ACCT 211 Chapter Notes - Chapter 9: Promissory Note, Current Liability, Interest Expense

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copperhornet780

30 Aug 2016

School

Binghamton University

Department

Accounting

Course

ACCT 211

Professor

Elliot Kamlet

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Document Summary

A current liability is an obligation of a business that is expected to be satisfied or paid within one year. Most current liabilities will be satisfied through the payment of cash, while others will be satisfied through the performance of a service. When conducting business, corporations generate a variety of tax obligations to federal, state and local taxing authorities. Like individuals, corporations are subject to federal taxation of their income and they often wait until later to pay the bill, which creates a current liability. Each time a company makes a retail sale, it collects sale tax according to state and/or local regulations. When paying employee wages, employers must withhold income taxes and social security (fica) taxes owed by the employee. In addition to withholding taxes on behalf of employees, employers must also pay social. When a company receives a customer"s cash prior to providing the service or product, the company has an obligation known as unearned revenue.

Related Questions

1.All of the following are generally considered current liabilities on a company balance sheet except

Wages Payable

Interest Payable

Bonds Payable

Taxes Payable

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2.If a one-year company loan spans equally over 2 fiscal periods, but interest is set to be paid when the loan amount itself is due, the company would

Still pay cash out for half the interest at the end of the first fiscal year to keep its records correct

Accrue the appropriate amount of interest payable at the end of the first fiscal period

Increase the Loan Payable amount by the interest amount accrued at the end of the first fiscal period

Do nothing until the interest payment itself is actually due

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3.If a firm has a warranty obligation on its product that is redeemed by the customer for cash, the firm would

		Record a warranty payable at the time of the redemption
		Reduce the already recorded warranty payable and cash for the amount of the claim
		Do nothing and just fix the product
		Reduce revenues and retained earnings at the time of the warranty redemption

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4.If a company collects sales tax on its products for the state in which it operates its business, it would

Include the amount in Revenue

Include the amount as an expense

Record a Sales Tax Payable until it is due to the state

Put the cash in a box under the counter

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5.An installment loan generally has all of the following features except

The cash payment per period by the borrower is the same amount each time

The amount of the payment applied to interest decreases over time

The amount of the payment applied to interest increases over time

The amount of the payment applied to the principal increases over time

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6.A pre-approved financing plan that allows companies to borrow and repay funds as needed up to the maximum amount set by the creditor and that is often used for relatively short-term borrowing to finance varying business needs is

		Trade credit
		A Line of Credit
		An account payable
		A debit card

coralbutterfly797

Selected transactions of Shadrach Computer Corporation duringNovember and December of 2016 are as follows:

Nov.	1	Borrowed money from the bank byissuing a non-interest-bearing, $58,000, 90-day note. The note isdiscounted on a 12% basis.
	9	Sold 125 computers with a 1-yearassurance-type warranty for $5,600 each on credit (ignore cost ofgoods sold). Past experience indicates that warranty costs average$110 per computer.
	12	Sold 125 software packages at $270each on credit (ignore cost of goods sold). With each softwarepackage, Shadrach offered a premium in the form of a USB drive forthe return of one proof of purchase. The offer expires June 30,2017. The cost of each USB drive is $5, and Shadrach estimates that80% of the premiums will be redeemed; therefore, 100 USB driveswere purchased on credit.
	20	Paid $2,000 in fulfillment of thewarranty agreement on several of the computers sold on November9.
	30	Accrued monthly vacation pay.Shadrach has 80 employees who are each paid an average of $180 perday. Shadrach has a policy of allowing each employee 12 daysâ paidvacation per year; the related liability is recorded on a monthlybasis. Employees are paid monthly.
	30	Paid monthly payroll. Grosssalaries were $430,000. No vacations were taken during November.Income tax withholdings of 20% are applicable to the salaries ofall employees. A F.I.C.A. tax of 8% for both employees andemployers is also applicable. These rates apply to all salariesbecause no employeeâs salary has exceeded the maximum wage limit.The state allows the corporation a 1% unemployment compensationmerit-rating reduction from the normal rate of 5.4%. The federalunemployment rate is 0.6%. Prior to October, each individualemployee had accumulated a gross salary in excess of $7,000 for2016.
Dec.	14	Twenty proofs of purchase werereturned from the November 12 sale.
	29	An individual filed suit againstShadrach for damages caused in a November 5 accident that resultedwhen a member of the sales force hit the individualâs car while onpersonal business. The amount of the suit filed was $1,450. Becausethe employee was on personal business, the companyâs insurancecompany will not pay the claim. In Shadrachâs attorneyâs opinion,the amount of the suit is reasonable; furthermore, the companybelieves it is likely to lose the suit.
	31	Accrued monthly vacation pay.
	31	Paid monthly payroll. Grosssalaries were $433,000. The salaries included $6,500 of vacationpay in the sales force and $3,300 of vacation pay in the officestaff. The F.I.C.A. tax rate still applies to all wages because noemployeeâs salary exceeded the maximum wage limit.
	31	Recorded presidentâs bonus. Thepresident receives a 10% bonus on any income over $240,000, beforededucting income taxes and the bonus. Shadrachâs effective incometax rate is 30%, and income before income taxes and bonus for 2016was $560,000. The bonus will be paid in January 2017.

