Intermediate Accounting II, ACCT 3322 Solutions to Review Questions, Exam #1, Chapters 13 and 14

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1 Intermediate Accounting II, ACCT 3322 Solutions to Review Questions, Exam #1, Chapters 13 and Spencer Company had the following payroll information for the payroll period ended March 31, Payroll Information Gross payroll $300,000 FICA wages 200,000 FUTA wages 42,000 SUTA wages 65,000 Federal income tax withheld 45,000 Union dues withheld 8,000 FICA tax rate 7.5% FUTA tax rate 0.8% SUTA tax rate 3.5% Prepare the journal entries to record payroll and payroll taxes for the payroll period ended March 31, Account Debit Credit Salaries and wages $300,000 FIT payable $45,000 Union dues payable 8,000 FICA payable 15,000 Cash 232,000 To record payroll for the pay period ended March 31, 2004 Analysis of FICA payable: FICA wages $200,000 FICA rate 7.5% FICA payable $15,000 1

2 Account Debit Credit Payroll taxes $17,611 FICA payable $15,000 FUTA payable 336 SUTA payable 2,275 To record payroll taxes for the pay period ended March 31, 2004 Analysis of FUTA payable: FUTA wages $42,000 FUTA rate 0.8% FUTA payable $336 Analysis of SUTA payable: SUTA wages $65,000 SUTA rate 3.5% SUTA payable $2, Spencer Company borrowed $100,000 at Bank of the West on October 31, The note was discounted at 8% and due on August 30, a. Prepare the journal entry to record the note on Spencer Company s books at October 31, /1/04 Cash $93,333 Discount on notes payable 6,667 Notes payable $100,000 To record the issuance of a 10-month $100,000 note discounted at 8% Analysis of discount: Face amount $100,000 Annual interest rate 8% Annual interest 8,000 Length of the note 10/12 Discount on notes payable $6,667 2

3 b. Calculate the effective rate of interest that Spencer Company paid on the discounted note. Analysis of effective interest rate: Discount $6,667 Principal $93, % Discount for the short period 7.14% Number of months in short period 10 Monthly interest rate 0.71% Annualized (multiply by 12 months) 12 Annualized effective interest rate 8.57% 3. Spencer Company sells pet entertainment centers for $2,500 per unit. The entertainment centers carry a three warranty covering parts and labor. The company has been in business for 25 years and has established a stable pattern of warranty expense. On average the company incurs $50 in labor costs and $25 in parts for each entertainment center sold. During 2005 the company sold 1,000 entertainment centers and incurred warranty costs of $80,000 ($55,000 in labor and $25,000 in parts). On January 1, 2005 the balance in the Estimated Liability under Warranties account was $95,000. a. Prepare the journal entry required to record warrant expense for Account Debit Credit Warranty Expense $75,000 Estimated Liability under Warranties $75,000 To record warranty expense for 2005 Analysis of warranty expense: Units sold 1,000 Warranty expense per unit $75 Warranty expense $75,000 b. Prepare the journal entry to record warranty costs incurred during the year of Account Debit Credit Estimated Liability under Warranties $80,000 Inventory-parts $25,000 Labor expense 55,000 To record warranty costs incurred during

4 c. Prepare a t-account analysis of the Estimate Liability under Warranties account for the year of T-Account: Estimated Liability under Warranties Description Debit Credit Beginning balance $95,000 Warranty expense for ,000 Warranty costs incurred in 2001 $80,000 Ending balance $90, May 1, 2002, Spencer Company issued $2,000,000, 8%, 5-year bonds dated January 1, Interest is paid on January 1 and July 1. The bonds were sold to yield 10% interest (the current market rate of interest). Bond issue costs were $120,000. a. Calculate the issue price of the bonds Issue Price of Bonds Payable Principal $2,000,000 PV of $1, n=10, i=5% PV of principal $1,227,820 Interest Face value of bonds 2,000,000 Stated annual interest rate 8% Annual interest 160,000 Payments per year 2 Annuity 80,000 PVOA, n=10, i=5% PV of annuity 617,738 Issue price of bonds $1,845,558 b. Calculate the accrued interest on the date of the sale of the bonds. Accrued Interest Face amount $2,000,000 Stated interest rate 8% Annual interest 160,000 Number of payments during year 2 Interest per payment 80,000 Short period 4/6 Accrued Interest $53,333 4

5 c. Prepare the journal entry to record the sale of the bonds. 5/1/02 Cash $1,898,891 Discount on bonds payable 154,442 Interest expense $53,333 Bonds payable 2,000,000 To record the sale of the bonds on May 1, d. Prepare the journal entry to record bond issue costs on May 1, /1/02 Bond issue costs $120,000 Cash $120,000 To record bond issue costs e. Prepare an amortization table through January 1, Date Payment Interest Expense Amortization of Discount Balance 1/1/02 $1,845,558 7/1/02 $80,000 $92,278 $12,278 1,857,836 1/1/03 80,000 92,892 12,892 1,870,728 7/1/03 80,000 93,536 13,536 1,884,264 1/1/04 80,000 94,213 14,213 1,898,477 7/1/04 80,000 94,924 14,924 1,913,401 1/1/05 80,000 95,670 15,670 1,929,071 7/1/05 80,000 96,454 16,454 1,945,525 1/1/06 80,000 97,276 17,276 1,962,801 7/1/06 80,000 98,140 18,140 1,980,941 1/1/07 80,000 99,059 19,059 2,000,000 1/1/07 2,000,000 0 $2,800,000 $954,442 $154,442 f. Prepare the journal entry to record the first payment of interest and amortization of discount. 7/1/02 Interest expense $92,278 Amortization of discount $12,278 Cash 80,000 To record interest expense, amortization of discount and the payment on July 1,

