Question

Exercises/Short Answer

1. Warranty expense for a company was $350,000 for the year. They began the year with an $1,200,000 balance in their Allowance for warranty costs account, and ended the year with $1,175,000. How much was incurred for actual warranty costs during the year?

2. Please state the two conditions that must be met in order for a company to accrue a loss contingency

3. On November 1, 2018 Daniels Inc. borrowed $200,000 under a 6% promissory note that was due on April 30, 2019.   Record to journal entries to accrue interest on this note as of December 31, 2018, and to pay it off on April 30, 2019.

4. Porter Co. recorded a cash sale of $250 that was subject to state sales tax rate of 10%. Prepare the journal entry to record this sale.

5. On July 31, 2016 Ernst Corporation called (i.e. redeemed) $10,000,000 par value of bonds payable at 103% of par value. At that time the bonds had an unamortized discount of $145,000. Prepare the journal entry to redeem these bonds.

Answer 1

1) Warranty expense for a company in current year is $ 350,000

Opening balance in their allowance is $ 1,200,000

Closing balance in the end of year is $ 1,175,000

Actual warranty costs during the year is $ 325,000 ( $1,200,000+$350,000-$1,175,000)

2) journal entries to accrue interest on this note as of December 31, 2018

Dr Cr

Dec 31 2018 Interest expenses a/c $2000   

To Interest payable a/c     $ 2000

(Being interest accrued for two months i.e Nov 18 & Dec 18 @ assuming 6% per annum interest accrued is caliculated as below = $200,000*6%*2/12 =$ 2000)

Dr Cr

April 30 2019 Interest payable a/c $2000   

To Bank a/c $ 2000

(Being interest Paid in current year which is accrued in previous year)

3) Journal entry to record the cash sales

Dr    Cr

Cash a/c $ 250

To State sales tax collected a/c $ 25

To Sales a/c $ 225

(Being cash sales and state sales tax received and accounted)

4) the journal entry to redeem these bonds.

Bond are redeem at par @103% i.e = $ 10,000,000 *103% = $ 10,300,000

carrying amount of bonds ( book value) = $ 9,855,000 ( $ 10,000,000 - $ 145,000)

we are paying cash of $10,300,000 which is more than the carrying value of the bonds. We will record a loss for the difference $44,5000 ($10,300 ,000 cash- $9,855,000 carrying value). In the required entry, we must remove the bond and its related accounts, in this case, discount on bonds payable by crediting accounts.  The required entry is:

Jul 16 Dr Cr

Bonds payable $10,000,000   

Loss on Retirement of Debt $44,5000

To

Cash a/c $ 10,300,000

unamortized discount a/c $ 145,000