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B PROBLEMS
1 P13-1B (Current Liability Entries and Adjustments) Described below are certain transactions of Shark
Company. The company uses the periodic inventory system.

1. On March 10, the company purchased goods from Bait Company for $42,000 subject to cash discount
terms of 1/10, n/30. Purchases and accounts payable are recorded by the company at gross amounts.
The invoice was paid on March 19.
2. On April 1, the company borrowed $172,000 from Omega National Bank by signing a $200,000 zero-
interest-bearing note due two years from April 1.
3. On June 30, the company bought a fishing boat for $40,000 from Open Water Corporation, paying
$6,000 in cash and signing a two-year, 8% note for the balance of the purchase price.
4. On September 8, the board of directors declared a $65,000 cash dividend that was payable on October
15 to stockholders of record on September 25.
Instructions
(a) Make all the journal entries necessary to record the transactions above using appropriate dates.
(b) Shark Companys year-end is December 31. Assuming that no adjusting entries relative to the trans-
actions above have been recorded, prepare any adjusting journal entries concerning inteest that are
necessary to present fair financial statements at December 31. Assume straight-line amortization of
discounts.
1 5 P13-2B (Liability Entries and Adjustments) Listed below are selected transactions of Jian Furniture Store
for the current year ending December 31.

1. On December 1, the store purchased for cash two delivery trucks for $70,000. The trucks were
purchased in a state that applies a 6% sales tax.
2. On December 10, the store received $2,000 from the local community theater as a deposit to be re-
turned after certain furniture to be used in stage production was returned on January 10.
3. During December, cash and credit card sales totaled $524,000, which includes the 6% sales tax that
must be remitted to the state by the fifteenth day of the following month.
4. The store determined it will cost $78,000 to restore the area (considered a land improvement)
surrounding one of its parking lots, when the store is closed in 5 years. Jian estimates the fair value
of the obligation at December 31 is $61,500.
Instructions
Prepare all the journal entries necessary to record the transactions noted above as they occurred and any
adjusting journal entries relative to the transactions that would be required to present fair financial state-
ments at December 31. Date each entry. For simplicity, assume that adjusting entries are recorded only once
a year on December 31.
3 P13-3B (Payroll Tax Entries) Yellow Company pays its office employee payroll weekly. Below is a partial
list of employees and their payroll data for June. Vacation pay for June is also listed.

Earnings to Weekly Vacation Pay to Be

Employee May 31 Pay Received in June
Mark James $45,600 $2,000 $4,000
Anna Carey 65,000 3,200
Joseph Black 2,000 610
Christina Peng 26,000 960 1,920

Assume that the federal income tax withheld is 12% of wages. Union dues withheld are 1% of wages.
Vacations are taken the second and third weeks of August by James and Peng. The state unemployment
tax rate is 2.5% and the federal is 0.8%, both on a $7,000 maximum. The FICA rate is 7.65% on employee
and employer on a maximum of $106,800 per employee. In addition, a 1.45% rate is charged both em-
ployer and employee for an employees wages in excess of $106,800.
Instructions
Make the journal entries necessary for each of the four June payrolls. The entries for the payroll and for the
companys liability are made separately. Also make the entry to record the monthly payment of accrued
payroll liabilities on June 30.

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2 Chapter 13 Current Liabilities and Contingencies

3 P13-4B (Payroll Tax Entries) Below is a payroll sheet for Mahogany Company for the month of July. The
company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax
rate is 0.8% and the maximum for both is $7,000. Assume a 10% federal income tax rate for all employees
and a 7.65% FICA tax on employee and employer on a maximum of $106,800. In addition, 1.45% is charged
both employer and employee for an employees wages in excess of $106,800 per employee.
Income
Earnings July Tax
Name to June. 30 Earnings Withholding FICA SUTA FUTA
Jerry Kaye $ 75,000 $ 15,000
Jessie Randle 104,000 17,000
Javier White 6,000 800
Jeremy Taggle 125,000 21,000
John Jay 42,500 7,100
Joan Short 3,600 1,500

