Jul 20, 2017 Research papers

How can a contingent liability become a real liability for Farley Motors?

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Accounting: Assignment 11


Please complete all requirements for each question.Also answer this question: 

17. Maynard Printers (MP) manufactures printers. Assume that MP recently paid $400,000 for a

patent on a new laser printer. Although it gives legal protection for 20 years, the patent is

expected to provide a competitive advantage for only 10 years.


R1. Assuming the straight-line method of amortization, make journal entries to record (a) the

purchase of the patent and (b) amortization for year 1.

R2. After using the patent for five years, MP learns at an industry trade show that another

company is designing a more efficient printer. On the basis of this new information, MP decides,

starting with year 6, to amortize the remaining cost of the patent over two remaining years, giving

the patent a total useful life of seven years. Record amortization for year 


Assignment 11.1 Handout

1. On August 31, 2010, Gordon, Co., purchased $7,000 of inventory on a one-year, 12% note



R1. Journalize the company’s accrual of interest expense on February 28, 2011, their fiscal year-


R2. Journalize the company’s payment of the note plus interest on August 31, 2011.

2. Catskills Corporation guarantees its snowmobiles for three years. Company experience

indicates that warranty costs will add up to 5% of sales. Assume that the Catskills dealer in

Colorado Springs made sales totaling $519,000 during 2011. The company received cash for

20% of the sales and notes receivable for the remainder. Warranty payments totaled $19,000

during 2011.


R1. Record the sales, warranty expense, and warranty payments for the company.

R2. Post to the Estimated warranty payable T-account. At the end of 2011, how much in

Estimated warranty payable does the company owe?

3. Farley Motors, Inc., a motorcycle manufacturer, included the following note (adapted) in its

annual report:


R1. Why are these contingent (versus real) liabilities?

R2. How can a contingent liability become a real liability for Farley Motors? What are the limits to

the company’s product liabilities in the United States?

4. Gina Tarver is paid $720 for a 40-hour workweek and time-and-a-half for hours above 40.


R1. Compute Tarver’s gross pay for working 52 hours during the first week of February.

R2. Tarver is single, and her income tax withholding is 20% of total pay. Tarver’s only payroll

deductions are payroll taxes. Compute Tarver’s net (take-home) pay for the week. Use an 8%

FICA tax rate, and carry amounts to the nearest cent.

5. Return to the Gina Tarver payroll situation in Short Exercise 10-4. Tarver’s employer, College

of St. Mary, pays all the standard payroll taxes plus benefits for employee retirement plan (4% of

total pay), health insurance ($105 per employee per month), and disability insurance ($11 per

employee per month).


R1. Compute College of St. Mary’s total expense of employing Gina Tarver for the 52 hours that

she worked during the first week of February. Carry amounts to the nearest cent.



6. Suppose you work for DePetro-Carr, the accounting firm, all year and earn a monthly salary of

$6,800. There is no overtime pay. Your withheld income taxes consume 25% of gross pay. In

addition to payroll taxes, you elect to contribute 6% monthly to your retirement plan. DePetro-Carr

also deducts $110 monthly for your co-pay of the health insurance premium.


R1. Compute your net pay for November. Use an 8% FICA tax rate.

7. Consult your solutions for problems #4 and #5.


R1. Journalize salary expense for College of St. Mary related to the employment of Gina Tarver.

R2. Journalize benefits expense for College of St. Mary related to the employment of Gina


R3. Journalize employer payroll taxes for College of St. Mary related to the employment of Gina


8. Consider the following note payable transactions of Crandell Video Productions.


R1. Journalize the transactions for the company.

9. The accounting records of Earthtone Ceramics included the following at December 31, 2011:

In the past, Earthtone’s warranty expense has been 5% of sales. During 2012, Earthtone made

sales of $115,000 and paid $4,000 to satisfy warranty claims.


R1. Journalize Earthtone’s warranty expense and warranty payments during 2012. Explanations

are not required.

R2. What balance of Estimated warranty payable will Earthtone report on its balance sheet at

December 31, 2012?

10. Juan’s Mexican Restaurants incurred salary expense of $62,000 for 2009. The payroll

expense includes employer FICA tax of 8%, in addition to state unemployment tax of 5.4% and

federal unemployment tax of 0.8%. Of the total salaries, $19,000 is subject to unemployment tax.

Also, the company provides the following benefits for employees: health insurance (cost to the

company, $2,040), life insurance (cost to the company, $380), and retirement benefits (cost to the

company, 5% of salary expense).


R1. Record Juan’s expenses for employee benefits and for payroll taxes. Explanations are not




11. The following transactions of Brewton Pharmacies occurred during 2010 and 2011:


R1. Journalize the transactions in Brewton’s general journal. Explanations are not required.

12. Logan White is general manager of Moonwalk Tanning Salons. During 2010, White worked

for the company all year at a $6,100 monthly salary. He also earned a year end bonus equal to

5% of his salary. White’s federal income tax withheld during 2010 was $810 per month, plus $932

on his bonus check. State income tax withheld came to $80 per month, plus $70 on the bonus.

The FICA tax withheld was 8% of the first $90,000 in annual earnings. White authorized the

following payroll deductions: United Fund contribution of 1% of total earnings and life insurance of

$20 per month. Moonwalk incurred payroll tax expense on White for FICA tax of 8% of the first

$90,000 in annual earnings. The company also paid state unemployment tax of 5.4% and federal

unemployment tax of 0.8% on the first $7,000 in annual earnings. In addition, Moonwalk provides

White with health insurance at a cost of $110 per month. During 2010, Moonwalk paid $2,000 into

White’s retirement plan.


R1. Compute White’s gross pay, payroll deductions, and net pay for the full year 2010. Round all

amounts to the nearest dollar.

R2. Compute Moonwalk’s total 2010 payroll expense for White.

R3. Make the journal entry to record Moonwalk’s expense for White’s total earnings for the year,

his payroll deductions, and net pay. Debit Salary expense and Bonus expense as appropriate.

Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not


13. The accounting records of Path Leader Wireless include the following:


R1. Report these liabilities on the Path Leader Wireless balance sheet, including headings and

totals for current liabilities and long-term liabilities.


Accounting: Assignment 11 Name Course Instructor Date Questions 1 R1: Feb 28- year end accrual of interestDebitCreditInterest expense(7,000*12%*6/12)420 Interest payable420 R2: August 31- Repayment of note and interestDebitCreditNotes payable7,000Interest payable420Interest expense420 Cash7,840 Question 2: R1 DebitCreditCash103,800Notes receivable415,200 Sales519,000Being sale of snowmobilesDebitCreditWarranty Expense25,950 Warranty Payable25,950Being record of warranty expenseDebitCreditWarranty payable19,000Cash19,000Being record of warranty payments R2: Warranty liability account Warranty payableCash19,000Warranty expense25,950Balance6,95025,95025,950 R1: The Company officials know that there are events that may give rise to liability, and these are the contingent liabilities rather than real liabilities, where Farley Motors can reasonably estimate the liability. R2: T


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