Question

3. Ebbert Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2018 is as follows:

                                                                                                                        12/31/17         12/31/18  

Employee advances                                                                           $44,000            $ 56,000

Accrued salaries payable                                                                 200,000                      ?

Salaries expense during the year                                                                                 1,000,000

Salaries paid during the year (gross)                                                                          1,050,000

1. At December 31, 2018, what amount should Ebbert report for accrued salaries payable? Hint: sometimes a T account comes in handy.

4. During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 4% within 12 months following sale and 6% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2017 and 2018 are as follows:

                                                                               Actual Warranty

                                    Sales                                    Expenditures

2017                        $   400,000                                   $8,000

2018                            600,000                                 14,000

                                  $1,000,000                              $22,000

1. At December 31, 2018, (assuming the accrual method) what amount should be reported as an estimated warranty liability?
2. Why are warranties recorded as an expense in the year of the sale, i.e., what accounting principle applies?

5. On July 1, 2018, Spear Co. issued 2,000 of its 10%, $1,000 bonds at 103 plus accrued interest. The bonds are dated April 1, 2018 and mature on April 1, 2028. Interest is payable semiannually on April 1 and October 1.
   1. What amount of cash did Spear receive from the bond issuance?
   2. What is the amount of accrued interest and how is this treated in the entry?

6. On January 1, 2018, Solis Co. issued its 10% bonds in the face amount of $4,000,000,

which mature on January 1, 2028. The bonds were issued for $3,100,000 to yield 8%, resulting in bond discount of $900,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31.

1. What is the amount of Solis's adjusted unamortized bond premium at December 31, 2019?

7. On January 1, 2018, Doty Co. redeemed its 10-year bonds of $4,000,000 par value for 103. They were originally issued on January 1, 2006 at 95 with a maturity date of
   January 1, 2016. Doty amortizes discounts and premiums using the straight-line method.
   1. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?

8. On June 30, 2018, Omara Co. had outstanding 8%, $4,000,000 face amount, 15-year bonds maturing on June 30, 2028. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2018 was $180,000. On June 30, 2018, Omara acquired all of these bonds at 96 and retired them.
   1. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Answer 1

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