Accounting 220 Help Week 6- Chapter 12 & 14

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B-12.01

Determining if an obligation is a current liability requires careful consideration of certain conditions. Examine the following five conditions, and determine what other conditions must be met before the obligation would be deemed current (Condition A is done as an example):
Condition: Other Conditions to meet:
A Obligation is due within one year C, D, or E
B Obligation is due within the operating cycle
C Obligation requires the use of current assets
D Obligation results in the creation of another current liability
E Obligation to be satisfied by providing services
&R&"Myriad Web Pro,Bold"&20B-12.01
B-12.01

Worksheet- B-12.01

Condition: Other Conditions to meet:
A Obligation is due within one year C, D, or E
B Obligation is due within the operating cycle
C Obligation requires the use of current assets
D Obligation results in the creation of another current liability
E Obligation to be satisfied by providing services
&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-12.01
B-12.01

B-12.02

Server Planet operates a web hosting company. Examine the following items and prepare the current liability section of the company's December 31, 20X7, balance sheet.
The beginning of year accounts payable was $100,000. Purchases on trade accounts during the year were $650,000, and payments on account were $610,000.
The company incurs substantial costs for electricity to run its servers and air conditioning systems. As of December 31, 20X7, it is estimated that $55,000 of electricity has been used, although the monthly billing for December has not yet been received.
Server Planet sells web hosting plans for as low as $25 per month. However, it requires its customers to prepay in 6-month increments. As of the end of the year, $375,000 had been collected for 20X8 web hosting plans.
Web hosting services are subject to sales taxes, and Server Planet collected $65,000 during the year. All of these amounts have been remitted to taxing authorities, with the exception of $5,000 that is due to be paid in January, 20X8.
The company has total bank loans of $1,500,000. This debt bears interest at 6%, payable monthly. As of December 31, 20X7, all interest had been paid, with the exception of accrued interest for the last half of December.
The company's bank loans ($1,500,000) are all due on June 30, 20X8. However, Server Planet has a firm lending agreement with the bank to renew and extend $1,000,000 of this amount on a 5-year basis. The company intends to exercise this renewal option, but is not yet sure about the final disposition of the remainder.
B-12.02

Worksheet B-12.02

Liabilities
Current liabilities
$ -
-
-
-
-
- $ -
Supporting calculations:
B-12.02

B-12.03

On October 1, 20X4, Farmer Engineering Services purchased a new laser surveying instrument. Farmer paid $5,000 down and executed the following promissory note:
Promissory note
For value received, the undersigned promises to pay to the order of Laser Equipment Company
the sum of: *******Twenty-Thousand and no/100 Dollars******* ($20,000)
Along with annual interest of 10% on any unpaid balance.   This note shall mature and be payable, along with accrued interest, on September 30, 20X5.
October 1, 20X4 J.D. Farmer Farmer Engineering
Issue Date Signature
(a) Prepare the appropriate journal entry to record the purchase on October 1, 20X4.
(b) Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X4.
(c) Prepare the appropriate journal entry to record the payment of the note and accrued interest on September 30, 20X5.
B-12.03

Worksheet B-12.03

(a), (b), (c)
GENERAL JOURNAL  
Date Accounts Debit Credit
B-12.03

B-12.04

On April 1, 20X7, Miller Oil Company purchased a pumping truck. The sole consideration was a $100,000 note due in one year. Interest of $12,000 was included the face amount of the note. If Miller had purchased the truck for cash, the purchase price would have been only $88,000.
(a) Prepare the appropriate journal entry to record the purchase on April 1, 20X7.
(b) Prepare the appropriate journal entry to record the year-end discount amortization on December 31, 20X7.
(c) Prepare the appropriate journal entry to record the payment of the note on March 31, 20X8.
(d) What was the actual rate of interest on this loan?
B-12.04

Worksheet B-12.04

(a), (b), (c)
GENERAL JOURNAL  
Date Accounts Debit Credit
1-Apr
31-Dec
31-Mar
(d)
B-12.04

B-12.05

Conroy Corporation has borrowed money under two different loans. Conroy's accounting department presented the following calculations to support the interest accrual calculations. Review the calculations and suggest any necessary revisions. What are the financial statement implications associated with the revisions?
The first loan was a one-year loan for $100,000, created on November 1 of the current year. It bears interest at 8%, with interest based on the "rule of 78s."
Calculations:
$100,000 X 8% X 2/12 = $1,333,33
The second loan is due on demand and was for $250,000. The loan was originated on November 1 of the current year, and it bears interest at 9%, using a 360-day year assumption.
Calculations:
$250,000 X 9% X 2/12 = $3,750.00
B-12.05

Worksheet B-12.05

Make necessary corrections below in red:
The first loan was a one-year loan for $100,000, created on November 1 of the current year. It bears interest at 8%, with interest based on the "rule of 78s."
Calculations:
$100,000 X 8% X 2/12 = $1,333.33
The second loan is due on demand and was for $250,000. The loan was originated on November 1 of the current year, and it bears interest at 9%, using a 360-day year assumption.
Calculations:
$250,000 X 9% X 2/12 = $3,750.00
The financial statement implications of the above corrections are:
B-12.05

