Exercises 521

EXERCISES
E11-1 C.S. Lewis Company had the following transactions involving notes payable. Prepare entries for interest-
bearing notes.
July 1, 2017 Borrows $50,000 from First National Bank by signing a 9-month, 8% note.
Nov. 1, 2017 Borrows $60,000 from Lyon County State Bank by signing a 3-month, (LO 1)
6% note.
Dec. 31, 2017 Prepares adjusting entries.
Feb. 1, 2018 Pays principal and interest to Lyon County State Bank.
Apr. 1, 2018 Pays principal and interest to First National Bank.
Instructions
Prepare journal entries for each of the transactions.

E11-2 On June 1, Merando Company borrows $90,000 from First Bank on a 6-month, Prepare entries for interest-
$90,000, 8% note. bearing notes.

Instructions (LO 1)
(a) Prepare the entry on June 1.
(b) Prepare the adjusting entry on June 30.
(c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have
been made through November 30.
(d) What was the total financing cost (interest expense)?

E11-3 In performing accounting services for small businesses, you encounter the follow- Journalize sales and related
ing situations pertaining to cash sales. taxes.
1. Poole Company enters sales and sales taxes separately on its cash register. On April 10, (LO 1)
the register totals are sales $30,000 and sales taxes $1,500.
2. Waterman Company does not segregate sales and sales taxes. Its register total for April
15 is $25,680, which includes a 7% sales tax.
Instructions
Prepare the entry to record the sales transactions and related taxes for each client.

E11-4 Moreno Company publishes a monthly sports magazine, Fishing Preview. Sub- Journalize unearned
scriptions to the magazine cost $20 per year. During November 2017, Moreno sells 15,000 subscription revenue.
subscriptions beginning with the December issue. Moreno prepares financial statements (LO 1)
quarterly and recognizes subscription revenue at the end of the quarter. The company uses
the accounts Unearned Subscription Revenue and Subscription Revenue.
Instructions
(a) Prepare the entry in November for the receipt of the subscriptions.
(b) Prepare the adjusting entry at December 31, 2017, to record sales revenue recognized
in December 2017.
(c) Prepare the adjusting entry at March 31, 2018, to record sales revenue recognized in
the first quarter of 2018.

E11-5 Betancourt Company sells automatic can openers under a 75-day warranty for Record estimated liability and
defective merchandise. Based on past experience, Betancourt estimates that 3% of the expense for warranties.
units sold will become defective during the warranty period. Management estimates that (LO 2)
the average cost of replacing or repairing a defective unit is $15. The units sold and units
defective that occurred during the last 2 months of 2017 are as follows.
Units Units Defective
Month Sold Prior to December 31
November 30,000 600
December 32,000 400
Instructions
(a) Prepare the journal entries to record the estimated liability for warranties and the
costs incurred in honoring 1,000 warranty claims. (Assume actual costs of $15,000.)
(b) Determine the estimated warranty liability at December 31 for the units sold in
November and December.
(c) Give the entry to record the honoring of 500 warranty contracts in January at an aver-
age cost of $15.
522 11 Current Liabilities and Payroll Accounting

Record and disclose E11-6 Gallardo Co. is involved in a lawsuit as a result of an accident that took place
contingent liabilities. September 5, 2017. The lawsuit was filed on November 1, 2017, and claims damages of
(LO 2) $1,000,000.

Instructions
(a) At December 31, 2017, Gallardo’s attorneys feel it is remote that Gallardo will lose the
lawsuit. How should the company account for the effects of the lawsuit?
(b) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is probable that
Gallardo will lose the lawsuit and be required to pay $1,000,000. How should the com-
pany account for this lawsuit?
(c) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is reasonably
possible that Gallardo could lose the lawsuit and be required to pay $1,000,000. How
should the company account for this lawsuit?

Prepare the current liabilities E11-7 Younger Online Company has the following liability accounts after posting adjust-
section of the balance sheet. ing entries: Accounts Payable $73,000, Unearned Ticket Revenue $24,000, Warranty
(LO 2) Liability $18,000, Interest Payable $8,000, Mortgage Payable $120,000, Notes Payable
$80,000, and Sales Taxes Payable $10,000. Assume the company’s operating cycle is less
than 1 year, ticket revenue will be recognized within 1 year, warranty costs are expected to
be incurred within 1 year, and the notes mature in 3 years.

Instructions
(a) Prepare the current liabilities section of the balance sheet, assuming $30,000 of the
mortgage is payable next year.
(b) Comment on Younger Online Company’s liquidity, assuming total current assets are
$300,000.

