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FINANCIAL ACCOUNTING PART TWO PRELIM REVIEWER

PROBLEMS

1. During 2010, PEREGRINA Co. introduced a new line of machines that carry a three-year warranty
against manufacturers defects. Based on the industry experience, warranty costs are estimated at 2% of
sales in the year of sale, 4% in the years aftersale, and 6% in the second year after sale. Sale and actual
warranty expenditures for the first three-year period were as follows:
YEAR
2010
2011
2012
TOTAL

SALES
400,000
1,000,000
1,400,000
2,800,000

ACTUAL WARRANTY EXPENDITURES


6000
30,000
90,000
126,000

What amount should PEREGRINA report as aliability at December 31,2012?


ANSWER: 210,000
2. LAHOM frosted flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops
from LAHOM Frosted Flakes boxes and P1. The company estimates that 60% of the BOXTOPS will
be redeemed. In 2010, the company sold 500,000 boxes of frosted flakes and customers redeemed
220,000 boxtops receiving 55,000 bowls. If the bowls cost LAHOM Company P2.50 each, how
much liability for outstanding premiums should be recorded at the end of 2010?
ANSWER: 50,000
3. MONILLA Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost MONILLA P2.00 each. MONILLA estimates that 40%
of the coupons will be redeemed. Data for 2010 and 2011 are as follows:

Bags of dog food sold


Leashes purchased
Coupons redeemed

2010
500,000
18,000
120,000

2011
600,000
22,000
150,000

ANSWERS:
PREMIUM EXPENSE FOR 2010: 50,000
ESTIMATED PREMIUM LIABILITY FOR 2010: 20,000
ESTIMATED PREMIUM LIABILITY FOR 2011: 42,500

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Chapter 10/Current Liabilities and Payroll

493

4. NAVAL Company estimates its annual warranty expense as 4% of annual net sales. The following date
relate to the calendar year 2010:
Net Sales
P1,500,000
Warranty Liability Account
Balance, 12/31/10
10,000
debit before adjustment
Balance, 12/31/10
50,000
credit after adjustment
What is the entry made to record the 2010 estimated warranty expense?
ANSWER: Warranty Expense
Warranty Liability

60,000
60,000

5. IN 2010, PAPASIN Corporation began selling a new line of products that carry a two-year warranty
against defects. Based upon past experience with other products, the estimated warranty costs related
to peso sales are as follows:
First year warranty
Second year warranty

2%
5%

Sales and actual warranty expenditures for 2010 and 2011 are presented below:

Sales
Actual warranty expenditures

300,000
10,000

400,000
20,000

ANSWER:
ESTIMATED WARRANTY LIABILITY FOR 2011: 19,000
6. FUENTES Food Company distributes to consumers coupons which may be presented (on or before a
stated expiration date) to grocers for discounts on certain products of FUENTES. The grocers are
reimbursed when they send the coupons to FUENTES. In FUENTES experience, 50% of such
coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon
from a consumer and the date FUENTES receives it. During 2010 FUENTES issued issued two
separate series of coupons as follows:

ISSUED ON

TOTAL VALUE

1/1/10
7/1/10

375,000
540,000

CONSUMER
EXPIRATION DATE
6/30/10
12/31/10

Amount disbursed
As of 12/31/10
177,000
225,000

The only journal entries to date recorded debits to coupon expense and credits to cash of 536,000. The
December 31, 2010 statement of financial position should include a liability for unredeemed coupons of:
ANSWER: 45,000
7. On October 1, Reynolds Co. signed a $90,000, 60-day discounted note at the bank. The discount rate
was 6%, and the note was paid on November 30.
(a)

Journalize the entries for October 1 and November 30.

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Chapter 10/Current Liabilities and Payroll

(b)
(c)

Assume that Reynolds Co. signed a 6% note. Journalize the entries for October 1 and
November 30.
Which of the two options is more favorable and why?

ANS:
(a) Oct. 1

Nov. 30

(b)

Oct. 1

Nov. 30

(c)

Cash
Interest Expense
Notes Payable

89,100
900

Notes Payable
Cash

90,000

Cash
Notes Payable

90,000

Notes Payable
Interest Expense
Cash

90,000
900

90,000

90,000

90,000

90,900

Option (b) is more favorable. The effective interest rate for option (a) is greater than 6%.
(900 (360/60) = 5400/89,100 = 6.06%)

8. Journalize the following transactions:


Dec. 31

ANS:
Dec. 31

The accrued product warranty for the year is estimated to be 1.5% of net
sales. Sales for the year totaled $8,000,000, and sales returns and
allowances were $120,000.

31

The accrued vacation pay for the year is estimated to be $60,000.

31

Paid Way Best Insurance Co. $85,000 as fund trustee for the pension plan.
The annual pension cost is $99,000.