B-12.06

The auditing firm of Rossellini and Rossellini was auditing the year-end financial statements of its client, City Center Foods. In the course of the audit, it was discovered that City Center was the defendant in a law suit involving a "food poisoning" case. City Center denies that it sold any tainted food products. City Center's attorney provided a representation letter regarding the ongoing litigation. Following is a portion of the reply received from the attorney:
Dear Ms. Rossellini:
You requested that we furnish you with certain information in connection with your examination of the accounts of City Center Foods, as of December 31, 20X7 . . .
While this firm represents City Center Foods, our engagement has been limited to specific matters involving the ongoing litigation between City Center Foods and Randal Ransom. This response is necessarily limited to those matters. The Company has advised us it does not intend to waive the attorney-client privilege with respect to any information which the Company has furnished to us. Moreover, please be advised that our response to you should not be construed in any way to constitute a waiver of the protection of the attorney work-product privilege with respect to any of our files involving the Company.
In the matter of Randal Ransom v. City Center Foods: On June 30, 20X7, Randal Ransom filed a civil action in Federal District Court for the Eastern District of Texas alleging that he was significantly damaged by consumption of food products sold by City Center Foods. He further alleges that City Center Foods knowingly sold such food products and failed to maintain appropriate refrigeration equipment. Mr. Ransom is requesting specific damages of $1,000,000 and such additional amounts as may be awarded by a jury.
This litigation is in its earliest stages, and discovery is not yet complete. At this stage of litigation, it is impracticable to render an opinion about whether the likelihood of an unfavorable outcome is either “probable” or “remote;” however, the Company believes it has meritorious defenses and is vigorously defending this litigation . . .
Robert Bean, Attorney
(a) What is a contingent liability?
(b) What criteria drive the determination of when/how a contingency should be reported?
(c) How do you believe the litigation described in the attorney's letter should be reported?
B-12.06

Worksheet B-12.06

(a)
(b)
(c)
B-12.06

B-12.07

Riseva Corporation manufactures and sells energy efficient lighting systems. These systems include a complex dimmer module, and about 10% of all units sold require subsequent repair under the warranty. The average repair cost is $80 per unit. Riseva began the year with an accrued warranty liability of $250,000. During the year, 50,000 lighting systems were sold. $310,000 was expended on warranty services performed during the year.
Prepare Riseva's journal entries to accrue additional warranty costs relating to current year sales and account for monies expended on actual warranty work performed during the year. How much will appear as warranty expense in the current year income statement, and how much will appear as the warranty liability on the closing balance sheet?
B-12.07

Worksheet B-12.07

GENERAL JOURNAL
Date Accounts Debit Credit
B-12.07

B-12.08

Lawrence's pay is subject to social security taxes at an (assumed) 6.5% rate and Medicare/Medicaid at an (assumed) 1.5% rate. He has not exceeded the annual base for social security taxes.
Baylor pays for workers' compensation insurance at a 4% rate. None of this cost is paid by the employee.
Baylor provides its employees with health care insurance, and pays 90% of the $500 per employee monthly premium. The other 10% is paid by employees via payroll withholdings.
Lawrence participates in a tax-sheltered deferred savings plan and has 8% of his gross pay withheld each month. Baylor Health Systems provides a 75% matching contribution. In other words, for every dollar that Lawrence saves, Baylor will contribute an additional 75 cents.
Baylor's payroll is subject to federal (0.5%) and state (1.5%) unemployment taxes on each employee's gross pay, up to $8,000 per year. Lawrence had $6,000 of gross earnings in the months prior to June.
Lawrence participates in the Community Chest fund drive each month, via a $25 contribution that is withheld from his pay.
(a) Complete Lawrence's paycheck and the remittance advice (i.e., "paycheck stub"). The blank worksheet will be very helpful for this portion of the assignment.
(b) Prepare journal entries for Lawrence's pay and the related payroll expenses.
(c) What is the total cost to Baylor for Lawrence's services during June?

Worksheet B-12.08

(a) (b)
GENERAL JOURNAL 
Date Accounts Debit Credit
BAYLOR HEALTH Check # 95859
Payroll Account Date: June 30, 20XX
Pay to the order of:
First Corner Bank
MEMO: June payroll for Bodine Judy Baylor
Detach below before depositing, and save for your records:
Employee: L. Bodine Gross Earnings $ - 0
Pay Period:  June 20XX Deductions:
Federal Income Tax $ - 0
Social Security Tax - 0
Medicare/Medicaid Tax - 0
Insurance - 0
Retirement Savings Plan - 0
Charity - 0 - 0
Net Pay $ - 0
Supporting calculations:
B-12.08(a)
B-12.08(b)(c)