Calculate current ratio E11-8 Suppose the following financial data were reported by 3M Company for 2016 and
and working capital before 2017 (dollars in millions).
and after paying accounts
payable. 3M COMPANY
(LO 2) Balance Sheets (partial)
2017 2016
Current assets
Cash and cash equivalents $ 3,040 $1,849
Accounts receivable, net 3,250 3,195
Inventories 2,639 3,013
Other current assets 1,866 1,541
Total current assets $10,795 $9,598
Current liabilities $ 4,897 $5,839

Instructions
(a) Calculate the current ratio and working capital for 3M for 2016 and 2017.
(b) Suppose that at the end of 2017, 3M management used $200 million cash to pay off
$200 million of accounts payable. How would its current ratio and working capital
have changed?

Compute net pay and record E11-9 Maria Garza’s regular hourly wage rate is $16, and she receives a wage of 1½ times
pay for one employee. the regular hourly rate for work in excess of 40 hours. During a March weekly pay period,
(LO 3) Maria worked 42 hours. Her gross earnings prior to the current week were $6,000. Maria
is married and claims three withholding allowances. Her only voluntary deduction is for
group hospitalization insurance at $25 per week.

Instructions
(a) Compute the following amounts for Maria’s wages for the current week.
(1) Gross earnings.
(2) FICA taxes. (Assume a 7.65% rate on maximum of $117,000.)
(3) Federal income taxes withheld. (Use the withholding table in the text, page 502.)
(4) State income taxes withheld. (Assume a 2.0% rate.)
(5) Net pay.
(b) Record Maria’s pay.
 Exercises 523

E11-10 Employee earnings records for Slaymaker Company reveal the following gross Compute maximum FICA
earnings for four employees through the pay period of December 15. deductions.
J. Seligman $93,500 L. Marshall $115,100 (LO 3)
R. Eby $113,600 T. Olson $120,000
For the pay period ending December 31, each employee’s gross earnings is $4,500. The
FICA tax rate is 7.65% on gross earnings of $117,000.
Instructions
Compute the FICA withholdings that should be made for each employee for the December 31
pay period. (Show computations.)

E11-11 Ramirez Company has the following data for the weekly payroll ending January 31. Prepare payroll register and
record payroll and payroll tax
Federal expense.
Hours Hourly Income Tax Health
(LO 3)
Employee M T W T F S Rate Withholding Insurance
L. Helton 8 8 9 8 10 3 $12 $34 $10
R. Kenseth 8 8 8 8 8 2 14 37 25
D. Tavaras 9 10 8 8 9 0 15 58 25
Employees are paid 1½ times the regular hourly rate for all hours worked in excess of
40 hours per week. FICA taxes are 7.65% on the first $117,000 of gross earnings. Ramirez
Company is subject to 5.4% state unemployment taxes and 0.8% federal unemployment
taxes on the first $7,000 of gross earnings.

Instructions
(a) Prepare the payroll register for the weekly payroll.
(b) Prepare the journal entries to record the payroll and Ramirez’s payroll tax expense.

E11-12 Selected data from a February payroll register for Sutton Company are presented Compute missing payroll
below. Some amounts are intentionally omitted. amounts and record payroll.

Gross earnings: State income taxes $ (3) (LO 3)

Regular $9,100 Union dues 100
Overtime (1) Total deductions (4)
Total (2) Net pay $7,595
Deductions: Account debited:
FICA taxes $ 765 Salaries and wages expense (5)
Federal income taxes 1,140
FICA taxes are 7.65%. State income taxes are 4% of gross earnings.

Instructions
(a) Fill in the missing amounts.
(b) Journalize the February payroll and the payment of the payroll.

E11-13 According to a payroll register summary of Frederickson Company, the amount of Determine employer’s payroll
employees’ gross pay in December was $850,000, of which $80,000 was not subject to taxes; record payroll tax
Social Security taxes of 6.2% and $750,000 was not subject to state and federal unemploy- expense.
ment taxes. (LO 3)
Instructions
(a) Determine the employer’s payroll tax expense for the month, using the following rates:
FICA 7.65%, state unemployment 5.4%, and federal unemployment 0.8%.
(b) Prepare the journal entry to record December payroll tax expense.