Product Warranty Expense


Product Warranty Payable

118,200
118,200*

*$7,880,000 .015 = $118,200


31

31

Vacation Pay Expense


Vacation Pay Payable

60,000

Pension Expense
Cash
Unfunded Pension Liability

99,000

60,000

85,000
14,000

Chapter 10/Current Liabilities and Payroll

495

9. Jackson Hole Construction installs swimming pools. They calculate that warranty obligations are 3% of
gross sales. For the year just ending Jackson Holes gross sales were $1,450,000.00. Due to previous
quarter recognitions, the Warranty Liability account has a credit balance of $28,700.00. Determine
the years total warranty liability and journalize any necessary value to establish the years liability at
December 31st.
ANS:
Due to sales, $1,450,000.00, warranty liability is ($1,450,000.00 3%) $43,500. Since $28,700.00 has
already been recognized, ($43,500.00 - $28,700.00) $14,800.00 must still be recognized.
Dec 31st

Warranty Expense
Warranty Payable

14,800.00
14,800.00

10. Jason Construction installs swimming pools. They calculate that warranty obligations are 5% of
gross sales. For the year just ending Jasons gross sales were $1,500,000. Due to previous quarter
recognitions, the Warranty Liability account has a credit balance of $48,700. Determine the years
total warranty liability and journalize any necessary value to establish the years liability at
December 31st.
ANS:
Due to sales, $1,500,000, warranty liability is ($1,500,000 5%) $75,000. Since $48,700 has already
been recognized, ($75,000 - $48,700) $26,300 must still be recognized.
Dec 31st

1.

Warranty Expense
Warranty Payable

26,300

On October 1, Reynolds Co. signed a $90,000, 60-day discounted note at the bank. The discount rate
was 6%, and the note was paid on November 30.
(a)
(b)
(c)

Journalize the entries for October 1 and November 30.


Assume that Reynolds Co. signed a 6% note. Journalize the entries for October 1 and
November 30.
Which of the two options is more favorable and why?

ANS:
(a) Oct. 1

Nov. 30

(b)

26,300

Oct. 1

Nov. 30

Cash
Interest Expense
Notes Payable

89,100
900

Notes Payable
Cash

90,000

Cash
Notes Payable

90,000

Notes Payable
Interest Expense
Cash

90,000
900

90,000

90,000

90,000

90,900

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Chapter 10/Current Liabilities and Payroll

(c)

Option (b) is more favorable. The effective interest rate for option (a) is greater than 6%.
(900 (360/60) = 5400/89,100 = 6.06%)

11. Marvel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31
indicated the following:
Salary expense
Federal income tax withheld

$120,000
20,000

Of the payroll, $40,000 is subject to social security tax of 6%; $120,000 is subject to Medicare tax of
1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8%.
Present the journal entries for payroll tax expense if the employees are paid (a) December 31 of the
current year, (b) January 2 of the following year.
ANS:
(a)
Social Security Tax, 6% on $40,000
$2,400
Medicare Tax, 1.5% on $120,000
1,800
State Unemployment, 4.3% on $10,000
430
Federal Unemployment, .8% on $10,000
80
Total Payroll Tax Expense
$4,710
Payroll Tax Expense
Social Security Tax Payable
Medicare Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable
(b)
Social Security Tax, 6% on $120,000
Medicare Tax, 1.5% on $120,000
State Unemployment Tax, 4.3% on $120,000
Federal Unemployment Tax, .8% on $120,000
Total Payroll Tax Expense
Payroll Tax Expense
Social Security Tax Payable
Medicare Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable

4,710
2,400
1,800
430
80

$ 7,200
1,800
5,160
960
$15,120
15,120
7,200
1,800
5,160
960

Chapter 10/Current Liabilities and Payroll

497

MULTIPLE CHOICE (THEORIES AND EXERCISES)


1.

Current liabilities are


a. due, but not receivable for more than one year
b. due, but not payable for more than one year
c. due and receivable within one year
d. due and payable within one year
ANS: D
2.

Notes may be issued


a. when assets are purchased
b. to creditor's to temporarily satisfy an account payable created earlier
c. when borrowing money
d. all of the above
ANS: D
3.

On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. What is the due date
of the note?
a. October 8
b. October 7
c. October 6
d. October 5
ANS: C
4.

On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. What is the maturity
value of the note?
a. $80,100
b. $84,800
c. $81,600
d. $81,200
ANS: C
5.

On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the
fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in
the current fiscal year?
a. $293.33
b. $400.00
c. $391.10
d. $1,600.00
ANS: A
6.

On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the
fiscal year of Still Co. ends June 30. What is the amount of interest revenue recognized by Still in the
following year?
a. $1,200.00
b. $1,208.89
c. $1,306.67
d. $1,600.00
ANS: C

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Chapter 10/Current Liabilities and Payroll

7.

On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable on an overdue account payable
to Still Co. Assume that the fiscal year of Acme Co. ends June 30. Which of the following
relationships is true?
a. Acme is the creditor and credits Accounts Receivable
b. Still is the creditor and debits Accounts Receivable
c. Still is the borrower and credits Accounts Payable
d. Acme is the borrower and debits Accounts Payable
ANS: D
8.

