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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?