Chapter 9 Demonstration Problems Demonstration Problem 9-1 - Computing Accrued Interest Johnson Company borrowed $1,000 cash by issuing a one-year note payable to McCoy Company McCoy charged Johnson interest on the note at a 12% annual rate. Both companies close their books on December 31, Year 1. Required Determine the amount of accrued interest expense Johnson would report and the amount of accrued interest revenue McCoy would report at Decemb 31, Year 1 under each of the three following independent assumptions of the note issue date. The note was issued (money was borrowed) on (1) April 1, Year 13 (2) June 1, Year 1; and (3) October 1, Year 1. 30 4. Demonstration Problem 9-2 - Accounting for Notes Payable Frank's Hot Dogs (FHD) experienced the following transactions during Year 1. 1. FHD was started on March 1, Year 1 when it borrowed $10,000 from City Bank 2. Earned $5,000 of cash revenue 3. Incured $2,000 of cash expenses Accrued interest expense on the note issued in Event 1. The note had a 6% annual interest rate and was to be repaid on March 1, Year 2. Frank's Hot Dogs (FHD) experienced the following transactions during Year 2. 1. Earned $5,000 of cash revenue. 2 Incurred $2,000 of cash expenses. Accrued interest expense on the note issued in Event 1. The note had a 6% annual interest rate and was to be repaid on March 1, Year 2 4. FHD paid the interest due on March 1 Year 2 5. FHD paid off the $10,000 principal balance of note payable on March 1, Year 2. 3 Required a Record the transactions for Year 1 and Year 2 using the horizontal financial statements model. Record the amounts under the appropriate heading and the initials"NA" under each heading not affected by the event. b. What is the amount of interest expense recognized in Year 1 and Year 2? c. What is the amount of cash flow from operating activities that is associated with interest in Year 1 and Year 2 Demonstration Problem 9-3 - Accounting for Sales Tax The following transaction apply to Dance Costumes Inc. (DCI). 1. During April DCI had total sales s0,000 plus sales tax of 4.5%. Assume the beginning balance in the sales tax payable account is zero 2. During May DCI paid the tax due on April sales. 3. During May DCI had total sales (including sales tax) of $12,000. The sales tax rate is 4.5% Required: a Use a horizontal financial statements model to show how the three events affected DCI's financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event b. What is the cash flow for sales tax in May? c. What is the amount of sales tax expense in May? d. What is the amount of sales tax payable at the end of May? Demonstration Problem 9-3 - Accounting for Sales Tax The following transaction apply to Dance Costumes Inc. (DCI). 1. During April DCI had total sales $10,000 plus sales tax of 4.5%. Assume the beginning balance in the sales tax payable account is zero. 2. During May DCI paid the tax due on April sales. 3. During May DCI had total sales (including sales tax) of $12,000. The sales tax rate is 4.5% Required: a Use a horizontal financial statements model to show how the three events affected DCI's financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event. b. What is the cash flow for sales tax in May? c. What is the amount of sales tax expense in May? d. What is the amount of sales tax payable at the end of May? Demonstration Problem 9-4 - Accounting for Warranties Versa Training Services provides instruction on how to pass the CPA examination. Versa has attained phenomenal growth by offering its customers a money-back guarantee. Any student who attends all classes and completes all homework assignments is entitled to a complete refund if he or she fails to pass the exam. The following events pertain to a new course that was recently established by Versa. 1. During Year 1, Versa charged a total of 40 students $400 each for the training. Versa only accepts cash payment for training 2. Versa estimates that 10 percent of the students will atted all the classes, complete all the homework assignments, and yet fail the exam and demand a cash refund. 3. During Year 1. only 1 customer presented his exam results to Versa and requested a cash refund. Versa paid a $400 cash refund to a customer after he received his exam results. This refund was the first of several Versa expected to grant to unsuccessful candidates. Required Use a horizontal financial statements model to show how the three events affected Versa's financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event. Demonstration Problem 9-5-Payroll Accounting Colby Company had one salaried employee, Carl Colby, who was paid $6,000 per month According to the employment tax laws, Colby Company had to remit Federal and State employment taxes on a quarterly basis. Colby Company also agreed to pay for benefits on a quarterly basis. During each month, Carl had the following deductions withheld from his paycheck Federal income tax $900 State income tax $240 Social Security 6% of gross Medicare 1.5% of gross Medical Insurance $100 United Way contribution $50 Additionally. Colby Company provided Carl with the following company paid benefits: Vacation 1 day earned per month, valued at $288 Medical Insurance $100 Finally, Colby Company had the following employment tax responsibilities: Social Security match that withheld from employee Medicare match that withheld from employee Federal Unemployment 0.6% of gross payroll State Unemployment 5.4% of gross payroll Required: a. Determine the monthly amount of net pay for Carl Colby b. Record the January 31 employer payroll in a horizontal financial statement model like the one shown below. Note that the total amount of liabilities is recorded in the "Various pays." column. Also, the expenses are recorded as a total amount Balance Sheet Income statement Statement Assets - Liab. + Equity of Yearl Cashe - Various pays. Ret Earn. Rev. - Exp. = Net Inc. Cash Flows 1/31 c. Determine the monthly amount of payroll tax expense. d. Record the January 31 payroll expense recognition in a horizontal financial statement model like the one shown below. Note that the total amount of liabilities is recorded in the Various Pays" column. Also, the expenses are recorded as a total amount Balance Sheet Income statement Statement Assets Liab. + Equity of Year 1 Cash - Various Pays Ret Earn. Rev. - Exp. Net Inc. Cash Flows 1/31 Demonstration Problem 9-6-Discount Note (Appendix) Computer Consultants experienced the following accounting events in its first year of operation. 1. The company was started on April 1, Year 1 when it issued a $5,000 face value discount note to State Bank. The note had a 12% discount rate and a one-year term. 2. Paid $4,200 cash for operating expenses. 3. Recognized $7,300 of cash service revenue. 4. Recognized accrued interest expense at December 31, Year 1. Accounting events affecting Year 2 were as follows: 1. On April 1. Year 2 Computer Consultants recognized the final three months of accrued interest expense on the discount note. 2. Paid State Bank the face value of the note. 3. Recognized $9,500 of cash service revenue 4. Paid $6,400 cash for operating expenses. Required Use a horizontal financial statements model to show how the these events affected Computer Consultants financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event