Below is a payroll sheet for Otis Import Company for the month of September 2014

P13-4 (Payroll Tax Entries) 

Below is a payroll sheet for Otis Import Company for the month of September 2014. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is $7,000. Assume a 10% federal income tax rate for all employees and a 7.65% FICA tax on employee and employer on a maximum of $113,700. In addition, 1.45% is charged both employer and employee for an employee's wages in excess of $113,700 per employee.

						Unemployment Tax
Name	Earnings to Aug. 31	September Earnings	Income Tax Withholding1	FICA		State	Federal
B.D. Williams	$  6,800	$   800
D. Raye	6,500	700
K. Baker	7,600	1,100
F. Lopez	13,600	1,900
A. Daniels	107,000	13,000
B. Kingston	112,000	16,000

Instructions

• (a)Complete the payroll sheet and make the necessary entry to record the payment of the payroll.
• (b)Make the entry to record the payroll tax expenses of Otis Import Company.
• (c)Make the entry to record the payment of the payroll liabilities created. Assume that the company pays all payroll liabilities at the end of each month.

TUTORIAL PREVIEW

(a)

Name

Earnings to Aug. 31

September Earnings

Income Tax Withholding

FICA

SUTA

FUTA

B. D. Williams

$    6,800

$     800

$     80

$  61.20

$2.00*

$1.60**

File name: P13-4 Otis Import Company.docx  File type:  .docx  PRICE: $8

The cost of equipment purchased by Charleston, Inc., on June 1, 2014

(Depreciation for Partial Periods--SL, Act., SYD, and Declining-Balance) 

The cost of equipment purchased by Charleston, Inc., on June 1, 2014, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2014, the machine was operated 6,000 hours and produced 55,000 units. During 2015, the machine was operated 5,500 hours and produced 48,000 units.

Instructions

Compute depreciation expense on the machine for the year ending December 31, 2014, and the year ending December 31, 2015, using the following methods.

(a)Straight-line.

b)Units-of-output.

(c)Working hours.

(d)Sum-of-the-years'-digits.

(e)Declining-balance (twice the straight-line rate).

TUTORIAL PREVIEW

		Depreciation Expense
		2014	2015
(a)	Straight-line:
	($89,000 – $5,000) ÷ 7 = $12,000/yr.
	2014: $12,000 X 7/12	$7,000

File name: Charleston Inc.docx  File type:  .docx  PRICE: $7

P10-2 (Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation

P10-2 (Classification of Acquisition Costs)  Selected accounts included in the property, plant, and equipment section of Lobo Corporation's balance sheet at December 31, 2013, had the following balances.

Land	$  300,000
Land improvements	140,000
Buildings	1,100,000
Equipment	960,000

During 2014, the following transactions occurred.

• 1.A tract of land was acquired for $150,000 as a potential future building site.
• 2.A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo's common stock. On the acquisition date, Lobo's stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota's books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000.
• 3.Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows.

Freight and unloading	$13,000
Sales taxes	20,000
Installation	26,000

• 4.Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation's various plant locations. These expenditures had an estimated useful life of 15 years.
• 5.A machine costing $80,000 on January 1, 2006, was scrapped on June 30, 2014. Double-declining-balance depreciation has been recorded on the basis of a 10-year life.
• 6.A machine was sold for $20,000 on July 1, 2014. Original cost of the machine was $44,000 on January 1, 2011, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000.

Instructions

(Round to the nearest dollar.)

• (a)Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014.

Land	Buildings
Land Improvements	Equipment

• (Hint: Disregard the related accumulated depreciation accounts.)
• (b)List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo's financial statements.

 TUTORIAL PREVIEW

(a)                                                               LOBO CORPORATION
	Analysis of Land Account
	2014
	Balance at January 1, 2014		$   300,000

File name: P10-2 Classification of Acquisition Costs.docx   File type:  .doc  PRICE: $12

E8-21 In a nutshell, LIFO subtracts inflation from inventory costs,

E8-21 (LIFO Effect) The following example was provided to encourage the use of the LIFO method.

E8-21 In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs. This gap is:

	With LIFO	Without LIFO
Revenues	$3,200,000	$3,200,000
Cost of goods sold	2,800,000	2,800,000
Operating expenses	150,000	150,000
Operating income	250,000	250,000
LIFO adjustment	40,000	0
Taxable income	$  210,000	$  250,000
Income taxes @ 36%	$   75,600	$   90,000
Cash flow	$  174,400	$  160,000
Extra cash	$  14,400	0
Increased cash flow	9%	0%

Instructions

(a)Explain what is meant by the LIFO reserve account.

(b)How does LIFO subtract inflation from inventory costs?

(c)Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct.

(d)Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.

TUTORIAL PREVIEW
The difference between the inventory used for internal reporting purposes and LIFO is referred to 

File name: E8-21 In a nutshell.docx    File type:  .doc  PRICE: $5

P7-4 (Bad-Debt Reporting) From inception of operations to December 31, 2014

Ch. 7 Problems: P7-4

P7-4 (Bad-Debt Reporting) From inception of operations to December 31, 2014, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. Provisions were made monthly at 2% of credit sales, bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days.

 The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2014, and an aging of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the aging is as follows.

Classification by Month of Sale	Balance in Each Category	Estimated % Uncollectible
November–December 2014	$1,080,000	2%
July–October	650,000	10%
January–June	420,000	25%
Prior to 1/1/14	150,000	80%
	$2,300,000

 Based on the review of collectibility of the account balances in the “prior to 1/1/14” aging category, additional receivables totaling $60,000 were written off as of December 31, 2014. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2014, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

 Instructions

 (a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2014. Show supporting computations in good form. (Hint: In computing the 12/31/14 allowance, subtract the $60,000 write-off.)

(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2014.

TUTORIAL PREVIEW

(a)                                                          FORTNER CORPORATION
Analysis of Changes in the Allowance for Doubtful Accounts
For the Year Ended December 31, 2014
Balance at January 1, 2014		$130,000
Provision for doubtful accounts ($9,000,000 X 2%)		180,000

File name: P7-4 Bad-Debt Reporting.docx   File type:  .doc  PRICE: $10