Question

Electronics Service Co. pays salaries monthly on the last day of the month. The following information is available from Electronics for the month ended December 31, Year 1:

Administrative salaries	$	82,000
Sales salaries		61,000
Office salaries		40,000

Assume the Social Security tax rate is 6.0 percent on the first $110,000 of salaries and the Medicare tax rate is 1.5 percent on all salaries. Duke reached the $110,000 amount in September. His salary in December amounted to $11,000 and is included in the $82,000. No one else will reach the $110,000 amount for the year. None of the employee salaries are subject to unemployment tax in December.

Other amounts withheld from salaries in December were as follows:

Federal income tax	$	22,000
State income tax		5,500
Employee savings plan		2,200

Required
a. Prepare the journal entry to record the payment of payroll on December 31, Year 1. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

_b)

On January 1, Year 1, Beatie Co. borrowed $240,000 cash from Central Bank by issuing a five-year, 6 percent note. The principal and interest are to be paid by making annual payments in the amount of $56,975. Payments are to be made December 31 of each year, beginning December 31, Year 1.

Required
Prepare an amortization schedule for the interest and principal payments for the five-year period. (Round your answers to the nearest dollar amount.)

c)

During Year 1 and Year 2, Agatha Corp. completed the following transactions relating to its bond issue. The corporation’s fiscal year is the calendar year.

Year 1

Jan.		1		Issued $330,000 of 8-year, 8 percent bonds for $324,000. The annual cash payment for interest is due on December 31.
Dec.		31		Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec.		31		Closed the interest expense account.

Year 2

Dec.		31		Recognized interest expense, including the straight-line amortization of the discount, and made the cash payment for interest.
Dec.		31		Closed the interest expense account.

Required
a-1. When the bonds were issued, was the market rate of interest more or less than the stated rate of interest?
a-2. If Agatha had sold the bonds at their face amount, what amount of cash would Agatha have received?
b. Prepare the general journal entries for the above transactions.
c. Prepare the liabilities section of the balance sheet at December 31, Year 1 and Year 2.
d. Determine the amount of interest expense that will be reported on the income statements for Year 1 and Year 2.
e. Determine the amount of interest that will be paid in cash to the bondholders in Year 1 and Year 2.

d)

Enscoe Enterprises, Inc. (EEI) has 260,000 shares authorized, 200,000 shares issued, and 40,000 shares of treasury stock. At this point, EEI has $1,190,000 of assets. $230,000 liabilities, $480,000 of common stock, and $480,000 of retained earnings. Further, assume that the market value of EEI's common stock is $8 per share.

Required
a. Determine the number of shares of stock that is outstanding.
b. Determine the book value per share.
c. Provide a rational explanation for the difference between the book value per share and the market value per share of EEIs' common stock.

e)

Eastport Inc. was organized on June 5, Year 1. It was authorized to issue 450,000 shares of $11 par common stock and 30,000 shares of 4 percent cumulative class A preferred stock. The class A stock had a stated value of $25 per share. The following stock transactions pertain to Eastport Inc.:

Issued 24,000 shares of common stock for $16 per share.

Issued 8,000 shares of the class A preferred stock for $30 per share.

Issued 48,000 shares of common stock for $19 per share.

Required
a. Prepare general journal entries for these transactions. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  b. Prepare the stockholders’ equity section of the balance sheet immediately after these transactions.

Answer 1

a)

Particular	Salary	Social Security Tax	Medicare Tax
Administrative Salaries	82000	(82000-11000)*65=4260	82000*1.5%=1230
Sales salaries	61000	61000*6%=3660	61000*1.5%=915
Office Salaries	40000	40000*6%=2400	40000*1.5%=600
	183000	10320	2745

Journal Entries in the books of Electronics Service Co

Date	Particular	Debit	Credit
Dec 31	Administrative Salaries	$ 82000
	Sales Salaries	$ 61000
	Office Salaries	$ 40000
	To FICA- Social Security Tax Payable		$ 10320
	To FICA- Medicare Tax Payable		$ 2745
	To Federal Income tax Payable		$ 22000
	To State Income tax Payable		$ 5500
	To Employee Saving Plan Payable		$ 2200
	To Salary Payable		$ 140235
	(Being record the salary)
Dec 31	Payroll Tax Expenses	$ 13065
	To FICA- Social Security Tax Payable		$ 10320
	To FICA- Medicare Tax Payable		$ 2745
	(Being record payroll tax expense paid by employer)
Dec 31	Salary Payable	$ 140235
	To Bank		$ 140235
	(Being Payment of salary)

b)

Date	Opening Balance	Installment	Interest	Principal	Balance
Dec 31, Year 1	$ 240000	$ 56975	$ 14400	$ 42575	$ 197425
Dec 31, Year 2	$ 197425	$ 56975	$ 11845.5	$ 45129.5	$ 152295.5
Dec 31, Year 3	$ 152295.5	$ 56975	$ 9137.73	$ 47837.27	$ 104458.23
Dec 31, Year 4	$ 104458.23	$ 56975	$ 6267.50	$ 50707.5	$ 53750.73
Dec 31, Year 5	$ 53750.73	$ 56975	$ 3224.27	$ 53750	$ 0

c) a-1) At the time of Issue, Market Rate is more than the stated rate of interest as the bond is issued at discount.

a-2) If Agatha had sold the bonds at their face amount, Agatha have received $ 330000 cash payment.

b)

Date	Particular	Debit	Credit
Jan 1, Year 1	Cash	$ 324000
	Discount on Bond	$ 6000
	To 8% Bond Payable		$ 330000
	( Being 8% Bond is issued at discount)
Dec 31, Year 1	Interest Expense	$ 27150
	To Cash (330000*8%)		$ 26400
	To Discount on Bond (6000/8)		$ 750
	(Being recognised interest expense and paid in cash)
Dec 31, Year 1	Profit & Loss	$ 27150
	To Interest Expense		$ 27150
	(Being Interest transferred )
Dec 31, Year 2	Interest Expense	$ 27150
	To Cash (330000*8%)		$ 26400
	To Discount on Bond (6000/8)		$ 750
	(Being recognised interest expense and paid in cash)
Dec 31, Year 2	Profit & Loss	$ 27150
	To Interest Expense		$ 27150
	(Being Interest transferred )