Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.50 each. Sterling's experience indicates that 60 percent of the coupons will be redeemed. During 2014, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 2015, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed.

Instructions

Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2014 and 2015.

Problem 2 - Payroll entries.

Total payroll of Walnut Co. was $1,840,000, of which $320,000 represented amounts paid in excess of $106,800 to certain employees. The amount paid to employees in excess of $7,000 was $1,440,000. Income taxes withheld were $450,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee’s salaries and wages to $106,800 and 1.45% in excess of $106,800.

Instructions:

(a) Prepare the journal entry for the salaries and wages paid.

(b) Prepare the entry to record the employer payroll taxes.

Problem 3 - Entries for bonds payable.

Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.:

March 1: Issued $3,000,000 face value Pitts Co. second mortgage, 8% bonds for $3,270,600, including accrued interest. Interest is payable semiannually on December 1 and June 1

with the bonds maturing 10 years from this past December 1. The bonds are callable at 102.

June 1 : Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.)

December 1 : Paid semiannual interest on Pitts Co. bonds and purchased $1,500,000 face value bonds at the call price in accordance with the provisions of the bond indenture