Financial Accounting 2 Prelim Reviewer

492

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 manufacturer’s 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 SALES ACTUAL WARRANTY EXPENDITURES

2010 400,000 6000

2011 1,000,000 30,000

2012 1,400,000 90,000

TOTAL 2,800,000 126,000

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:

2010 2011

Bags of dog food sold 500,000 600,000

Leashes purchased 18,000 22,000

Coupons redeemed 120,000 150,000

ANSWERS:

PREMIUM EXPENSE FOR 2010: 50,000

ESTIMATED PREMIUM LIABILITY FOR 2010: 20,000

ESTIMATED PREMIUM LIABILITY FOR 2011: 42,500

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 60,000

Warranty Liability 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 2%

Second year warranty 5%

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

Sales 300,000 400,000

Actual warranty expenditures 10,000 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 CONSUMER Amount disbursed

EXPIRATION DATE As of 12/31/10

1/1/10 375,000 6/30/10 177,000

7/1/10 540,000 12/31/10 225,000

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.

494 Chapter 10/Current Liabilities and Payroll

(b) Assume that Reynolds Co. signed a 6% note. Journalize the entries for October 1 and

November 30.

(c) Which of the two options is more favorable and why?

ANS: (a) Oct. 1 Cash 89,100

Interest Expense 900

Notes Payable 90,000

Nov. 30 Notes Payable 90,000

Cash 90,000

(b) Oct. 1 Cash 90,000




Cash 90,900

(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%)

8. Journalize the following transactions:

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.

ANS: Dec. 31 Product Warranty Expense 118,200

Product Warranty Payable 118,200*

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

31 Vacation Pay Expense 60,000

Vacation Pay Payable 60,000

31 Pension Expense 99,000

Cash 85,000

Unfunded Pension Liability 14,000


9. Jackson Hole Construction installs swimming pools. They calculate that warranty obligations are 3% of

gross sales. For the year just ending Jackson Hole’s 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 year’s total warranty liability and journalize any necessary value to establish the year’s 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 14,800.00

Warranty Payable 14,800.00

10. Jason Construction installs swimming pools. They calculate that warranty obligations are 5% of

gross sales. For the year just ending Jason’s gross sales were $1,500,000. Due to previous quarter

recognitions, the Warranty Liability account has a credit balance of $48,700. Determine the year’s

total warranty liability and journalize any necessary value to establish the year’s 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 Warranty Expense 26,300

Warranty Payable 26,300

1. 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.

(b) Assume that Reynolds Co. signed a 6% note. Journalize the entries for October 1 and

November 30.

(c) Which of the two options is more favorable and why?

ANS: (a) Oct. 1 Cash 89,100




Cash 90,000

(b) Oct. 1 Cash 90,000




Cash 90,900


(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 $120,000

Federal income tax withheld 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 4,710

Social Security Tax Payable 2,400

Medicare Tax Payable 1,800

State Unemployment Tax Payable 430

Federal Unemployment Tax Payable 80

(b)

Social Security Tax, 6% on $120,000 $ 7,200

Medicare Tax, 1.5% on $120,000 1,800

State Unemployment Tax, 4.3% on $120,000 5,160

Federal Unemployment Tax, .8% on $120,000 960

Total Payroll Tax Expense $15,120

Payroll Tax Expense 15,120

Social Security Tax Payable 7,200

Medicare Tax Payable 1,800

State Unemployment Tax Payable 5,160

Federal Unemployment Tax Payable 960


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


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


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


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?


a. $29,500

b. $35,500

c. $23,500

d. $20,500

ANS: 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



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 $13,000

Social security and Medicare Taxes withheld 975

Income Taxes withheld 2,600

Retirement Savings 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

Documents

Financial Accounting 2 Prelim Reviewer