Chapter 11: 13RQ (page 604)
What is contingent liability? Provide some examples of contingencies.
Contingent liabilities are potential but not actual and depend upon some future event.
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Logan White is general manager of Valuepoint Salons. During 2018, White worked for the company all year at a \(13,600 monthly salary. He also earned a year-end bonus equal to 15% of his annual salary.
White’s federal income tax withheld during 2018 was \)1,360 per month, plus \(4,876 on his bonus check. State income tax withheld came to \)150 per month, plus \(60 on the bonus. FICA tax was withheld on the annual earnings. White authorized the following payroll deductions: Charity Fund contribution of 1% of total earnings and life insurance of \)40 per month.
Valuepoint incurred payroll tax expense on White for FICA tax. The company also paid state unemployment tax and federal unemployment tax.
Requirements
1. Compute White’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.
2. Compute Valuepoint’s total 2018 payroll tax expense for White.
3. Make the journal entry to record Valuepoint’s expense for White’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
4. Make the journal entry to record the accrual of Valuepoint’s payroll tax expense for White’s total earnings.
5. Make the journal entry for the payment of the payroll withholdings and taxes.
The following financial information was obtained from the year ended 2018 income statements for Cash Automotive and Pennington Automotive:
Cash Pennington
Net income \( 26,070 \) 74,188
Income tax expense 9,270 27,080
Interest expense 300 2,900
Requirements
1. Compute the times-interest-earned ratio for each company. Round to two decimals.
2. Which company was better able to cover its interest expense?
What are the three main characteristics of liabilities?
Golden Bear Construction operates throughout California. The owner, Gaylan Beavers, employs 15 work crews. Construction supervisors report directly to Beavers, and the supervisors are trusted employees. The home office staff consists of an accountant and an office manager.
Because employee turnover is high in the construction industry, supervisors hire and fire their own crews. Supervisors notify the office of all personnel changes. Also, supervisors forward the employee W-4 forms to the home office. Each Thursday, the supervisors submit weekly time sheets for their crews, and the accountant prepares the payroll. At noon on Friday, the supervisors come to the office to get paychecks for distribution to the workers at 5 p.m.
The company accountant prepares the payroll, including the paychecks. Beavers signs all paychecks. To verify that each construction worker is a bona fide employee, the accountant matches the employee’s endorsement signature on the back of the canceled paycheck with the signature on that employee’s W-4 form.
Requirements
Discuss a control feature that the company can use to safeguard against the fraud you identified in Requirement 1.
The general ledger of Prompt Ship at June 30, 2018, the end of the company’s fiscal year, includes the following account balances before payroll and adjusting entries.
Accounts Payable \( 118,000
Interest Payable 0
Salaries Payable 0
Employee Income Taxes Payable 0
FICA—OASDI Taxes Payable 0
FICA—Medicare Taxes Payable 0
Federal Unemployment Taxes Payable 0
State Unemployment Taxes Payable 0
Unearned Rent Revenue 5,400
Long-term Notes Payable 198,000
The additional data needed to develop the payroll and adjusting entries at June 30 are as follows:
a. The long-term debt is payable in annual installments of \)39,600, with the next installment due on July 31. On that date, Prompt Ship will also pay one year’s interest at 10%. Interest was paid on July 31 of the preceding year. Make the adjusting entry to accrue interest expense at year-end.
b. Gross unpaid salaries for the last payroll of the fiscal year were \(4,800. Assume that employee income taxes withheld are \)920 and that all earnings are subject to OASDI.
c. Record the associated employer taxes payable for the last payroll of the fiscal year, \(4,800. Assume that the earnings are not subject to unemployment compensation taxes
d. On February 1, the company collected one year’s rent of \)5,400 in advance.
Requirements
1. Using T-accounts, open the listed accounts and insert the unadjusted June 30 balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts that you opened. Identify each adjusting entry by letter. Round to the nearest dollar.
3. Prepare the current liabilities section of the balance sheet at June 30, 2018.
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