Solution manual accounting 25th editon warren chapter 11

The deductions from employees’ earnings are for amounts owed liabilities to others for such items as federal taxes, state and local income taxes, and contributions to pension plans.. Th

CHAPTER 11 CURRENT LIABILITIES AND PAYROLL

DISCUSSION QUESTIONS

1 No A discounted note payable has no stated interest rate, but provides interest by discounting the

note proceeds The discount, which is the difference between the proceeds and the face of the note, is the interest and is accounted for as such

2 a. Employee’s federal income taxes, social security, and Medicare

b. Employees Federal Income Tax Payable, Social Security Tax Payable, and Medicare TaxPayable

3 The deductions from employees’ earnings are for amounts owed (liabilities) to others for

such items as federal taxes, state and local income taxes, and contributions to pension plans

5 An advantage of using a separate payroll bank account is that reconciling the bank statements

is simplified In addition, a payroll bank account establishes control over payroll checks

and, thus, prevents their theft or misuse

6 a Constants are data that remain unchanged from payroll to payroll These include employee

names, social security numbers, marital status, number of income tax withholding

allowances, rates of pay, tax rates, and withholding tables

b Variables are data that change from payroll to payroll These include number of hours or

days worked for each employee, accrued days of sick leave, vacation credits, total earnings

to date, and total taxes withheld

7 The vacation pay expense should be recorded during the period in which the vacation privilege

is earned

8 In a defined contribution plan, the company invests contributions on behalf of the employee

during the employee’s working years Normally, the employee and employer contribute to the plan The employee’s pension depends on the total contributions and the investment returns

earned on those contributions

9 To match revenues and expenses properly, the liability to cover product warranties should be

recorded in the period during which the sale of the product is recorded

10 When the defective product is repaired, the repair costs would be recorded by debiting

Product Warranty Payable and crediting Cash, Supplies, or another appropriate account

11-1

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Multiplied by allowances claimed on Form W-4……… × 2 140.00

Initial withholding from wage bracket in Exhibit 3……… $ 327.40 Plus additional withholding: 28% of excess over $1,648*……… 227.36

*($2,460 – $1,648) × 28%

PE 11–2B

One allowance (provided by IRS)……… $70.00

Multiplied by allowances claimed on Form W-4……… × 1 70.00

Plus additional withholding: 25% of excess over $704*……… 156.50

*($1,330 – $704) × 25%

PE 11–3A

Medicare tax ($2,600 × 1.5%)……… 39.00 749.76

PE 11–3B

Medicare tax ($1,400 × 1.5%)……… 21.00 352.90

PE 11–4A

PE 11–4B

PE 11–5A

* $35,000 × 5.4%

** $35,000 × 0.8%

PE 11–5B

Vacation pay accrued for the period.

To record pension contribution, 6% × $260,000.

Vacation pay accrued for the period.

To record pension cost and funding.

To record warranty expense for February, 6% × $200,000.

To record warranty expense for July, 4.5% × $325,000.

b The quick ratio of Adieu Company has improved from 1.5 in 2013 to 1.6 in

2014 This increase is the result of a small decrease in the three types of quick assets (cash, temporary investments, and accounts receivable) compared to the larger decrease in the current liability, accounts payable.

Ex 11–1

Current liabilities:

* $840,000 × 40%

** 25,000 × $85 × 9/12 = $1,593,750

The nine months of unfilled subscriptions are a current liability because Bon Nebo

received payment prior to providing the magazines.

Ex 11–3

a $240,000 × 8% × 60/360 = $3,200 for each alternative.

b (1) $240,000 simple-interest note: $240,000 proceeds

(2) $240,000 discounted note: $240,000 – $3,200 interest = $236,800 proceeds

c Alternative (1) is more favorable to the borrower This can be verified by

comparing the effective interest rates for each loan as follows:

Situation (1): 8% effective interest rate

a $1,276 is the amount disclosed as the current portion of long-term debt.

b The current liabilities increased by $1,225 ($1,276 – $51).

Ex 11–9

Computer Consultant Programmer Administrator

Federal income tax withheld……… 904.06 610.76 585.56

Multiplied by: Value of one allowance……… × $70.00 × $70.00 × $70.00 Amount to be deducted……… $ 140.00 $ 140.00 $ 70.00 Amount subject to withholding……… $3,660.00 $2,660.00 $2,570.00 Initial withholding from wage bracket

Ex 11–15

a Appropriate All changes to the payroll system, including wage rate increases,

should be authorized by someone outside the Payroll Department.

b Inappropriate Each employee should record his or her own time out for lunch.

Under the current procedures, one employee could clock in several employees

who are still out to lunch The company would be paying employees for more

time than they actually worked.

c Inappropriate Payroll should be informed when any employee is terminated.

A supervisor or other individual could continue to clock in and out for the

terminated employee and collect the extra paycheck.

d Inappropriate Access to the check-signing machine should be restricted.

e Appropriate The use of a special payroll account assists in preventing fraud

and makes it easier to reconcile the company’s bank accounts.

