1.On November 1, 20xx Mission Beach Surf Shop borrows $200,000, by signing a 90-
ID: 2459263 • Letter: 1
Question
1.On November 1, 20xx Mission Beach Surf Shop borrows $200,000, by signing a 90-Day, 9% Note Payable. In proper order and form, prepare the following journal entries. (Assume a 360 day year.)
2.In late December, Nero Fashions of La Jolla guarantees the $110,000 debt of a supplier. It is unlikely the supplier will default on the debt. Decide and take the appropriate accounting action concerning this contingent liability.
3.Nate McCall works for The Prescott Company. 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, The Prescott Company 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, The Olsen Machine Company’s net income is $1,000,000, it interest expense is $275,000, and its income taxes expense is $225,000. Calculate Olsen’s times interest earned ratio to four decimal places.
Explanation / Answer
1.
Date
Account titles and explanation
Debit
Credit
November 1, 20XX
Cash
$200,000.00
Notes payable
$200,000.00
2.
The debt guarantee need not to be accounted as it is a contingent liability. It is to be disclosed in the notes forming part of financial statements as contingent liability.
4.
Date
Account titles and explanation
Debit
Credit
November 1
Cash
$5,000
Notes payable
$5,000
December 31
Notes payable
$5,000
Interest expense
$100
Cash
$50,100
5.
Earnings before interest and taxes = Net income + Interest expense + Taxes expense = $1,000,000 + $275,000 + $225,000 = $1,500,000
Times interest earned ratio = Earnings before interest and taxes/Interest expense = $1,500,000/$275,000 = 5.45 times
Date
Account titles and explanation
Debit
Credit
November 1, 20XX
Cash
$200,000.00
Notes payable
$200,000.00
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