B-12.09

Wild Man Wilson hosts a television show where he gives investment opinions about companies to call-in-viewers. Below is the transcript of a portion of one of his shows that focused on employee benefits. Evaluate Wilson's reponses to the callers' questions, and identify the errors.
Caller 1 "Wilson, tell me about Xyloclick!"
Wilson "The company is a fraud! It has a defined contribution plan for its employees and does not list the pension assets and liabilities on its books! Sell, sell, sell!"
Caller 2 "Wilson, tell me about Fling Media!"
Wilson "You have to love this company. They are very conservative. They even accrue a liability for health insurance coverage relating to future retirees. Nobody does that! This company's real earnings are much higher than they are letting on. Buy, buy, buy!"
Caller 3 "Wilson, tell me about Big Foot Shoe!"
Wilson "Well, it's true that peoples' feet are growing larger, so maybe this a good play. But, beware because the company is not accruing costs related to employee sick leave. They offer some lame excuse about not meeting all four criteria of an applicable accounting rule. Wrong, you only need to meet one of the criteria! Sell, sell, sell!"
Caller 4 "Wilson, tell me about Optic Sky!"
Wilson "Buy! The company offers employees a defined benefit pension plan. The pension trust is loaded with loot, yet the company continues to show a pension liability on its books. It’s a hidden asset."
B-12.09

Worksheet B-12.09

Each of Wilson's comments was wrong. Following is an evaluation of the incorrect statements:
Wilson "The company is a fraud! It has a defined contribution plan for its employees and does not list the pension assets and liabilities on its books! Sell, sell, sell!"
Correction
Wilson "You have to love this company. They are very conservative. They even accrue a liability for health insurance coverage relating to future retirees. Nobody does that! This company's real earnings are much higher than they are letting on. Buy, buy, buy!"
Correction
Wilson "Well, it's true that peoples' feet are growing larger, so maybe this a good play. But, beware because the company is not accruing costs related to employee sick leave. They offer some lame excuse about not meeting all four criteria of an applicable accounting rule. Wrong, you only need to meet one of the criteria! Sell, sell, sell!"
Correction
Wilson "Buy! The company offers employees a defined benefit pension plan. The pension trust is loaded with loot, yet the company continues to show a pension liability on its books. It’s a hidden asset."
Correction
B-12.09

I-12.01

Following are selected transactions or events of Amazon Company relating to its first month of operation.
1-May Amazon borrowed $100,000 via a note payable bearing interest at 1% per month. This note and all accrued interest is due at the end of July.
10-May Purchased $25,000 of inventory, terms 2/10, n/30. The purchase was initially recorded at the net amount. The obligation was not paid during May.
16-May The company adopted an employee health insurance plan. The total estimated cost is $100 per day. None of this cost was funded during May.
20-May Sold goods for $80,000 cash. Amazon offers a warranty on the goods, and anticipates that total warranty cost will be 2% of sales.
25-May One of Amazon's vehicles was involved in an accident. Amazon expects to be held responsible for an estimated $10,000 in damages.
31-May At month end, it was estimated that employees are owed for $13,000 in accrued wages. In addition, $400 was spent on warranty service work.
(a) Prepare any initial journal entries necessary to record the preceding transactions or events.
(b) Prepare month-end adjusting journal entries that are deemed appropriate related to the preceding transactions or events.
(c) Prepare the current liability section of the company's balance sheet as of the end of the month. The only obligations are those related to the preceding transactions or events.
I-12.01

Worksheet I-12.01

(a) (b) (c)
GENERAL JOURNAL GENERAL JOURNAL
Date Accounts Debit Credit Date Accounts Debit Credit Liabilities
Current liabilities
$ -
-
-
-
-
-
- $ -
I-12.01(a)
I-12.01(b)
I-12.01(c)

I-12.02

Following are selected borrowing transactions by Campus Housing Corporation.
1-Jun Campus purchased new furniture in exchange for a $500,000 promissory note. The note was due in 6 months and bears interest at 8% per annum.
1-Jul Borrowed cash of $90,000, giving a $100,000 one-year note. The interest is implicit in the difference between the cash borrowed and the note's $100,000 maturity value.
1-Oct Campus was experiencing a temporary cash flow crunch. The company issued a $40,000 one-year note in settlement of an outstanding account payable. The note bears interest at 8% per annum. The agreement with the creditor was that Campus would repay the note as soon as possible, and the total interest would be allocated to each month based on the "rule of 78."
31-Oct Campus paid the note and accrued interest resulting from the October 1 transaction.
1-Nov Borrowed $75,000 cash from a local bank by issuing a 2-year, 6% promissory note. The interest is to be calculated based on actual days, using a 365-day year assumption.
1-Dec Campus paid the note and accrued interest resulting from the June 1 transaction.
(a) Prepare journal entries necessary to record the above transactions.
(b) Prepare year-end adjusting journal entries pertinent to the above borrowing transactions.
I-12.02

Worksheet I-12.02

(a) (b)
GENERAL JOURNAL   GENERAL JOURNAL  
Date Accounts Debit Credit Date Accounts Debit Credit
I-12.02(a)
I-12.02(b)