Chapter 9: Q2DQ (page 428)
What is an estimated liability?
Estimated life is the length of time an asset will be productively used in the operations of a business.
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On September 11, 2016, Home Store sells a mower (that costs \(200) for \)500 cash with a one-year warrantythat covers parts. Warranty expense is estimated at 8% of sales. On July 24, 2017, the mower is brought in forrepairs covered under the warranty requiring $35 in materials taken from the Repair Parts Inventory. Prepare theSeptember 11, 2016, entry to record the mower sale (and cost of sale), and the July 24, 2017, entry to recordthe warranty repairs.
Keesha Co. borrows \(200,000 cash on November 1, 2017, by signing a 90-day, 9% note with a face value
of \)200,000.
1. On what date does this note mature?
2. How much interest expense results from this note in 2017? (Assume a 360-day year.)
3. How much interest expense results from this note in 2018? (Assume a 360-day year.)
4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2017, and
(c) payment of the note at maturity. (Assume no reversing entries are made.)
Prepare any necessary adjusting entries at December 31, 2017, for Piper Company’s year-end financialstatements for each of the following separate transactions and events.
1. Piper Company records a year-end entry for \(10,000 of previously unrecorded cash sales (costing
\)5,000) and its sales taxes at a rate of 4%.
2. The company earned \(50,000 of \)125,000 previously received in advance and originally recorded as
unearned services revenue.
Refer to Samsung’s recent balance sheet in Appendix A. What current liabilities related to income taxes are on its balance sheet? Explain the meaning of each income tax account identified.
Bug-Off Exterminators provides pest control services and sells extermination products manufactured by other companies. The following six-column table contains the company’s unadjusted trial balance as of December 31, 2017.
BUG-OFF EXTERMINATORS December 31, 2017 | ||||||
| Particulars | Unadjusted trial balance | Adjustments | Adjusted trial balance | |||
| Debit \( | Credit \) | Debit \( | Credit \) | Debit \( | Credit \) | |
| Cash | \(17,000 | |||||
| Accounts receivables | 4,000 | |||||
| Allowance for doubtful accounts | \)828 | |||||
| Merchandise inventory | 11,700 | |||||
| Trucks | 32,000 | |||||
| Accumulated depreciation – trucks | 0 | |||||
| Equipment | 45,000 | |||||
| Accumulated depreciation – equipment | 12,200 | |||||
| Account payable | 5,000 | |||||
| Estimated warranty liability | 1,400 | |||||
| Unearned service revenue | 0 | |||||
| Interest payable | 0 | |||||
| Long-term note payable | 15,000 | |||||
| Common stock | 10,000 | |||||
| Retained earnings | 49,700 | |||||
| Dividend | 10,000 | |||||
| Extermination service revenue | 60,000 | |||||
| Interest revenue | 872 | |||||
| Sales | 71,026 | |||||
| Cost of goods sold | 46,300 | |||||
| Depreciation expenses – truck | 0 | |||||
| Depreciation expenses – equipment | 0 | |||||
| Wages expenses | 35,000 | |||||
| Interest expenses | 0 | |||||
| Rent expenses | 9,000 | |||||
| Bad debt expenses | 0 | |||||
| Miscellaneous expenses | 1,226 | |||||
| Repair expenses | 8,000 | |||||
| Utility expenses | 6,800 | |||||
| Warranty expenses | 0 | |||||
| Total | \(226,026 | \)226,026 | ||||
The following information in a through h applies to the company at the end of the current year.
a. The bank reconciliation as of December 31, 2017, includes the following facts.
Cash balance per bank | \(15,100 |
Cash balance per book | 17,000 |
Outstanding checks | 1,800 |
Deposit in transit | 2,450 |
Interest earned (on bank account) | 52 |
Bank service charges (miscellaneous expenses) | 15 |
Reported on the bank statement is a canceled check that the company failed to record. (Information from the bank reconciliation allows you to determine the amount of this check, which is a payment on an account payable.)
b. An examination of customers’ accounts shows that accounts totaling \)679 should be written off as uncollectible. Using an aging of receivables, the company determines that the ending balance of the Allowance for Doubtful Accounts should be \(700.
c. A truck is purchased and placed in service on January 1, 2017. Its cost is being depreciated with the straight-line method using the following facts and estimates.
Original cost | \)32,000 |
Expected salvage value | 8,000 |
Useful life (years) | 4 |
d. Two items of equipment (a sprayer and an injector) were purchased and put into service in early January 2015. They are being depreciated with the straight-line method using these facts and estimates.
Sprayer | Injector | |
Original cost | \(27,000 | \)18,000 |
Expected salvage value | 3,000 | 2,500 |
Useful life (years) | 8 | 5 |
e. On August 1, 2017, the company is paid \(3,840 cash in advance to provide monthly service for an apartment complex for one year. The company began providing the services in August. When the cash was received, the full amount was credited to the Extermination Services Revenue account.
f. The company offers a warranty for the services it sells. The expected cost of providing warranty service is 2.5% of the extermination services revenue of \)57,760 for 2017. No warranty expense has been recorded for 2017. All costs of servicing warranties in 2017 were properly debited to the Estimated Warranty Liability account.
g. The \(15,000 long-term note is an 8%, five-year, interest-bearing note with interest payable annually on December 31. The note was signed with First National Bank on December 31, 2017.
h. The ending inventory of merchandise is counted and determined to have a cost of \)11,700. Bug-Off uses a perpetual inventory system.
Required
1. Use the preceding information to determine amounts for the following items.
a. Correct (reconciled) ending balance of Cash, and the amount of the omitted check.
b. Adjustment needed to obtain the correct ending balance of the Allowance for Doubtful Accounts.
c. Depreciation expense for the truck used during year 2017.
d. Depreciation expense for the two items of equipment used during year 2017.
e. The adjusted 2017 ending balances of the Extermination Services Revenue and Unearned Services Revenue accounts.
f. The adjusted 2017 ending balances of the Warranty Expense and the Estimated Warranty Liability accounts.
g. The adjusted 2017 ending balances of the Interest Expense and the Interest Payable accounts. (Round amounts to nearest whole dollar.)
2. Use the results of part 1 to complete the six-column table by first entering the appropriate adjustments for items a through g and then completing the Adjusted Trial Balance columns. (Hint: Item b requires two adjustments.)
3. Prepare journal entries to record the adjustments entered on the six-column table. Assume Bug-Off’s adjusted balance for Merchandise Inventory matches the year-end physical count.
4. Prepare a single-step income statement, a statement of retained earnings (cash dividends during 2017 were $10,000), and a classified balance sheet.
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