2. Purchased equipment inventory of $380,000 on account.
3. Sold equipment for $510,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $330,000.
4. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 2 percent of sales.
5. Paid the sales tax to the agency on $400,000 of the sales.
6. On September 1, 2016, borrowed $50,000 from the local bank. The note had a 4 percent interest rate and matured on March 1, 2017.
7. Paid $6,200 for warranty repairs during the year.
8. Paid operating expenses of $78,000 for the year.
9. Paid $250,000 of accounts payable.
10. Recorded accrued interest on the note issued in transaction no. 6.
a. Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use + for increase, – for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is recorded as an example.
Assets = Liabilities + Equity
Rev. – Exp. = Net Income
+ NA +
b. Prepare the journal entries for the above transactions and post them to the appropriate T- accounts.
c. Prepare the income statement, balance sheet, and statement of cash flows for 2016.
d. What is the total amount of current liabilities at December 31,2016.
9-10A Calculating Payroll
Old Town Entertainment has two employees in 2016. Clay earns $3,600 per month and Philip, the manager, earns $10,800 per month. Neither is paid extra for working overtime. Assume Social Security tax rate is 6 percent on the first $110,000 of earnings and the Medicare tax rate earnings tax rate is 1.5 percent on all earnings. The federal income tax withholdings is 15 percent of gross earnings for Clay and 20 percent for Philip. Both clay and Philip have been employed all year.
a. Calculate the net pay for both Clay and Philip for March.
b. Calculate the net pay for both Clay and Philip in December.
c. Is the net pay the same in March and December for both employees? Why or why not?
d. What amounts will hold Old Town report in 2016 W-2s for each employee?
10-6A Two accounting cycles for bonds issued at face value
Doyle Company issued $500,000 of 10-year, 7 percent bonds on January 1, 2016. The bonds were issued at face value. Interest is payable in cash on December 31 of each year. Doyle immediately invested the proceeds from the bond issue in land. The land was leased for an annual $125,000 of cash revenue, which was collected on December 31 of each year, beginning December 31, 2016.
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