	Required:
	Prepare journal entries torecord the preceding transactions of Shadrach Computer Corporationfor 2016. Include year-end accruals. Round all calculations to thenearest dollar.

Chart of Accounts

CHARTOF ACCOUNTS

Shadrach Computer Corporation

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
132	Inventory of Premiums
152	Prepaid Insurance
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
221	Bonus Payable
222	Liability for CompensatedAbsences
224	FICA Taxes Payable
225	Federal Income Taxes WithholdingPayable
231	Salaries Payable
240	Estimated Warranty Liability
241	Estimated Premium Liability
245	Estimated Liability fromLawsuit
250	Unearned Revenue
260	Notes Payable
261	Discount on Notes Payable
271	Federal Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
522	Payroll Taxes Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
551	Warranty Expense
552	Premium Expense
559	Miscellaneous Expenses
561	Loss from Accident
910	Income Tax Expense

raspberrycamel834

1. On January 1, 2015 James Bond & Company issued 5-yearbonds with a face value of $500,000. The bonds carry a statedinterest rate of 7%. The straight-line method is used to amortizepremiums & discounts.

a. Prepare the journal entry for the issuance assuming the bondsare issued at 97.

i. Was the market interest rate higher or lower than the statedinterest at issue?

ii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on December 31.

iii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on January 1, 2016

b. Prepare the journal entry for the issuance assuming the bondsare issued at 102.

i. Was the market interest rate higher or lower than the statedinterest at issue?

ii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on December 31.

iii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on January 1, 2016.

iv. Prepare the journal entry at maturity assuming that interesthas been accrued and paid.

2. Record journal entries for the following transactionsconcerning current & long-term liabilities at Lubar Corp..

a. On January 1, 2015 the corporation acquired a building bysigning an $800,000, 10%, 5-year mortgage note payable. The termsprovide for yearly installment payments of $211,038 on December31.

b. On January 1, 2015 the corporation issued a $400,000, 11%,10-year bond at 110 with interest payable on December 31. Thestraight-line method is used to amortize the bond premium.

c. On December 31, the corporation issued a $300,000, 9%, 5-yearbond at 97 with interest payable on December 31 (starting in 2016).The straight-line method is used to amortize the bond discount.

d. Record the necessary adjusting journal entries at December31, 2015 for items âaâ and âbâ.

e. Prepare the liabilities section of the balance sheet as of asof December 31, 2015 for items âaâ and âbâ.

3. Prepare the following independent journal entries.

a. On September 1, 2015 Rushmore Corporation issued a 6-month,12% note in the amount of $20,000. Interest & principal will bepaid when the note matures on February 28, 2016.

i. Journalize the issuance of the note on September 1, 2015.

ii. Journalize the adjusting entry needed at December 31,2015.

iii. Journalize the maturity of the note on February 28,2016.

b. Sold merchandise for cash totaling $422,400, which includes5.6% sales tax on October 6^th. Sales tax is remitted tothe state department of revenue every January 1^st.

i. Journalize the October 6^th sale.

ii. What is the gross profit on this sale if the cost of themerchandise sold was $270,000?

c. During December, the companyâs employees earned wages of$160,000. Withholdings related to these wages were $12,240 forSocial Security (FICA), $13,300 for Federal income tax, and $4,000for state income tax. The company owed no money related to theseearnings for federal or state unemployment tax. Assume the wagesearned during December will be paid in January. No entry has beenmade for wage or payroll tax expense as of December 31.

i. Prepare journal entries to record wage expense & payrollexpense at December 31.

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ACCT 211 Chapter Notes - Chapter 9: Promissory Note, Current Liability, Interest Expense

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