*E11-14 Mayberry Company has two fringe benefit plans for its employees: Prepare adjusting entries for
fringe benefits.
1. It grants employees 2 days’ vacation for each month worked. Ten employees worked the
entire month of March at an average daily wage of $140 per employee. (LO 4)
2. In its pension plan, the company recognizes 10% of gross earnings as a pension expense.
Gross earnings in March were $40,000. No contribution has been made to the pension
fund.
Instructions
Prepare the adjusting entries at March 31.
524 11 Current Liabilities and Payroll Accounting

Prepare journal entries for *E11-15 Podsednik Corporation has 20 employees who each earn $140 a day. The follow-
fringe benefits. ing information is available.
(LO 4) 1. At December 31, Podsednik recorded vacation benefits. Each employee earned 5 vaca-
tion days during the year.
2. At December 31, Podsednik recorded pension expense of $100,000, and made a contri-
bution of $70,000 to the pension plan.
3. In January, 18 employees used one vacation day each.

Instructions
Prepare Podsednik’s journal entries to record these transactions.

EXERCISES: SET B AND CHALLENGE EXERCISES

Visit the book’s companion website, at www.wiley.com/college/weygandt, and choose
the Student Companion site to access Exercises: Set B and Challenge Exercises.

PROBLEMS: SET A
Prepare current liability P11-1A On January 1, 2017, the ledger of Accardo Company contains the following liability
entries, adjusting entries, and accounts.
current liabilities section.
Accounts Payable $52,000
(LO 1, 2)
Sales Taxes Payable 7,700
Unearned Service Revenue 16,000
During January, the following selected transactions occurred.
Jan. 5 Sold merchandise for cash totaling $20,520, which includes 8% sales taxes.
12 Performed services for customers who had made advance payments of
$10,000. (Credit Service Revenue.)
14 Paid state revenue department for sales taxes collected in December 2016
($7,700).
20 Sold 900 units of a new product on credit at $50 per unit, plus 8% sales tax.
This new product is subject to a 1-year warranty.
21 Borrowed $27,000 from Girard Bank on a 3-month, 8%, $27,000 note.
25 Sold merchandise for cash totaling $12,420, which includes 8% sales taxes.

Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable,
and (2) estimated warranty liability, assuming warranty costs are expected to equal 7%
of sales of the new product. (Hint: Use one-third of a month for the Girard Bank note.)
(c) Current liability total (c) Prepare the current liabilities section of the balance sheet at January 31, 2017. Assume
$94,250 no change in accounts payable.

Journalize and post note P11-2A The following are selected transactions of Blanco Company. Blanco prepares
transactions; show balance financial statements quarterly.
sheet presentation.
Jan. 2 Purchased merchandise on account from Nunez Company, $30,000, terms
(LO 1) 2/10, n/30. (Blanco uses the perpetual inventory system.)
Feb. 1 Issued a 9%, 2-month, $30,000 note to Nunez in payment of account.
Mar. 31 Accrued interest for 2 months on Nunez note.
Apr. 1 Paid face value and interest on Nunez note.
July 1 Purchased equipment from Marson Equipment paying $11,000 in cash and
signing a 10%, 3-month, $60,000 note.
Sept. 30 Accrued interest for 3 months on Marson note.
Oct. 1 Paid face value and interest on Marson note.
Dec. 1 Borrowed $24,000 from the Paola Bank by issuing a 3-month, 8% note with a
face value of $24,000.
Dec. 31 Recognized interest expense for 1 month on Paola Bank note.
 Problems: Set A 525

Instructions
(a) Prepare journal entries for the listed transactions and events.
(b) Post to the accounts Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) What is total interest expense for the year? (d) $2,110

P11-3A Mann Hardware has four employees who are paid on an hourly basis plus time- Prepare payroll register and
and-a-half for all hours worked in excess of 40 a week. Payroll data for the week ended payroll entries.
March 15, 2017, are presented below. (LO 3)
Federal
Hours Hourly Income Tax United
Employee Worked Rate Withholdings Fund
Ben Abel 40 $15.00 $ ? $5.00
Rita Hager 42 16.00 ? 5.00
Jack Never 44 13.00 60.00 8.00
Sue Perez 46 13.00 61.00 5.00

Abel and Hager are married. They claim 0 and 4 withholding allowances, respectively. The
following tax rates are applicable: FICA 7.65%, state income taxes 3%, state unemploy-
ment taxes 5.4%, and federal unemployment 0.8%.

Instructions
(a) Prepare a payroll register for the weekly payroll. (Use the wage-bracket withholding (a) Net pay $2,039.30
table in the text for federal income tax withholdings.)
(b) Journalize the payroll on March 15, 2017, and the accrual of employer payroll taxes. (b) Payroll tax expense
(c) Journalize the payment of the payroll on March 16, 2017. $349.43
(d) Journalize the deposit in a Federal Reserve bank on March 31, 2017, of the FICA and (d) Cash paid $578.02
federal income taxes payable to the government.