6 g. Prepare the journal entry on December 31, 2002 to record the accrual of interest, amortization of discount and accrual of interest payable. 12/31/02 Interest expense $92,892 Amortization of discount $12,892 Interest payable 80,000 To record interest expense, amortization of discount and the accrual of interest payable on December 31, h. Prepare the journal entry to record the amortization of bond issue costs for /31/02 Bond issue expense $24,000 Bond issue costs $24,000 To record the amortization of bond issue costs for Analysis of amortization of bond issue costs: Bond issue costs $120,000 Months bonds are outstanding 60 Monthly amortization 2,000 Months in Bond issue expense $24,000 i. On September 1, 2005 Spencer Company retired the bonds at 102. Prepare the journal entry to record interest expense, amortization of discount and accrued interest payable through September 1, /1/05 Interest expense $32,426 Discount on bonds payable $5,759 Accrued interest 26,667 To record interest expense, amortization of discount and accrual of interest through September 1,

7 Interest expense: Interest expense, 1/1/06 $97,276 Short period 2/6 Amortization of discount $32,425 Amortization of discount: Amortization of discount, 1/1/06 $17,276 Short period 2/6 Amortization of discount $5,759 Accrued interest: Interest payment, 1/1/06 $80,000 Short period 2/6 Accrued interest $26,667 j. Prepare the journal entry to amortize bond issue costs through September 1, /1/05 Bond issue expense $16,000 Bond issue costs $16,000 To record amortization of bond issue costs through September 1, 2005 Amortization of bond issue costs: Annual amortization $24,000 Short period 8/12 Bond issue expense $16,000 k. Prepare the journal entry to record the loss on the early retirement of the bonds. 9/1/05 Bonds payable $2,000,000 Accrued interest 26,667 Loss on retirement of bonds 120,716 Discount on bonds payable $48,716 Bond issue costs 32,000 Cash 2,066,667 To record the early retirement of bonds payable on September 1,

8 Unamortized discount on bonds payable: Face amount $2,000,000 Carrying amount, 7/1/05 $1,945,525 Short period amortization 5,759 Carrying amount, 9/1/05 1,951,284 Unamortized discount $48,716 Unamortized bond issue costs: Bond issue costs $120, amortization $24, amortization 24, amortization 24, amortization 16,000 Amortization through 9/1/05 88,000 Bond issue costs $32,000 Analysis of cash paid: Face amount of bonds $2,000,000 Retirement rate 102 Cost of retired bonds $2,040,000 Accrued interest 26,667 Cash paid $2,066,667 Loss on retirement of bonds: Cost of retired bonds $2,040,000 Less: Face amount $2,000,000 Unamortized discount 48,716 Carrying amount 1,951,284 Unamortized bond issue costs 32,000 Net carrying amount 1,919,284 Loss on retirement of bonds $120,716 8

9 5. Spencer Company sold a piece of equipment that originally cost $1,000,000 and had accumulated depreciation of $400,000. The contract terms were as follows: Cash down payment $70,000 $700,000, 10-year, 5% note receivable with interest paid at the end of each year. The market rate of interest on a comparable note would be 8% per annum. a. In the space provided calculate the selling price of the piece of equipment. Analysis of Selling Price Principal Principal $700,000 PV of 1, n=10, i=8% PV of principal $324,233 Interest Face amount $700,000 Stated interest rate 5% Annual interest payments 35,000 PVOA, n=10, i=8% Present value of interest payments 234,853 Present value of contract 559,086 Cash down payment 70,000 Selling price of equipment $629,086 b. In the space provided calculate the gain on the sale of the equipment. Gain on Sale of Equipment Selling price $629,086 Original cost $1,000,000 Accumulated depreciation 400,000 Book value 600,000 Gain on Sale of Equipment $29,086 c. In the space provided prepare the journal entry to record the sale of the piece of equipment. 9

10 Account Debit Credit Cash $70,000 Note receivable 700,000 Accumulated depreciation 400,000 Equipment $1,000,000 Discount on note receivable 140,914 Gain on sale of equipment 29,086 To record the sale of equipment. d. In the space provided prepare the journal entry to record interest revenue, amortization of the discount and collection of the first interest payment. Account Debit Credit Cash $35,000 Discount on note receivable 9,727 Interest revenue $44,727 To record the receipt of the first payment and the amortization of the discount Analysis of amortization: Carrying value of note $559,086 Effective interest rate 8% Interest revenue 44,727 Interest received 35,000 Amortization of discount $9,727 10