Instructions
(a) Complete the payroll sheet and make the necessary entry to record the payment of the payroll.
(b) Make the entry to record the payroll tax expenses of Mahogany Company.
(c) Make the entry to record the payment of the payroll liabilities created. Assume that the company
pays all payroll liabilities at the end of each month.
5 P13-5B (Warranties, Accrual, and Cash Basis) Houston Air Corporation sells central home air condition-
ing units under a 2-year warranty contract that requires the corporation to replace defective parts and to
provide the necessary repair labor. During 2014, the corporation sells for cash 1,100 air conditioning units
at a unit price of $4,000. On the basis of past experience, the 2-year warranty costs are estimated to be $125
for parts and $220 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2014.)
The warranty is not sold separately from the air conditioning units.
Instructions
(a) Record any necessary journal entries in 2014, applying the cash-basis method.
(b) Record any necessary journal entries in 2014, applying the expense warranty accrual method.
(c) What liability relative to these transactions would appear on the December 31, 2014, balance sheet
and how would it be classified if the cash-basis method is applied?
(d) What liability relative to these transactions would appear on the December 31, 2014, balance sheet
and how would it be classified if the expense warranty accrual method is applied?
In 2015, the actual warranty costs to Brooks Corporation were $71,950 for parts and $126,900 for labor.
(e) Record any necessary journal entries in 2015, applying the cash-basis method.
(f) Record any necessary journal entries in 2015, applying the expense warranty accrual method.
5 P13-6B (Extended Warranties) Floating Company sells hot tubs at an average price of $2,100 and also offers
to each customer a separate 5-year warranty contract for $215 that requires the company to perform peri-
odic services and to replace defective parts. During 2014, the company sold 625 hot tubs and 460 warranty
contracts for cash. It estimates the 5-year warranty costs as $45 for parts and $90 for labor and accounts for
warranties separately. Assume sales occurred on December 31, 2014, and straight-line recognition of war-
ranty revenues occurs.
Instructions
(a) Record any necessary journal entries in 2014.
(b) What liability relative to these transactions would appear on the December 31, 2014, balance sheet
and how would it be classified?
In 2015, Floating Company incurred actual costs relative to 2014 hot tub warranty sales of $4,100 for
parts and $6,800 for labor.
(c) Record any necessary journal entries in 2015 relative to 2014 hot tub warranties.
(d) What amounts relative to the 2014 hot tub warranties would appear on the December 31, 2015, bal-
ance sheet and how would they be classified?
4 5 P13-7B (Warranties, Accrual, and Cash Basis) Treanor Company sells a machine for $12,200 under a
12-month warranty agreement that requires the company to replace all defective parts and to provide the
repair labor at no cost to the customers. With sales being made evenly throughout the year, the company
sells 240 machines in 2014 (warranty expense is incurred half in 2014 and half in 2015). As a result of prod-
uct testing, the company estimates that the warranty cost is $635 per machine ($260 parts and $375 labor).
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B Problems 3

Instructions
Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be
made relative to the following facts?
(a) Under application of the expense warranty accrual method for:
(1) Sale of machinery in 2014.
(2) Warranty costs incurred in 2014.
(3) Warranty expense charged against 2014 revenues.
(4) Warranty costs incurred in 2015.
(b) Under application of the cash-basis method for:
(1) Sale of machinery in 2014.
(2) Warranty costs incurred in 2014.
(3) Warranty expense charged against 2014 revenues.
(4) Warranty costs incurred in 2015.
(c) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of
December 31, 2014, under each method?
(d) Which method best reflects the income in 2014 and 2015 of Treanor Company? Why?
5 P13-8B (Premium Entries) To stimulate the sales of its Royal Frozen dinners, King Company places 1
coupon in each box. Ten coupons are redeemable for a premium consisting of a hot meal carrier. In 2015,
the company purchases 100,000 hot meal carriers at $2.25 each and sells 2,200,000 boxes of Royal Frozen
dinners at $4.75 a dinner.
From its experience with other similar premium offers, the company estimates that 30% of the coupons
issued will be mailed back for redemption. During 2015, 230,000 coupons are presented for redemption.
Instructions
Prepare the journal entries that should be recorded in 2015 relative to the premium plan.
5 6 P13-9B (Premium Entries and Financial Statement Presentation) Sanibel Mint Company offers one song
download as a premium for every five candy mint UPC codes presented by customers together with $0.50.
The candy mints are sold by the company to distributors for 20 cents each. The purchase price of each
download to the company is $0.80. Upon receipt and verification, a music download code is emailed to the
customer. The results of the premium plan for the years 2014 and 2015 are as follows. (All purchases and
sales are for cash.)
2014 2015
Download codes purchased 600,000 500,000
Candy mints sold 6,200,500 7,600,000
UPC codes redeemed 1,600,000 3,100,000
2014 wrappers expected to be redeemed in 2015 620,000
2014 wrappers expected to be redeemed in 2016 360,000

