ACCT 110 Lecture Notes - Lecture 6: Accounts Payable, Contingent Liability, Promissory Note

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Accounting 110

The following information is from the video lecture and powerpoint for Accounting 110. The



yellow



highlights are what I think are

important. The highlights of different colors are to make it easier to find definitions that came out previously.

Accounting 110 Week 6 Accounting for Liabilities

Show how notes payable and related interest expense affect financial

statements

- Accounting for Notes Payable

- 09/01/14 Borrowing

1. On September 1, 2014 Herrera Supply Company (HSC) borrowed

$90,000 from the National Bank. HSC issued a note payable due in

one year with an annual interest rate of 9%

- Accrual of Interest Expense

- 12/31/14 Recognition of Interest Expense

1. At the end of 2014, HSC must accrue interest on its note payable for

the 4 month payable

a. HSC won’t pay the interest until it’s due, but it has to recognize it

- Paying Principal & Interest at Maturity Date

- 08/31/15 Recognition of interest expense and Payment of Principal and

interest on the maturity date (August 31)

3. Recording Payment of Principal and Interest Payable

i. Where does $8,100 come from? It’s the total interest cost

1. $2,700 + $5,400 = $8,100

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Show how sales tax liabilities affect financial statements

- Accounting for Sales Tax

- Most states require retail companies to collect sales tax on items sold to

their customers

- Retailer then remits (sends the money) the tax to the state at regular

intervals.

- Sales tax is a liability to the retailer until paid to the state

1. HSC sells merchandise to a customer for $2,000 cash in a state

where the sales tax rate is 6%

- Accounting for Sales Tax

- Remitting the tax (paying the tax to the state tax authority) is an asset use

transaction

Define contingent liabilities and explain how they are reported in

financial statements

- Reporting Contingent Liabilities

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Explain how warranty obligations affect financial statements

- Warranty Obligations

- Many companies guarantee their products or services to attract customers

- Companies promises to replace or repair defective products without

charge during the warranty period

- Event 1 Sale of Merchandise

1. HSC sells $7,000 of merchandise for cash. The merchandise

had a cost of $4,000

a. This would be a profit of $3,000

- Event 2 Recognition of Warranty Expense

1. HSC estimates that warranty expense associated with the

current sale will be $100

- Event 3 Settlement of Warranty Obligation

1. HSC pays $40 cash to repair defective merchandise returned

by a customer

a. $60 still remains in potential liability claim

- Financial Statements

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Document Summary

The following information is from the video lecture and powerpoint for accounting 110. The yellow highlights are what i think are important. The highlights of different colors are to make it easier to find definitions that came out previously. Show how notes payable and related interest expense affect financial statements. 09/01/14 borrowing: on september 1, 2014 herrera supply company (hsc) borrowed. Hsc issued a note payable due in one year with an annual interest rate of 9% a. Paying principal & interest at maturity date. 08/31/15 recognition of interest expense and payment of principal and interest on the maturity date (august 31) It"s the total interest cost: ,700 + ,400 = ,100. Show how sales tax liabilities affect financial statements. Most states require retail companies to collect sales tax on items sold to. Retailer then remits (sends the money) the tax to the state at regular.

Related Questions

The following items were selected from among the transactions completed by Sherwood Co. during the current year:

Mar.	1	Purchased merchandise on account from Kirkwood Co., $366,000, terms n/30.
	31	Issued a 30-day, 6% note for $366,000 to Kirkwood Co., on account.
Apr.	30	Paid Kirkwood Co. the amount owed on the note of March 31.
Jun.	1	Borrowed $198,000 from Triple Creek Bank, issuing a 45-day, 8% note.
Jul.	1	Purchased tools by issuing a $270,000, 60-day note to Poulin Co., which discounted the note at the rate of 6%.
	16	Paid Triple Creek Bank the interest due on the note of June 1 and renewed the loan by issuing a new 30-day, 6.5% note for $198,000. (Journalize both the debit and credit to the notes payable account.)
Aug.	15	Paid Triple Creek Bank the amount due on the note of July 16.
	30	Paid Poulin Co. the amount due on the note of July 1.
Dec.	1	Purchased equipment from Greenwood Co. for $400,000, paying $108,000 cash and issuing a series of ten 8% notes for $29,200 each, coming due at 30-day intervals.
	22	Settled a product liability lawsuit with a customer for $320,000, payable in January. Accrued the loss in a litigation claims payable account.
	31	Paid the amount due to Greenwood Co. on the first note in the series issued on December 1.

Required:

Journalize the transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year. Round your answers to the nearest dollar.

