Exam#3PracticeProblems&Answers

#1.
RotaryToolssellspowertoolsandbackseachproductitsellswithaoneyear
warrantyagainstdefects.Basedonpreviousexperience,thecompanyexpectswarranty
coststobeapproximately5%ofsales.Bytheendofthefirstyear,salesandactualwarranty
expendituresare$800,000and$13,000,respectively.

1.Doesthissituationrepresentacontingentliability?Whyorwhynot?
2.Recordwarrantyexpenseandwarrantyliabilityfortheyearbasedon5%ofsales.
3.Recordthereductioninwarrantyliabilityfortheactualwarrantyexpendituresincurred
duringtheyear.
4.WhatisthebalanceintheWarrantyLiabilityaccountaftertheentriesinparts2and3?

Answer:
1.Yes,itsprobablethatcostsforwarrantieswillbeincurredandbasedonprevious
experiencethecompanycanreasonablyestimatetheamount.ItisALSOanestimated
expense.

2.WarrantyExpense($800,000x5%)

40,000

WarrantyLiability

40,000

(Recordliabilityforwarranties)

3.WarrantyLiability

13,000

Cash

13,000

(Recordactualwarrantyexpenditures)

4.
WarrantyLiability

Payment$13,000 $40,000Expense

$27,000Balance

#2.
IfJeffersonCompanypaidabonusequalto6.5%ofnetincomeafterbonusesandthe
totalbonusdistributedwas$560,000,howmuchwasnetincomefortheyear?

Answer:$9,175,385
Feedback:
$560,000=.065(X$560,000)
$560,000=.065X$36,400
$596,400=.065X
X=$9,175,385

#3.
OnJanuary1,2015,JuleeEnterprisesborrows$30,000topurchaseanewToyota
Highlanderbyagreeingtoa6%,4yearnotewiththebank.Paymentsof$704.55aredueat
theendofeachmonthwiththefirstinstallmentdueonJanuary31,2015.Recordthe
issuanceofthenotepayableandthefirsttwomonthlypayments.

Answer:

DebitCredit

January1,2015
Cash
30,000

NotesPayable

30,000
(Issuanceofnotepayable)

January31,2015

InterestExpense($30,000x6%x1/12)
150.00

NotesPayable(difference)
554.55

Cash(monthlypayment)

704.55
(torecordthefirstmonthlypayment)

February28,2015

InterestExpense[($30,000$554.55)x6%x1/12]
147.23

NotesPayable(difference)
557.32

Cash(monthlypayment)

704.55
(torecordthesecondmonthlypayment)


#4. NorthwestClothingSupplyhasthefollowingtransactionsduringtheyearrelatedto
stockholdersequity:

January1
Issues3,000sharesofnoparvaluecommonstockfor$20pershare.
March15
Issues800sharesof$20parvaluepreferredstockfor$22pershare.
December1 Declaresacashdividendof$1persharetoallstockholdersofrecord(both
commonandpreferred)onDecember15.
December15 Dateofrecord.
December31 PaysthecashdividenddeclaredonDecember1.

Recordeachofthesetransactions.

Answer:
January1
Debit
Credit
Cash(3,000x$20)
60,000

CommonStock(3,000x$20)

60,000
(Issuenoparvaluecommonstock)

March15

Cash(800x$22)
17,600

PreferredStock(800x$20)

16,000
AdditionalPaidinCapital(difference)

1,600
(Issuepreferredstockabovepar)

December1

Dividends(3,800sharesx$1)
3,800

DividendsPayable

3,800
(Declarecashdividends)

December15

NoEntry

December31

DividendsPayable(3,800sharesx$1)
3,800

Cash

3,800
(Paycashdividends)