Instructions
(a) Prepare the journal entries that should be made in 2014 and 2015 to record the transactions related
to the premium plan of the Sanibel Mint Company.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan
that would appear on the balance sheet and the income statement at the end of 2014 and 2015.
4 5 P13-10B (Loss Contingencies: Entries and Essay) On July 9, 2014, 13 passengers on a Islamorada Fishing
and Scuba Tour were injured when the boat accelerated when docking and crashed into the pier. Personal
injury suits for damages totaling $600,000 were filed on August 13, 2014, against the tour company by 7
injured passengers. The toru company carries no insurance. Legal counsel has studied each suit and ad-
vised Islamorada that it can reasonably expect to pay 40% of the damages claimed. The financial statements
for the year ended July 31, 2014, were issued September 29, 2014.
Instructions
(a) Prepare any disclosures and journal entries required by the toru company in preparation of the July
31, 2014, financial statements.
(b) Ignoring the July 9, 2014, accident, what liability due to the risk of loss from lack of insurance cover-
age should Islamorada record or disclose? During the past decade, the company has experienced at
least one accident per year and incurred average damages of $180,000. Discuss fully.
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4 Chapter 13 Current Liabilities and Contingencies

4 5 P13-11B (Loss Contingencies: Entries and Essays) Starfish Corporation, in preparation of its December
31, 2014, financial statements, is attempting to determine the proper accounting treatment for each of the
following situations.

1. As a result of uninsured accidents during the year, personal injury suits for $261,000 and $697,000
have been filed against the company. It is the judgment of Starfishs legal counsel that an unfavorable
outcome is unlikely in the $261,000 case but that an unfavorable verdict approximating $410,000 will
probably result in the $697,000 case.
2. Starfishs deep sea exploration division consisting of operations in the Marina Trench is uninsurable
because of the special risk of injury to employees and losses due to high pressure. The year 2014 is
considered one of tinesafest (luckiest) in the divisions history because no loss due to injury or
casualty was suffered. Having suffered an average of two casualties a year during the rest of the past
decade (ranging from $25,000 to $1,000,000), management is certain that next year the company will
probably not be so fortunate.
3. Starfish Corporation owns a subsidiary in a foreign country that has a book value of $21,600,000 and
an estimated fair value of $30,890,000. The foreign government has communicated to Starfish its
intention to expropriate the assets and business of all foreign investors. On the basis of settlements
other firms have received from this same country, Starfish expects to receive 60% of the fair value of
its properties as final settlement.
Instructions
(a) Prepare the journal entries that should be recorded as of December 31, 2014, to recognize each of the
situations above.
(b) Indicate what should be reported relative to each situation in the financial statements and accompa-
nying notes. Explain why.
5 P13-12B (Warranties and Premiums) WXZ Pools carries a wide variety of residential quality outdoor
swimming pools and supplies to maintain the pools. WXZ uses two sales promotion techniqueswarranties
and premiumsto attract and retain customers.
Swimming pools are sold with a two-year warranty for replacement of parts and labor. The estimated
warranty cost, based on past experience, is 6% of sales.
The premium is offered on the purchases of chemical supplies to maintain the pool. Customers receive
a coupon for each dollar spent on pool chemical supplies. Customers may exchange 250 coupons and $5
for on of an assortment of pool toys. WXZ pays $16 for each pool toy and estimates that 40% of the coupons
given to customers will be redeemed.
WXZs total sales for 2014 were $7,500,000$6,400,000 from outdoor swimming pools and $1,100,000
from pool chemicals. Replacement parts and labor for warranty work totaled $234,000 during 2014. A total
of 2,500 pool toys used in the premium program were purchased during the year, and there were 286,000
coupons redeemed in 2014.
The accrual method is used by WXZ to account for the warranty and premium costs for financial
reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2014,
were as shown below.