Ex 11–16

a.

b Vacation pay is reported as a current liability on the balance sheet If

employees are allowed to accumulate their vacation pay, then the estimated

vacation pay that will not be taken in the current year will be reported as a

long-term liability When employees take vacations, the liability for vacation

b In a defined contribution plan, the company invests contributions on behalf of

the employee during the employee’s working years Normally, the employee

and employer contribute to the plan The employee’s pension depends on the

total contributions and the investment return on those contributions In a

defined benefit plan, the company pays the employee a fixed annual

amount based on a formula The employer is obligated to pay for (fund)

the employee’s future pension benefits.

Ex 11–18

The $4,267 million unfunded pension liability is the approximate amount of the

pension obligation that exceeds the value of the net assets of the pension plan

Apparently, Procter & Gamble has underfunded its plan relative to the obligation

that has accrued over time This can occur when the company contributes less to

the plan than the annual pension cost.

The obligation grows yearly by the amount of the periodic pension cost Thus, the

$538 million periodic pension cost is a measure of the amount of pension earned by employees during the year The annual pension cost is determined by making

assumptions about employee life expectancies, employee turnover, expected

compensation levels, and interest.

Vacation pay accrued for January, $42,000 × 1/12.

To record quarterly pension cost.

a The warranty liability represents estimated outstanding automobile warranty

claims Of these claims, $2,965 million is estimated to be due during Year 2,

while the remainder ($4,065 million) is expected to be paid after Year 2 The

distinction between short- and long-term liabilities is important to creditors in

order to accurately evaluate the near-term cash demands on the business,

relative to the quick current assets and other longer-term demands.

b.

$7,030 + X – $3,000 = $6,789

X = $6,789 – $7,030 + $3,000

X = $2,759 million

c In order for a product warranty to be reported as a liability in the financial

statements, it must qualify as a contingent liability Contingent liabilities are

only reported as liabilities on the balance sheet if it is probable that the liability will occur and the amount of the liability is reasonably estimable

To record warranty expense for June,

4% × $560,000.

Note to Instructors: The “damage awards and fines” would be disclosed on the

income statement under “Other expenses.”

b The company experienced a hazardous materials spill at one of its plants during the previous period This spill has resulted in a number of lawsuits to which the company is a party The Environmental Protection Agency (EPA) has fined the

company $240,000, which the company is contesting in court Although the

company does not admit fault, legal counsel believes that the fine payment is

probable In addition, an employee has sued the company A $125,000 out-of-

court settlement has been reached with the employee The EPA fine and out-of- court settlement have been recognized as an expense for the period There is

one other outstanding lawsuit related to this incident Counsel does not believe that the lawsuit has merit Other lawsuits and unknown liabilities may arise from this incident.

b The quick ratio decreased between the two balance sheet dates The major

reason is a significant increase in inventory which likely drove the increase in

accounts payable Cash also declined, possibly to purchase the inventory As

a result, quick assets actually declined, while the current liabilities increased.

The quick ratio for December 31, 2014, is not yet at an alarming level However, the trend suggests that the firm’s current asset (working capital) management

should be watched closely.

CHAPTER 11 Current Liabilities and Payroll

Ex 11–21

Dell, Inc.

1.3

Apple Inc (in millions):

Quick Ratio = $11,261 + $14,359 + $11,560 $20,722 = 1.8 Dell, Inc (in millions):

Quick Ratio = $13,913 + $452 + $10,136 $19,483 = 1.3

b It is clear that Apple Inc.’s short-term liquidity is stronger than Dell’s.

Apple’s quick ratio is 38% [(1.8 – 1.3) ÷ 1.3] higher Apple has a much stronger relative cash and short-term investment position than does Dell Apple’s cash, accounts receivable, and short-term investments are over 89% of total current assets (180% of current liabilities), compared to Dell’s 84% of total current assets 130% of current liabilities) In addition, Dell’s relative accounts payable position is larger than Apple’s, indicating the possibility that Dell has longer supplier

payment terms than does Apple A quick ratio of 1.8 for Apple suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 1.3 for Dell indicates an efficient, but tight, quick asset management policy.

CHAPTER 11 Current Liabilities and Payroll

Prob 11–1A

Prob 11–1A (Concluded)

2 a.

b.

Warranty expense for the current year.

Interest on notes, $30,000 × 8.0% × 30/360 × 9.

CHAPTER 11 Current Liabilities and Payroll

Prob 11–2A

Prob 11–3A

2 a Social security tax paid by employer $19,780.80

b Medicare tax paid by employer 4,945.20

c Earnings subject to unemployment compensation tax,

$10,000 for all employees except Arnett, Harvin, and Ward

Thus, total earnings subject to SUTA and FUTA are

$62,080 [(4 × $10,000) + $8,250 + $6,000 + $7,830].

