 1.5)

Miller Co. Weaver Co.
Sales............................................. $1,500,000 $1,500,000
Variable expenses....................... 1,200,000 900,000
Income before interest................ 300,000 600,000
Interest expense (fixed).............. 60,000 260,000
Net income................................... $ 240,000 $ 340,000
Net income increases by............ 71% 143%

5. Sales increase by 80% (multiply prior sales by 1.8)

Miller Co. Weaver Co.
Sales............................................. $1,800,000 $1,800,000
Variable expenses....................... 1,440,000 1,080,000
Income before interest................ 360,000 720,000
Interest expense (fixed).............. 60,000 260,000
Net income................................... $ 300,000 $ 460,000
Net income increases by............ 114% 229%
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-5A (Continued)

6. Sales decrease by 10% (multiply prior sales by 0.9)

Miller Co. Weaver Co.
Sales........................................ $900,000 $900,000
Variable expenses.................. 720,000 540,000
Income before interest........... 180,000 360,000
Interest expense (fixed)......... 60,000 260,000
Net income.............................. $120,000 $100,000
Net income decreases by...... -14% -29%

7. Sales decrease by 20% (multiply prior sales by 0.8)

Miller Co. Weaver Co.
Sales........................................ $800,000 $800,000
Variable expenses.................. 640,000 480,000
Income before interest........... 160,000 320,000
Interest expense (fixed)......... 60,000 260,000
Net income.............................. $100,000 $ 60,000
Net income decreases by...... -29% -57%

8. Sales decrease by 40% (multiply prior sales by 0.6)

Miller Co. Weaver Co.
Sales........................................ $600,000 $600,000
Variable expenses.................. 480,000 360,000
Income before interest........... 120,000 240,000
Interest expense (fixed)......... 60,000 260,000
Net income.............................. $ 60,000 $ (20,000)
Net income decreases by...... -57% -114%

9. The higher fixed cost strategy (having more fixed interest expense) of
Weaver 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 Weaver Co. is indicated by a lower value of
the times interest earned ratio.
The higher fixed cost strategy works fine if the sales level increases.
Weaver Co. enjoys greater percent increases in its net income because
it has made this choice (see parts 3, 4, and 5).
The lower fixed cost strategy protects the company if the sales level
decreases. Miller Co. experiences smaller percent decreases in its net
income because it has made this choice (see parts 6, 7, and 8).
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-6AA (50 minutes)

Mar. 15 FICASocial Security Taxes Payable....................3,472

FICAMedicare Taxes Payable............................... 812
Employee Fed. Income Taxes Payable..................4,000
Cash..................................................................... 8,284
To record payment of FICA & federal income taxes.

31 Office Salaries Expense...........................................11,200

Shop Salaries Expense............................................ 16,800
FICASocial Sec. Taxes Payable..................... 1,736
FICAMedicare Taxes Payable......................... 406
Employee Fed. Income Taxes Payable............ 4,000
Salaries Payable................................................. 21,858
To record payroll for the period.

31 Salaries Payable....................................................... 21,858

Cash..................................................................... 21,858
To record payment of payroll.*
*Check numbers are likely entered in the Payroll Register.

31 Payroll Taxes Expense*............................................2,786

FICASocial Sec. Taxes Payable..................... 1,736
FICAMedicare Taxes Payable......................... 406
State Unemployment Taxes Payable................ 560
Federal Unemployment Taxes Payable............ 84
To record employer payroll taxes.
*
Amount earned through 2/28 = 2 x $2,800 = $5,600
Subject to SUTA/FUTA in March = $7,000 - $5,600 = $1,400
SUTA = $1,400 x 10 employees x 4.0% = $560
FUTA = $1,400 x 10 employees x 0.6% = $84
FICASocial Security Taxes = $1,736 (same as employees)
FICAMedicare Taxes = $406 (same as employees)
Chapter 11 - Current Liabilities and Payroll Accounting

Problem 11-6AA (Concluded)

Apr. 15 FICASocial Security Taxes Payable....................3,472

FICAMedicare Taxes Payable............................... 812
Employee Fed. Income Taxes Payable..................4,000
Cash..................................................................... 8,284
To record payment of FICA & federal income taxes.

15 State Unemployment Taxes Payable......................2,800

Cash..................................................................... 2,800
To record payment of SUTA taxes [$2,240 + $560].

30 Federal Unemployment Taxes Payable.................. 420

Cash..................................................................... 420
To record payment of FUTA taxes [$336 + $84].

30 No entry required upon mailing Form 941.