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Week 7

E 822 (LO1)
1.

2.

3.

Salaries Expense.....................................................................
FICA Taxes Payable, Employees ......................................
Federal Income Taxes Withheld .......................................
State Income Taxes Withheld ...........................................
Cash (or Salaries Payable)................................................
To record payroll for 2009.

127,000

Payroll Tax Expense ...............................................................


FICA Taxes Payable, Employer ........................................
Federal Unemployment Taxes Payable ...........................
State Unemployment Taxes Payable ...............................
To record payroll taxes for 2009.

10,628
9,716
192
720

Bonus Computation and Journal Entry

The bonuses are calculated as follows:


Net income ......................................................................
Bonus threshold .............................................................
Income subject to bonus................................................
Bonus package ...............................................................
Bonus (before any tax considerations).........................

2.

9,716
15,550
5,900
95,834

In addition to income and FICA taxes, employers often withhold amounts for
medical insurance, life insurance, union dues, charitable contributions, employee savings plans, and retirement benefits.

E 823 (LO1)
1.

Payroll Accounting

Chris

George

$745,000
325,000
$420,000

0.05
$ 21,000

$745,000
325,000
$420,000

0.04
$ 16,800

Salaries Expense ($21,000 + $16,800) ...................................


Various Taxes Payable ($8,400 + $6,720) ........................
Bonus Payable ($12,600 + $10,080)..................................
To record bonuses earned by the president and vice
president.

37,800

Various Taxes Payable ..........................................................


Bonus Payable .......................................................................
Cash....................................................................................
To record the payment of bonuses.

15,120
22,680

15,120
22,680

37,800

Chapter 8

E 824 (LO1)

Stock Options: Fair Value Method

Fair value method


Total compensation expense over the one-year period is $660,000 ($11 fair
value 60,000 options).
E 830 (LO2)

Deferred Income Taxes

1.

The amount of income taxes payable is $231,000 ($660,000 0.35).

2.

Income tax expense is $262,500 ($750,000 0.35).

3.

Income tax expense of $31,500 relates to a deferred income tax liability


($90,000 0.35). This deferred income tax liability represents the future income tax that must be paid on the $90,000 in income that was earned but not
taxed during the year. A summary of the components of income tax expense
is as follows:
Current income taxes ($660,000 0.35) ...........................................
Deferred income taxes ($90,000 0.35) ...........................................
Income tax expense ...........................................................................

E 832 (LO3)

$231,000
31,500
$262,500

Contingent Liabilities

The objective of this exercise is to illustrate the difficulty involved in applying the
contingency standards. While the accounting standard uses terms such as probable and possible, matching these terms with probabilities is difficult. Studies
show that there is little consensus on the probabilities associated with the terms
probable, possible, and remote. While there are no exact answers to the scenarios given, students should recognize the judgment involved in making the classification decision. The following are provided as possible (or probable) answers.
a.

A 40% probability of occurrence would most likely fall between remote and
probable. If Rayn Company determined this contingency was reasonably
possible, then note disclosure would be appropriate.

b.

If the probability of incurring fines levied by the government is less than


10%, most would classify this event as remote and provide no information
(or only a brief mention, with no details) in the notes to the financial statements.

c.

A probability of 90% is likely to be interpreted as probable. If management


determines the likelihood of losing the gender discrimination lawsuit as being probable, the liability (and associated loss) would be formally recognized
in the accounting records.

E 833 (LO4)

Classifying Expenditures as Assets or Expenses

1.

This amount should be expensed. Although the company expects the ad to


increase sales over the next 18 months, the product is new and the advertising is not directed at specific past customers. Significant uncertainty exists
regarding the actual amount of increased sales in the future.

2.

The entire amount should be expensed. Although the company feels that the
research costs will be beneficial in the future, significant uncertainty still exists. It may take years before any actual sales are generated from the research, or there may be no sales at all. The FASB specifically requires that
all R&D costs be expensed immediately.

3.

The cost of this targeted advertising should be capitalized and then recognized as an expense over the expected beneficial life of the advertising campaign.

4.

This one is easythe cost of the warehouse should be capitalized.

P 842 (LO5)

Unifying Concepts: The Income Statement


Moriancumer, Inc.
Income Statement
For the Year Ended December 31, 2009

Gross sales revenue ..........................................


Less: Sales returns ............................................
Net sales revenue...............................................
Cost of goods sold.............................................
Gross margin......................................................
Operating expenses:
Selling expenses:
Sales salaries expense ...........................
Advertising and promotion expense......
Insurance expense ..................................
Rent expense ...........................................
Miscellaneous expenses.........................
Payroll tax expense .................................
Automobile expense ...............................
Delivery expense .....................................
Entertainment expense ...........................
General and administrative expenses:
Administrative salaries expense ............
Office supplies expense .........................
Miscellaneous expenses.........................

$4,230,000
8,000
$4,222,000
3,116,000
$1,106,000

$350,000
204,000
17,000
16,000
6,300
4,900
3,500
3,100
1,500
$200,000
8,000
5,400

$ 606,300

Utilities expense ......................................


Insurance expense ..................................
Total operating expenses..................
Operating income...............................................
Other revenues and expenses:
Interest revenue ............................................
Interest expense ...........................................
Income before income taxes .............................
Income taxes ......................................................
Income before extraordinary item ....................
Fire loss (net of tax) ...........................................
Net income..........................................................
Earnings per share:
Income before extraordinary items .............
Extraordinary loss ........................................
Net income ($98,500 15,000 shares) ..............

Chapter 8

1,100
700

215,200
821,500
$ 284,500
$

2,000
(39,000)

(37,000)
$ 247,500
99,000
$ 148,500
(50,000)
$ 98,500
$
$

9.90
(3.33)
6.57