State unemployment compensation tax: $62,080 × 5.4% 3,352.32

d Federal unemployment compensation tax: $62,080 × 0.8%……… 496.64

e Total payroll tax expense $28,574.96

CHAPTER 11 Current Liabilities and Payroll

CHAPTER 11 Current Liabilities and Payroll

Social Security Tax

Medicare Tax

Federal Income Tax

U.S.

Savings

Net Pay

Ck

No.

Sales Salaries Expense

Office Salaries Expense

Williams 2,000.00 120.00 30.00 440.00 125.00 715.00 1,285.00 908 2,000.00 Vaughn 42 2,480.00 186.00 2,666.00 159.96 39.99 533.20 50.00 783.15 1,882.85 909 2,666.00

16,864.00 2,196.00 22,860.00 1,371.60 342.91 4,738.01 885.00 7,337.52 15,522.48 19,060.00 3,800.00

2.

Sales Salaries Expense 19,060.00

Office Salaries Expense 3,800.00

Social Security Tax Payable 1,371.60

Medicare Tax Payable 342.91

Employees Federal Income Tax Payable 4,738.01

Bond Deductions Payable 885.00

Salaries Payable 15,522.48

11-22

CHAPTER 11 Current Liabilities and Payroll

Prob 11–5A

CHAPTER 11 Current Liabilities and Payroll

Prob 11–5A (Concluded)

To record pension cost and unfunded liability.

2 a.

b.

Accrued wages for the period.

Vacation pay accrued for the period.

CHAPTER 11 Current Liabilities and Payroll

CHAPTER 11 Current Liabilities and Payroll

Prob 11–1B (Concluded)

2 a.

b.

Warranty expense for the current year.

Interest on notes, $20,000 × 9% × 45/360 × 19.

CHAPTER 11 Current Liabilities and Payroll

CHAPTER 11 Current Liabilities and Payroll

Prob 11–3B

* The gross earnings are determined by multiplying the monthly earnings by the

number of months of employment based on the date of hire.

2 a Social security tax paid by employer……… $17,163.90

c Earnings subject to unemployment compensation tax,

$10,000 for all employees except Stewart and Tolbert.

Thus, total earnings subject to SUTA and FUTA are

$59,375 [(5 × $10,000) + $4,500 + $4,875].

State unemployment compensation tax: $59,375 × 5.4%……… 3,206.25

d Federal unemployment compensation tax: $59,375 × 0.8%……… 475.00

CHAPTER 11 Current Liabilities and Payroll

Social Security Tax

Medicare Tax

Federal Income Tax

U.S.

Savings

Net Pay

Ck

No.

Sales Salaries Expense

Office Salaries Expense

Carlton 52 2,000.00 900.00 2,900.00 174.00 43.50 667.00 60.00 944.50 1,955.50 328 2,900.00

Grove 4,000.00 240.00 60.00 860.00 100.00 1,260.00 2,740.00 329 4,000.00 Johnson 36 1,872.00 1,872.00 112.32 28.08 355.68 496.08 1,375.92 330 1,872.00

Koufax 45 2,320.00 435.00 2,755.00 165.30 41.33 578.55 44.00 829.18 1,925.82 331 2,755.00

Maddux 37 1,665.00 1,665.00 99.90 24.98 349.65 62.00 536.53 1,128.47 332 1,665.00

Seaver 3,200.00 192.00 48.00 768.00 120.00 1,128.00 2,072.00 333 3,200.00 Spahn 46 2,080.00 468.00 2,548.00 152.88 38.22 382.20 573.30 1,974.70 334 2,548.00

Winn 48 2,000.00 600.00 2,600.00 156.00 39.00 572.00 75.00 842.00 1,758.00 335 2,600.00

Young 43 2,160.00 243.00 2,403.00 144.18 36.05 480.60 80.00 740.83 1,662.17 336 2,403.00

14,097.00 2,646.00 23,943.00 1,436.58 359.16 5,013.68 541.00 7,350.42 16,592.58 16,743.00 7,200.00

2.

Sales Salaries Expense 16,743.00

Office Salaries Expense 7,200.00

Social Security Tax Payable 1,436.58

Medicare Tax Payable 359.16

Employees Federal Income Tax Payable 5,013.68

Bond Deductions Payable 541.00

Salaries Payable 16,592.58

11-29

CHAPTER 11 Current Liabilities and Payroll

Prob 11–5B

11-31

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CHAPTER 11 Current Liabilities and Payroll

Prob 11–5B (Concluded)

To record pension cost and unfunded liability.

Accrued wages for the period.

Vacation pay accrued for the period.

CHAPTER 11 Current Liabilities and Payroll

COMPREHENSIVE PROBLEM 3

CHAPTER 11 Current Liabilities and Payroll

Comp Prob 3 (Continued)

Accumulated Depreciation—Office Equipment 64,000

Pension cost of $190,400 funded

at $139,700.