Inventory of Premiums $ 6,100

Premium Liability 11,800
Warranty Liability 149,000

Instructions
WXZ Pools is preparing its financial statements for the year ended December 31, 2014. Determine the
amounts that will be shown on the 2014 financial statements for the following.
(1) Warranty Expense. (4) Inventory of Premiums.
(2) Warranty Liability. (5) Premium Liability.
(3) Premium Expense.
(CMA adapted)
4 5 P13-13B (Liability Errors) You are the independent auditor engaged to audit Sequoia Corporations
December 31, 2014, financial statements. Sequoia manufactures small appliances. During the course of
your audit, you discovered the following contingent liabilities.

1. Sequoia began production of a new blender in August 2014 and, by December 31, 2014, sold 381,000
to various retailers for $60 each. Each blender is under a one-year warranty. The company estimates
that its warranty expense per blender will amount to $4. At year-end, the company had already paid
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B Problems 5

out $831,000 in warranty expenses. Sequoias income statement shows warranty expenses of $831,000
for 2014. Sequoia accounts for warranty costs on the accrual basis.
2. Sequoia is the defendant in a patent infringement lawsuit by Crusher Blenders, Inc. over Sequoias
use of a blade design and ice crushing technique in its new blender. Sequoias general counsel
claims that, if the suit goes against Sequoia, the loss may be as much as $25,000,000; however, their
attorney believes the loss of this suit to be only reasonably possible. Again, no mention of this
suit is made in the financial statements.
3. In response to your attorneys letter, Sequoias general counsel has informed you that Sequoia has
been cited for burying toxic chemicals behind one of the plants. Clean-up costs and fines amount to
$4,200,000. Although the case is still being contested, their attorney is certain that Sequoia will most
probably have to pay at least $3,500,000 of the fine and clean-up costs. No disclosure of this situation
was found in the financial statements.
As presented, these contingencies are not reported in accordance with GAAP, which may create problems
in issuing a favorable audit report. You feel the need to note these problems in the work papers.
Instructions
Heading each page with the name of the company, balance sheet date, and a brief description of the prob-
lem, write a brief narrative for each of the above issues in the form of a memorandum to be incorporated
in the audit work papers. Explain what led to the discovery of each problem, what the problem really is,
and what you advised your client to do (along with any appropriate journal entries) in order to bring these
contingencies in accordance with GAAP.
5 P13-14B (Warranty and Coupon Computation) Thompson Company must make computations and
adjusting entries for the following two independent situations at December 31, 2015.

1. Its line of copier machines carries a 3-year warranty against defects. On the basis of past experience
the estimated warranty costs related to dollar sales are: first year after sale1% of sales; second year
after sale4% of sales; and third year after sale6% of sales. Sales and actual warranty expenditures
for the first 3 years of business were:

Warranty
Sales Expenditures
2013 $2,650,000 $ 42,000
2014 2,400,000 156,200
2015 3,060,000 183,900

Instructions
Compute the amount that Thompson Company should report as a liability in its December 31, 2015, bal-
ance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also
evenly spaced relative to the rates above.
2. With some of its products, Thompson Company includes coupons that are redeemable in merchan-
dise. The coupons have no expiration date and, in the companys experience, 60% of them are
redeemed. The liability for unredeemed coupons at December 31, 2014, was $21,000. During 2015,
coupons worth $61,000 were issued, and merchandise worth $34,600 was distributed in exchange
for coupons redeemed.
Instructions
Compute the amount of the liability that should appear on the December 31, 2015, balance sheet.
(AICPA adapted)