Download Set B Exercises – Chapter 9 – Libby 7e

Chapter 9 – Set B Exercises – Libby 7e
E9-1B (Similar to E9-1) [LO 1,2,5,6] Computing Working Capital; Explaining the Quick Ratio and
Working Capital
Allen Corporation is preparing its 2012 balance sheet. The company records show the following selected
amounts at the end of the accounting period, December 31, 2012:
Total assets
Total noncurrent assets
$630,000
392,000
Liabilities:
Notes payable (8%, due in 5 years)
15,000
Accounts payable
76,000
Income taxes payable
10,000
Liability for withholding taxes
5,000
Rent revenue collected in advance
8,000
Bonds payable (due in 15 years)
90,000
Wages payable
9,000
Property taxes payable
4,000
Note payable (10%, due in 6 months)
Interest payable (due in 2 months)
Common stock
11,500
800
100,000
Required:
1. Compute ( a ) working capital and ( b ) the quick ratio (quick assets are $90,000). Why is working
capital important to management? How do financial analysts use the quick ratio?
2. Would your computations be different if the company reported $250,000 worth of contingent liabilities
in the notes to the statements? Explain.
E9-2B (Similar to E9-2) [LO 1] Recording Payroll Costs
Pogue Company completed the salary and wage payroll for May 2011. The payroll provided the following
details:
Salaries and wages earned
$211,000
Employee income taxes withheld
43,000
Insurance premiums withheld
2,000
FICA payroll taxes*
16,000
*$16,000 each for employer and employees
Required:
1. Give the journal entry to record the payroll for May, including employee deductions.
2. Give the journal entry to record the employer’s payroll taxes.
3. Give a combined journal entry to show the payment of amounts owed to governmental agencies.
E9-3B (Similar to E9-3) [LO1] Computing Payroll Costs; Discussion of Labor Costs
Olson Company has completed the payroll for January 2012, reflecting the following data:
Salaries and wages earned
$98,000
Employee income taxes withheld
11,000
FICA payroll taxes*
9,000
*Assessed on both employer and employee (i.e., $9,000 each).
Required:
1. What amount of additional labor expense to the company was due to tax laws? What was the amount
of the employees’ take-home pay?
2. List the liabilities and their amounts reported on the company’s January 31, 2012, balance sheet,
assuming the employees have been paid.
3. Would employers react differently to a 10 percent increase in the employer’s share of FICA than to
a 10 percent increase in the basic level of salaries? Would financial analysts react differently?
E9-4B (Similar to E9-4) [LO 1,4] Recording a Note Payable through Its Time to Maturity with
Discussion of Management Strategy
Many businesses borrow money during periods of increased business activity to finance inventory and
accounts receivable. Grabber Inc. is a prestigious retailer. Each Christmas season, Grabber builds up its
inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As
a result, Grabber often collects cash from the sales several months after Christmas. Assume that on
September 1, 2011, Grabber borrowed $4.2 million cash from Multinational Bank for working capital purposes
and signed an interest-bearing note due in six months. The interest rate was 6 percent per annum payable at
maturity. The accounting period ends December 31.
Required:
1. Give the journal entry to record the note on September 1.
2. Give any adjusting entry required at the end of the annual accounting period.
3. Give the journal entry to record payment of the note and interest on the maturity date, February 28, 2012.
4. If Grabber needs extra cash during every Christmas season, should management borrow money on a longterm basis to avoid the necessity of negotiating a new short-term loan each year?
E9-5B (Similar to E9-15) [LO 8] Computing Four Present Value Problems
On January 1, 2011, Soho Company completed the following transactions (assume a 10 percent annual
interest rate):
a. Bought a delivery truck and agreed to pay $60,000 at the end of three years.
b. Rented an office building and was given the option of paying $12,000 at the end of each of the next
three years or paying $32,000 immediately.
c. Established a savings account by depositing a single amount that will increase to $30,000 at the end
of seven years.
d. Decided to deposit a single sum in the bank that will provide 10 equal annual year-end payments of
$20,000 to a retired employee (payments starting December 31, 2011).
Required (show computations and round to the nearest dollar):
1. In ( a ), what is the cost of the truck that should be recorded at the time of purchase?
2. In ( b ), which option for the office building should the company select?
3. In ( c ), what single amount must be deposited in this account on January 1, 2011?
4. In ( d ), what single sum must be deposited in the bank on January 1, 2011?
E9-6B (Similar to E9-16) [LO 8] Using Present Value Concepts for Decision Making
You have just won the state lottery and have two choices for collecting your winnings. You can collect
$100,000 today or receive $20,000 per year for the next seven years. A financial analyst has told you that
you can earn 10 percent on your investments. Which alternative should you select?
E9-7B (Similar to E9-17) [LO 8] Calculating a Retirement Fund
You are a financial adviser working with a client who wants to retire in eight years. The client has a savings
account with a local bank that pays 9 percent and she wants to deposit an amount that will provide
her with $1,000,000 when she retires. Currently, she has $250,000 in the account. How much additional
money should she deposit now to provide her with $1,000,000 when she retires?
E9-8B (Similar to E9-25) [Sup C] Recording Growth in a Savings Account with Equal Periodic
Payments (Supplement C)
On each December 31, you plan to deposit $4,000 in a savings account. The account will earn 9 percent
annual interest, which will be added to the fund balance at year-end. The first deposit will be made
December 31, 2011 (end of period).
Required (show computations and round to the nearest dollar):
1. Give the required journal entry on December 31, 2011.
2. What will be the balance in the savings account at the end of the 10th year (i.e., after 10 deposits)?
3. What is the interest earned on the 10 deposits?
4. How much interest revenue did the fund earn in 2012? 2013?
5. Give all required journal entries at the end of 2012 and 2013.
E9-9B (Similar to E9-2) [LO 1] Recording Payroll Costs
Greyson Company completed the salary and wage payroll for May 2011. The payroll provided the following
details:
Salaries and wages earned
$221,000
Employee income taxes withheld
53,000
Insurance premiums withheld
5,000
FICA payroll taxes*
18,000
*$18,000 each for employer and employees
Required:
1. Give the journal entry to record the payroll for May, including employee deductions.
2. Give the journal entry to record the employer’s payroll taxes.
3. Give a combined journal entry to show the payment of amounts owed to governmental agencies.
E9-10B (Similar to E9-22) [LO 8] Computing the Value of an Asset Based on Present Value
You have the chance to purchase the royalty interest in a gas well in the Barnett Shale. Your best estimate
is that the net royalty income will average $35,000 per year for seven years. There will be no residual
value at that time. Considering the uncertainty in your estimates, you expect to earn 9 percent per year on
the investment. What should you be willing to pay for this investment now?