P11-4A The following payroll liability accounts are included in the ledger of Harmon Journalize payroll
Company on January 1, 2017. transactions and adjusting
entries.
FICA Taxes Payable $ 760.00 (LO 3, 4)
Federal Income Taxes Payable 1,204.60
State Income Taxes Payable 108.95
Federal Unemployment Taxes Payable 288.95
State Unemployment Taxes Payable 1,954.40
Union Dues Payable 870.00
U.S. Savings Bonds Payable 360.00

In January, the following transactions occurred.

Jan. 10 Sent check for $870.00 to union treasurer for union dues.
12 Remitted check for $1,964.60 to the Federal Reserve bank for FICA taxes and
federal income taxes withheld.
15 Purchased U.S. Savings Bonds for employees by writing check for $360.00.
17 Paid state income taxes withheld from employees.
20 Paid federal and state unemployment taxes.
31 Completed monthly payroll register, which shows salaries and wages $58,000,
FICA taxes withheld $4,437, federal income taxes payable $2,158, state income
taxes payable $454, union dues payable $400, United Fund contributions
payable $1,888, and net pay $48,663.
31 Prepared payroll checks for the net pay and distributed checks to employees.
At January 31, the company also makes the following accrued adjustments pertaining to
employee compensation.
1. Employer payroll taxes: FICA taxes 7.65%, federal unemployment taxes 0.8%, and state
unemployment taxes 5.4%.
*2. Vacation pay: 6% of gross earnings.

Instructions (b) Payroll tax expense

(a) Journalize the January transactions. $8,033; Vacation benefits
(b) Journalize the adjustments pertaining to employee compensation at January 31. expense $3,480
526 11 Current Liabilities and Payroll Accounting

Prepare entries for payroll and P11-5A For the year ended December 31, 2017, Denkinger Electrical Repair Company
payroll taxes; prepare W-2 reports the following summary payroll data.
data.
Gross earnings:
(LO 3)
Administrative salaries $200,000
Electricians’ wages 370,000
Total $570,000
Deductions:
FICA taxes $ 38,645
Federal income taxes withheld 174,400
State income taxes withheld (3%) 17,100
United Fund contributions payable 27,500
Health insurance premiums 17,200
Total $274,845

Denkinger Company’s payroll taxes are Social Security tax 6.2%, Medicare tax 1.45%, state
unemployment 2.5% (due to a stable employment record), and 0.8% federal unemploy-
ment. Gross earnings subject to Social Security taxes of 6.2% total $490,000, and gross
earnings subject to unemployment taxes total $135,000.

Instructions
(a) Salaries and wages (a) Prepare a summary journal entry at December 31 for the full year’s payroll.
payable $295,155 (b) Journalize the adjusting entry at December 31 to record the employer’s payroll taxes.
(b) Payroll tax expense (c) The W-2 Wage and Tax Statement requires the following dollar data.
$43,100
Wages, Tips, Federal Income State Income FICA FICA Tax
Other Compensation Tax Withheld Tax Withheld Wages Withheld
Complete the required data for the following employees.
Employee Gross Earnings Federal Income Tax Withheld
Maria Sandoval $59,000 $28,500
Jennifer Mingenback 26,000 10,200

PROBLEMS: SET B AND SET C

Visit the book’s companion website, at www.wiley.com/college/weygandt, and choose the
Student Companion site to access Problems: Set B and Set C.

COMPREHENSIVE PROBLEM
CP11 Morgan Company’s balance sheet at December 31, 2016, is presented below.
MORGAN COMPANY
Balance Sheet
December 31, 2016
Cash $ 30,000 Accounts Payable $ 13,750
Inventory 30,750 Interest Payable 250
Prepaid Insurance 6,000 Notes Payable 50,000
Equipment 38,000 Owner’s Capital 40,750
$104,750 $104,750

During January 2017, the following transactions occurred. (Morgan Company uses the perpetual
inventory system.)
1. Morgan paid $250 interest on the note payable on January 1, 2017. The note is due December 31,
2018.
2. Morgan purchased $261,100 of inventory on account.
3. Morgan sold for $440,000 cash, inventory which cost $265,000. Morgan also collected $28,600 in
sales taxes.
4. Morgan paid $230,000 in accounts payable.
5. Morgan paid $17,000 in sales taxes to the state.