Journalize the adjusting entry for each of the following accrued expenses at the end of the current year (refer to the Chart of Accounts for exact wording of account titles):

	a. Product warranty cost, $29,000.
	b. Interest on the nine remaining notes owed to Greenwood Co. Assume a 360-day year.

Chart of Accounts

CHART OF ACCOUNTS

Sherwood Co.

General Ledger

	ASSETS
110	Cash
111	Accounts Receivable
112	Interest Receivable
113	Notes Receivable
115	Inventory
116	Supplies
118	Prepaid Insurance
120	Land
123	Building
124	Accumulated Depreciation-Building
125	Office Equipment
126	Accumulated Depreciation-Office Equipment
127	Tools
128	Accumulated Depreciation-Tools

	LIABILITIES
210	Accounts Payable-Kirkwood Co.
211	Accounts Payable-Greenwood Co.
212	Accounts Payable-Poulin Co.
213	Interest Payable
214	Notes Payable
215	Salaries Payable
216	Social Security Tax Payable
217	Medicare Tax Payable
218	Employees Federal Income Tax Payable
219	Employees State Income Tax Payable
220	Group Insurance Payable
221	Bond Deductions Payable
224	Federal Unemployment Tax Payable
225	State Unemployment Tax Payable
226	Vacation Pay Payable
227	Unfunded Pension Liability
228	Product Warranty Payable
229	Litigation Claims Payable

	EQUITY
310	Common Stock
311	Retained Earnings
312	Dividends
313	Income Summary

	REVENUE
410	Sales
610	Interest Revenue

	EXPENSES
510	Cost of Goods Sold
520	Salaries Expense
524	Depreciation Expense-Building
525	Delivery Expense
526	Repairs Expense
529	Selling Expenses
531	Rent Expense
532	Depreciation Expense-Office Equipment
533	Depreciation Expense-Tools
534	Insurance Expense
535	Supplies Expense
536	Payroll Tax Expense
537	Vacation Pay Expense
538	Pension Expense
539	Cash Short and Over
540	Product Warranty Expense
541	Miscellaneous Expense
710	Interest Expense
720	Litigation Loss

Journal

1. Journalize the transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year. Scroll down to access page 12 of the journal. Round your answers to the nearest dollar.

PAGE 11

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
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Journalize the adjusting entry for each of the following accrued expenses at the end of the current year (refer to the Chart of Accounts for exact wording of account titles):

A.	Product warranty cost, $29,000.
B.	Interest on the nine remaining notes owed to Greenwood Co. Assume a 360-day year.

PAGE 12

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1		Adjusting Entries
2
3
4
5

bluelion973

. Make all 16 adjustments to journal entries. Remember to include a description under each journal entry.

1	On March 1, ABC purchased a one-year liability insurance policy for $98,400.
	Upon purchase, the following journal entry was made:
		Dr Prepaid insurance			98,400
			Cr Cash			98,400
	The expired portion of insurance must be recorded as of 12/31/14.
	Notice that the expired portion from March through November has been recorded already.
	Make sure that the Prepaid Insurance balance after the adjusting entry is correct.


2	Depreciation expense must be recorded for the month of December.
	The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000.
		The method of depreciation for the building is straight-line.
	The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000.
		The method of depreciation for the equipment is double-declining balance.
	Depreciation has been recorded for the building and equipment for months February through November.


3	On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month,
	and XYZ paid ABC on December 1 in advance for the first three months' rent.
	The entry made on December 1 was as follows:
		Dr Cash			36,000
			Cr Unearned rent revenue			36,000
	The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14.


4	Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours.
	Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015.
	The liability for wages payable must be recorded as of 12/31/14.


5	On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable.
	This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%.
	The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item)
		Dr Cash			235,000
			Cr Notes payable			235,000
	On February 28, 2015 ABC must pay the bank the amount borrowed plus interest.
	Assume the beginning balance for Notes Payable is correct.
	Interest through 12/31/14 must be accrued on the $235,000 note.


6	ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete
	physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at
	that time totaled $75,000, which reflects historical cost.
	Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.


	Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.
	A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of
	completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory
	using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting
	for adjustments of inventory to market value.


7	It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized
	that their intangible asset might be impaired on December 31, 2014. Record the impairment if any.
	The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500.


8	On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury
	stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14,
	ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock.


9	On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry
	to reflect the issuance of the stock on 12/31/14.


10	On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are
	dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of
	amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14.
	Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense.


11	The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies.

		Securities					Cost	Fair Value
		2,200 shares of Toyota Corporation Common Stock					$ 100,000	$ 125,000
		1,100 shares of G.M. Corporation Common Stock					$ 67,000	$ 34,000
							$ 167,000	$ 159,000
	Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading.


12	On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824,
	which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization.
	Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used.
	Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the
	investment account.


