The students will learn about short-term liabilities: notes payable and employee-related liabilities. They will be informed about the employee-related accounts and calculations. The most important outcome is to be able to calculate and post transactions including notes payable and payroll.
Problem L/1.
Remember problem C/4?
Prepare Journal entries of ‘Tuesday’ Co. for the following transactions:
1. On December 1, 20X4, ‘Monday’ Co. received a € 15,000, 4%, 1-year note from
‘Tuesday’ Co. The note was issued based on an account balance of Tuesday as a customer of Monday.
2. On December 31, 20X4, Tuesday made an end-of-year adjusting entry to accrue the interest on the note.
3. On November 30, 20X5, Tuesday payed the full amount due to the note payable.
Worksheet:
Date Accounts Debit Credit
X4-12-01
X4-12-31
X5-11-30
72 Problem L/2.
Windy Co. has issued a note for borrowing 4,000 € from Rainy Bank on October 1, 20X8.
The interest rate is 7% and the payment is due on April 30, 20X9. Record the journal entries for 20X8 and 20X9 for Windy if the financial statements are prepared on December 31!
Worksheet:
Date Accounts Debit Credit
X8-10-01
X8-12-31
X9-04-30
73 Problem L/3
Hope Inc. has five employees at the accounting department. Their salaries are determined on a monthly basis (not on an hourly). Based on the table and the information given, prepare the payroll calculations for the department in the worksheet and post the related journal entries of Hope!
Deductions from gross wages:
personal income tax: 15%
social security contribution: 18.5% (amount is matched by the employer!)
workers’ union fee (all employees participate): 1%
Employer’s expenses:
social security
labour market contribution: 1.5%
the firm has a pension programme for the employees and contributes 3% of monthly gross wages
74 Worksheet
Date Accounts Debit Credit
Problem L/4.
Last Inc. has four employees at the HR department. Their salaries are determined on a monthly basis (not on an hourly). Based on the table and the information given, prepare the payroll calculations for the department in the worksheet and post the related journal entries of Last!
Mrs. Motivated 4,300
Ms. Funny 1,900
Mr. Relaxed 7,000
Totals
75 Deductions from gross wages:
personal income tax: 15%
social security contribution: 18.5% (amount is matched by the employer!)
workers’ union fee (all employees participate): 1%
Employer’s expenses:
social security
labour market contribution: 1.5%
the firm has a pension programme for the employees and contributes 3% of monthly gross wages
Worksheet
76 Solution for Problems
Solution L/1.
Date Accounts Debit Credit
X4-12-01 Accounts payable 15,000
Notes payable 15,000
Issuing a 4% 1-year note
X4-12-31 Interest expense 50
Interest payable 50
Computed accrued interest on note (15,000*0,04*1/12).
X5-11-30 Note payable 15,000
Interest expense 550
Interest payable 50
Cash 15,600
To record interest expense (11 months:
15,000*0,04*11/12=550) and the payment of note and interest payable.
Solution L/2.
Date Accounts Debit Credit
X8-10-01 Cash 4,000
Notes payable 4,000
To record the note issued (interest: 7%, maturity:
April 30,20X9)
X8-12-31 Interest expense 70
Interest payable 70
Computed accrued interest on note (4,000*0,07*3/12).
X9-04-30 Note payable 4,000
Interest expense 93.33
Interest payable 70
Cash 4,163.33
To record interest expense (4 months:
4,000*0,07*4/12=93.33) and the payment of note and interest payable.
77 Solution L/3.
DEDUCTIONS
Name
Gross
Earnings Personal income tax
Social Security
08.31 Salaries expense 17,200
Wages Payable 17,200
To record gross wages
Wages Payable 5,934
Personal Income tax payable 2,580
Social Security payable 3,182
Worker’s Union 172
To record deductions in payroll
08.31 Payroll contributions expense 2,838
Employee benefits expense 516
Social Security Payable 2,580
Labour market contr. payable 258
Pension Programme 516
To record employer’s salary-related expenses
78 Sample Exam
THIS IS A SAMPLE EXAM. PLEASE BE AWARE THAT THE ACTUAL EXAMS WILL BE DIFFERENT FROM THIS (REGARDING QUESTIONS, TOPICS, POINTS).
TASK 1. (15 POINTS)
A company purchased an asset for 200.000 with an expected useful life of five years and a salvage value of 20.000. After two years of use the company decided to revise the estimates. As of the beginning of the 3rd year: the total life will be 7 years, and the salvage value 10.000.
Calculate the data in the following table!
Year Annual depreciation Accumulated depreciation at End of Year
Calculation of annual depreciation
79
TASK 2. (10 POINTS)
‘Exam Company purchases 2,000 shares (trading securities) of Midterm Ltd. Prepare the journal entries for the purchase and the necessary end-of-month adjustments based on the following data:
June 22 Purchased 2,000 shares of Midterm. Price: €22 per share.
June 30 The fair value of Midterm’s share: €18 per share.
July 15 Received a dividend from Midterm. Amount: €0.50 per share.
July 31 The fair value of Midterm’s share: €23 per share.
August 30 The fair value of Midterm’s share: €25 per share.
