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Chapter 11: Q13RQ (page 604)
What is a contingent liability? Provide some examples of contingencies.
Contingent liabilities are potential but not actual and depend upon some future event.
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The following transactions of Belkin Howe occurred during 2018:
Apr. 30 Howe is party to a patent infringement lawsuit of \(230,000. Howe’s attorney is certain it is remote that Howe will lose this lawsuit.
Jun. 30 Estimated warranty expense at 3% of sales of \)390,000.
Jul. 28 Warranty claims paid in the amount of \(6,300.
Sep. 30 Howe is party to a lawsuit for copyright violation of \)90,000. Howe’s attorney advises that it is probable Howe will lose this lawsuit. The attorney estimates the loss at \(90,000.
Dec. 31 Howe estimated warranty expense on sales for the second half of the year of \)520,000 at 3%.
Requirements
1. Journalize required transactions, if any, in Howe’s general journal. Explanations are not required.
2. What is the balance in Estimated Warranty Payable assuming a beginning balance of $0?
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 \( 118,000
Interest Payable 0
Salaries Payable 0
Employee Income Taxes Payable 0
FICA—OASDI Taxes Payable 0
FICA—Medicare Taxes Payable 0
Federal Unemployment Taxes Payable 0
State Unemployment Taxes Payable 0
Unearned Rent Revenue 5,400
Long-term Notes Payable 198,000
The additional data needed to develop the payroll and adjusting entries at June 30 areas follows:
a. The long-term debt is payable in annual installments of \)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 30balances.
2. Journalize and post the June 30 payroll and adjusting entries to the accounts thatyou 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.
On August 10, Swanson Company recorded sales of merchandise inventory on account, \(4,000. The sales were subject to sales tax of 4%. The company uses the perpetual inventory system. On September 30, Swanson paid \)500 of sales tax to the state.
1. Journalize the transaction to record the sale on August 10. Ignore cost of goods sold.
Lily Carter works for JDK all year and earns a monthly salary of \(12,100. There is no overtime pay. Lily’s income tax withholding rate is 10% of gross pay. In addition to payroll taxes, Lily elects to contribute 5% monthly to United Way. JDK also deducts \)250 monthly for co-payment of the health insurance premium. As of September 30, Lily had $108,900 of cumulative earnings. Requirements
1. Compute Lily’s net pay for October.
2. Journalize the accrual of salaries expense and the payment related to the employment of Lily Carter.
Freeman Motors, a motorcycle manufacturer, had the following contingencies.
a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be \(4,500,000.
b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.
c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be \)75,000.
Determine the appropriate accounting treatment for each of the situations Freeman is facing.
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