13	ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used,
	prepare the entry to record bad debt expense.


14	On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make
	annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000
	unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method
	of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet
	been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal
	entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for
	this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)


15	ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension
	plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014.
	Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry.

	Pension asset/liability (January 1)			$0
	Actual return on plan assets			$40,000
	Expected return on plan assets			$20,000
	Contributions (funding) in 2014			$37,000
	Fair value of plan assets (December 31)			$75,000
	Settlement rate			10%
	Projected benefit obligation (January 1)			$0
	Service cost			$60,000
	Benefits paid in 2014			$0
	*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature.

16	On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of
	$10 per share on December 31, 2014. Additional information is as follows:
		a. The service period related to the restricted stock is 2 years.
		b. Vesting occurs if the CFO stays with the company for a two-year period.
		c. The par value of the common stock is $3 per share.
	Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation.

	Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense)
17	Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15.
	However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full
	on the return's March 15, 2015 due date.
	ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600,
	so January through November income tax expense recognized amounts to $63,800 (11/12 months).
	Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents
	tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities.
	Based on the income before income taxes figure from the income statement, record December's income tax expense
	so that the entire year's total tax expense is correct.

I need Adjusted Trial Balance and multi step Income statement to use this information.

Jones Widget Company (JWC) incorporated near the end of 2013. Operations began in January of 2014. JWC prepares adjusting entries and financial statements at the end of each month. The statements report monthly results for the period February 1-29, 2014.

Pertinent items of general information:
Beginning Balances from 1/31/14
Cash $33,620

Unearned Revenue (40 units) $6,000
Accounts Receivable $9,510

Accounts Payable (Jan Rent) $1,300
Allowance for Doubtful Accounts $700

Notes Payable $18,000
Inventory (30 units) $2,730

Contributed Capital $15,000
Retained Earnings $4,860

â¢ JWC establishes a policy that it will sell inventory at $150 per unit.
â¢ In January, JWC received a $6,000 advance for 40 units, as reflected in Unearned Revenue.
â¢ JWCâs February 1 inventory balance consisted of 30 units at a total cost of $2,730.
â¢ JWCâs note payable accrues interest at a 10% annual rate.
â¢ JWC will use the FIFO inventory method and record COGS on a perpetual basis.

February Transactions
02/01 Included in JWCâs February 1 Accounts Receivable balance is a $2,000 account due from Kit Kat, a JWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. JWC arranges with Kit Kat to convert the $2,000 balance to a note, and Kit Kat signs a 6-month note, at 12% interest. The principal and all interest will be due and payable to JWC on August 1, 2014.
02/02 JWC paid a $500 insurance premium covering the month of February. The amount paid is recorded directly as an expense.
02/05 An additional 150 units of inventory are purchased on account by JWC for $14,100 â terms 3/10, n30; FOB Destination.
02/10 Sales of 110 units of inventory occurred during the period of 02/07 â 02/10. The sales terms are 2/10, net 30.
02/15 The advance order for 40 units from January is delivered to the customer.
02/15 20 units of the inventory that had been sold on 2/10 are returned to JWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are identified as being from the batch that was acquired on 02/05.
02/16 JWC pays the first 2 weeks wages to the employees. The total paid $1,500.
02/17 Paid in full the amount owed for the 02/05 purchase of inventory.
02/18 Wrote off a customerâs account in the amount of $700.
02/19 $2,600 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense.
02/19 Collected $4,000 on customersâ Accounts Receivable. Of the $4,000, the discount was taken by the customer on
$3,000 of the account balances.
02/21 A new inventory supplier that charges a lower price per unit is located. The new supplierâs terms are 2/15, n45; FOB Shipping Point. JWC purchases 50 units on account for $4,400.
02/22 JWC paid Federal Express $100 to have the 50 units of inventory delivered overnight. Delivery occurred on 02/22.
02/26 JWC recovered $400 cash from the customer whose account had previously been written off (see 02/18).
02/27 A $400 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28 JWC declared and paid a $500 cash dividend.
02/28 Paid in full the amount owed for the 02/21 purchase of inventory.

Adjusting entries:
02/29 (adjusting 1) Record the $1,500 employee salary that is owed but will be paid March 1.
02/29 (adjusting 2) JWC decides to use the aging method to estimate uncollectible accounts. JWC determines 8% of the ending accounts receivable balance is the appropriate end of February estimate of uncollectible accounts.
02/29 (adjusting 3) Record February interest expense accrued on the note payable.
02/29 (adjusting 4) Record one monthâs interest earned Kit Katâs note (see 02/01)

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ACCT 110 Lecture Notes - Lecture 6: Accounts Payable, Contingent Liability, Promissory Note

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