1. On Oct 12, Prescott arranged with a supplier to replace Prescott’s overdue $1
ID: 2444413 • Letter: 1
Question
1. On Oct 12, Prescott arranged with a supplier to replace Prescott’s overdue $10,000 account payable by paying $2,500 cash and signing a note for the remainder. The note matures in 90 days and carries a 12% interest rate. Prepare the entries for Oct 12, and Dec 31 of the current year and Jan 10 of next year.
2. In late December, Prescott learns it is facing a product liability suit filed by an unhappy customer. Prescott’s attorney advises that although it will probably suffer a loss from the lawsuit, it is not possible to estimate the amount of damages. Decide and take the appropriate accounting action concerning this contingent liability.
3. Nate McCall works for Prescott. For the pay period ended Nov 30, his gross earnings are $3,000. McCall has $800 deducted for federal income taxes and $200 for state income taxes from each paycheck. Additionally, a $35 premium for his health care insurance and $10 donation for the United Way are deducted. McCall pays FICA Social Security taxes at a rate of 6.2% and FICA Medicare taxes at a rate of 1.45%. He has not earned enough this year to be exempt from any FICA taxes. Journalize the accrual of salaries expense of McCall’s wages. Round all calculations to the nearest whole dollar.
4. On Nov 1, Prescott borrows $5,000 cash from a bank in return for a 60 day, 12%, $5,000 note. Record the note’s issuance on Nov 1 and it repayment on Dec 31.
5. For this calendar year, Prescott’s net income is $1,000,000, it interest expense is $275,000, and its income taxes expense is
Explanation / Answer
1. Entry for October 12:
Accounts payable (Dr) $10,000
Cash (Cr) $2,500
Notes payable (Cr) $7,500
Explanation - The accounts payable of $10,000 was partly paid in cash of $2,500. Remainder = 10,000 - 2,500 = $7,500. This is the amount of notes payable.
Entry on December 31 current year:
On december 31, we will have to calculate the interest amount from October 12th till December 31.
number of days = 20 in october+30 in november+31 in december = 81 days. Interest for 81 days = 12%*$7,500*81/365 = $199.72
Entry will be:
Interest expenses (Dr) $199.72
Interest payable (Cr) $199.72
The interest payable will stand as a current liability in the balance sheet upto 10th January.
Entry for Jan 10th next year:
Total interest for 90 days = $7,500*90/365*12% = $221.92
Of this amount, $199.72 has already been recognized in the books. Balance = 221.92 - 199.72 = $22.2. This amount will be recognized as interest expense.
Entry as on January 10th will be:
Interest expenses (Dr) $22.2
Interest payable (Dr) 199.72
Cash (Cr) 221.92
After this entry there will be no current liability of interest payable in books.
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