Date Accounts Debit Credit
80
TASK 3. (8 POINTS)
Prepare Journal entries of ‘One’ Co. for the following transactions:
1. On December 1, 20X4, ‘One’ Co. received a € 15,000, 4%, 1-year note from ‘Two’ Co. The note was issued based on an account balance of Two as a customer of One.
2. On December 31, 20X4, One made an end-of-year adjusting entry to accrue the interest on the note.
3. On November 30, 20X5, One collected the full amount due to the note receivable.
Date Accounts Debit Credit
TASK 4. (7 POINTS)
Calculate the cost of goods sold using periodic FIFO method!
1st purchase: 100 pieces, price: 250 Ft/piece 2nd purchase: 140 pieces, price: 210 Ft/piece 3rd purchase: 200 pieces, price: 220 Ft/piece 4th purchase: 300 pieces, price: 230 Ft/piece Sold: 350 pieces
The cost of goods sold:____________________________
Calculations:
81
TASK 5. (15 POINTS)
WHAT IS DEFINED HERE?
_____________________________: It is recorded when the carrying amount of a fixed-asset is not recoverable from its expected future cash flows.
____________________________: These are fixed assets that lack physical substance.
____________________________: It is the difference between net sales and cost of goods sold.
____________________________: A formula meaning that freight is borne by seller.
Name four typical short-term liabilities!
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
TRUE OR FALSE?
An asset’s residual value is an estimated value. TRUE/FALSE
Depreciation is the systematic allocation of the depreciable amount of an asset over its physical life. TRUE/FALSE
Merchandise is processed during manufacturing of goods or during the production of services. TRUE/FALSE
Under the first in first out method, the cost of goods sold is based on the most recent purchases. TRUE/FALSE
Writing off uncollectible accounts has no impact on income. TRUE/FALSE
‚Allowance for uncollectibles’ is recorded as an income statement account. TRUE/FALSE Net earnings are equal to gross earnings plus deductions. TRUE/FALSE
82
SOLUTION FOR SAMPLE EXAM
TASK 1. (15 POINTS)
Year Annual depreciation Accumulated depreciation at End of Year
Calculation of annual depreciation
1st 36000 36000 (200000-20000)/5
2nd 36000 72000 (200000-20000)/5
3rd 23600 95600 (200000-72000-10000)/5
4th 23600 119200 (200000-72000-10000)/5
5th 23600 142800 (200000-72000-10000)/5
6th 23600 166400 (200000-72000-10000)/5
7th 23600 190000 (200000-72000-10000)/5
83
TASK 2. (10 POINTS)
Date Accounts Debit Credit
June 22 trading securities 44000
cash 44000
to record the purchase of 2000 shares
June 30 unrealized loss on investment 8000
trading securities 8000
to record a € 4 per share decrease in the
July 15 cash 1000
divided income 1000
to record received dividends
July 31 trading securities 10000
unrealized gain on investment 10000
to record a € 5 per share increase in the value
Aug 30 trading securities 4000
unrealized gain on investment 4000
to record a € 2 per share increase in the value
84
TASK 3. (8 POINTS)
Date Accounts Debit Credit
Dec 1 Notes receivable 15,000
Accounts receivable 15,000
Receipt of 4% 1-year note
Dec 31 Interest receivable 50
Interest income 50
Computed accrued interest on note (15,000*0,04*1/12).
Nov 30 Cash 15,600
Notes receivable 15,000
Interest income 550
Interest receivable 50
To record interest income (11 months:
15,000*0,04*11/12=550) and the collection of note receivable and accrued interest.
85
TASK 4. (7 POINTS)
Calculate the cost of goods sold using periodic FIFO method!
1st purchase: 100 pieces, price: 250 Ft/piece 2nd purchase: 140 pieces, price: 210 Ft/piece 3rd purchase: 200 pieces, price: 220 Ft/piece 4th purchase: 300 pieces, price: 230 Ft/piece Sold: 350 pieces
The cost of goods sold: 78,600 Calculations:
Beginning inventory 0
Plus: purchases 167,400 Goods available for sales 167,400 Less: ending inventory 88,800
(300*230+90*220)
Cost of goods sold = 78,600
86
TASK 5. (15 POINTS)
WHAT IS DEFINED HERE?
Asset impairment: It is recorded when the carrying amount of a fixed-asset is not recoverable from its expected future cash flows.
Intangible asset: These are fixed assets that lack physical substance.
Gross Profit: It is the difference between net sales and cost of goods sold.
F.O.B Destination: A formula meaning that freight is borne by seller.
Name four typical current obligations!
1. Accounts payable 2. Notes payable
3. The current portion of long term debt 4. Accrued liabilities
TRUE OR FALSE?
An asset’s residual value is an estimated value. TRUE/FALSE
Depreciation is the systematic allocation of the depreciable amount of an asset over its physical life. TRUE/FALSE
Merchandise is processed during manufacturing of goods or during the production of services. TRUE/FALSE
Under the first in first out method, the cost of goods sold is based on the most recent purchases. TRUE/FALSE
Writing off uncollectible accounts has no impact on income. TRUE/FALSE
‚Allowance for uncollectibles’ is recorded as an income statement account. TRUE/FALSE Net earnings are equal to gross earnings plus deductions. TRUE/FALSE
This teaching material has been made at the University of Szeged, and supported by the European Union. Project identity number: EFOP-3.4.3-16-2016-00014