A business borrowed $40,000 on March 1 of the current year by signing a 30 day, 6% interest
bearing note. When the note is paid on March 31, the entry to record the payment should include a
a. debit to Interest Payable $200
b. debit to Interest Expense $200
c. credit to Cash for $40,000
d. credit to Cash for $42400
ANS: B
DIF: Moderate
OBJ: 10-01
NAT: AACSB Analytic | AICPA FN-Measurement
9.

The interest deducted from the maturity value of a note is called


a. proceeds
b. discount
c. face value
d. maturity value
ANS: B
10. The maturity value of an interest-bearing note payable is the
a. face value plus the interest
b. face value minus the interest
c. interest
d. face value
ANS: A

Chapter 10/Current Liabilities and Payroll

499

11. The interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable for
$100,000 is
a. $6,000
b. $1,500
c. $500
d. $1,000
ANS: B
12. The maturity value of a $40,000, 90-day, 6% note payable is
a. $40,600
b. $42,400
c. $600
d. $2,400
ANS: A
13. Proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount
. 10.00%
c. 10.26%
d. 9.75%
ANS: B
14. Miller Co. issued a $35,000, 60-day, discounted note to River City Bank. The discount rate is 6%.
What is the maturity value of the note?
a. $35,350
b. $37,100
c. $35,000
d. $34
15. Chu Co. issued a $50,000, 60-day, discounted note to River City Bank. The discount rate is 6%. The
cash proceeds to Chu Co. are
a. $50,500
b. $50,250
c. $49,500
d. $50,250
ANS: C
16. During its first year of operations, a company granted employees vacation privileges and pension
rights estimated at a cost of $20,500 and $15,000. The vacations are expected to be taken in the next year
and the pension rights are expected to be paid in the future 5-30 years. What is the total cost of vacation
pay and pension rights to be recognized in the first year?

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Chapter 10/Current Liabilities and Payroll

a.
b.
c.
d.
ANS:

$29,500
$35,500
$23,500
$20,500
B

17. Searches Company sells merchandise with a one year warranty. In 2007, sales consisted of 2,500
units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will
be made in 2007 and 70% in 2008. In the 2007 income statement, Searches should show warranty
expense of
a. $25,000
b. $7,500
c. $17,500
d. $0
ANS: A
18. During September, Eltronics sold 100 radios for $50 each. Each radio cost Eltronics $30 to purchase,
and carried a two-year warranty. If 5% typically need to be replaced over the warranty period and
one is actually replaced during September, for what amount in September would Eltronics debit
Product Warranty Expense?
a. $50
b. $150
c. $30
d. $120
ANS: B
19. Estimating and recording product warranty expense in the period of the sale best follows which of
the following accounting concepts?
a. Cost concept
b. Business entity concept
c. Matching Concept
d. Materiality concept
ANS: C
20. Proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount
rate used by the bank in computing the proceeds was
a. 6.25%
b. 10.00%
c. 10.26%
d. 9.75%
ANS: B
21. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable on an overdue account payable to
Still Co. Assume that the fiscal year of Acme Co. ends June 30. Which of the following relationships
is true?
a. Acme is the creditor and credits Accounts Receivable
b. Still is the creditor and debits Accounts Receivable
c. Still is the borrower and credits Accounts Payable
d. Acme is the borrower and debits Accounts Payable
ANS: D

Chapter 10/Current Liabilities and Payroll

501

22. On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. Assume that the
fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized by Acme in
the current fiscal year?
a. $293.33
b. $400.00
c. $391.10
d. $1,600.00
ANS: A
23. An employee receives an hourly rate of $25, with time and a half for all hours worked in excess of
40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income
tax withheld, $350; cumulative earnings for year prior to current week, $99,700; social security tax
rate, 6.0% on maximum of $100,000; and Medicare tax rate, 1.5% on all earnings. What is the gross
pay for the employee?
a. $775.00
b. $752.50
c. $1,225.00
d. $1,102.50
ANS: C
24. The following totals for the month of June were taken from the payroll register of ABC Company:
Salaries expense
Social security and Medicare Taxes withheld
Income Taxes withheld
Retirement Savings

$13,000
975
2,600
500

The entry to record the payment of net pay would include a


a. debit to Salaries Payable for $13,000
b. Debit to Salaries Payable for $8,925
c. Credit to Salaries Expense for $8,925
d. Credit to Salaries Payable for $8,925
ANS: D
25. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40
during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax
withheld, $120; cumulative earnings for the year prior to this week, $24,500; Social security tax rate, 6%
on maximum of $100,000; and Medicare tax rate, 1.5% on all earnings; state unemployment
compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, .8% on the first
$7,000.
A. What is the net amount to be paid the employee?
a. $568.74
b. $601.50
c. $660.00
d. $574.90
ANS: B
B. What is the employer's payroll tax expense?
a. $152.76
b. $91.26
c. $58.50
d. $178.50
ANS:
C