Pine Corp. is required to contribute, to an employee stock
ownership plan (ESOP), 10% of its income after deduction for
this contribution but before income tax. Pine’s income before
charges for the contribution and income tax was $75,000. The
income tax rate is 30%. What amount should be accrued as a
contribution to the ESOP?
(b) To compute the amount of the contribution, the
requirements described in the problem must be translated into an
equation. The contribution must equal 10% of income after
deduction of the contribution, but before income tax. Therefore,
the tax rate (30%) does not enter into the computation.
The equation is solved below.
C = .10 × ($75,000 ??C)
C = $7,500 ??.10C
1.1C = $7,500
C = $7,500 ÷ 1.1
C = $6,818
The amount to be accrued as an expense and liability is $6,818.
On July 1, year 2, Ran County issued realty tax assessments
for its fiscal year ended June 30, year 3. On September 1, year 2,
Day Co. purchased a warehouse in Ran County. The purchase
price was reduced by a credit for accrued realty taxes. Day did
not record the entire year’s real estate tax obligation, but instead
records tax expenses at the end of each month by adjusting prepaid
real estate taxes or real estate taxes payable, as appropriate.
On November 1, year 2, Day paid the first of two equal installments
of $12,000 for realty taxes. What amount of this payment
should Day re-cord as a debit to real estate taxes payable?
(b) When the warehouse was purchased on 9/1/Y2, it
would be recorded at its total cost before any credit for accrued
realty taxes. The offsetting credits would be to cash for the net
amount paid, and to real estate taxes payable for two months’
taxes ($12,000 × 2/6 = $4,000). At the end of September and of
October, Day would record property tax expense each month as
Real estate tax expense 2,000
Real estate taxes payable 2,000
Therefore, at October 31, Day has a balance of $8,000 in the
payable account ($4,000 + $2,000 + $2,000). On 11/1/Y2, Day
would record the semiannual payment as follows:
Real estate taxes payable 8,000
Prepaid real estate taxes 4,000
The prepaid real estate taxes would then be expensed $2,000 per
month at the end of November and December
Kemp Co. must determine the December 31, year 2 yearend
accruals for advertising and rent expenses. A $500 advertising
bill was received January 7, year 3, comprising costs of $375
for advertisements in December year 2 issues, and $125 for advertisements
in January year 3 issues of the newspaper.
A store lease, effective December 16, year 1, calls for fixed
rent of $1,200 per month, payable one month from the effective
date and monthly thereafter. In addition, rent equal to 5% of net
sales over $300,000 per calendar year is payable on January 31 of
the following year. Net sales for year 2 were $550,000.
In its December 31, year 2 balance sheet, Kemp should report
accrued liabilities of
(d) An accrued liability is an expense which has been
incurred, but has not been paid. Of the $500 advertising bill,
$375 had been incurred as an expense as of 12/31/Y2 and should
be reported as an accrued liability at that time. For the store
lease, the fixed portion ($1,200 per month) is payable on the
16th of each month for the preceding month. Therefore, on
12/16/Y2, rent was paid for the period 11/16/Y2 to 12/15/Y2.
An additional one-half month’s rent expense (1/2 × $1200 =
$600) has been incurred but not paid as of 12/31/Y2. The variable
portion of the rent [5% × ($550,000 – $300,000), or
$12,500] was incurred during year 2, but will not be paid until
1/31/Y3. It, too, is an accrued liability at 12/31/Y2. Total
12/31/Y2 accrued liabilities are $13,475.
Advertising $ 375
Fixed rent (1/2 × $1,200) 600
Variable rent [5% × ($550,000 ??$300,000)] 12,500
In June year 2, Northan Retailers sold refundable merchandise
coupons. Northan received $10 for each coupon redeemable
from July 1 to December 31, year 2, for merchandise with a
retail price of $11. At June 30, year 2, how should Northan report
these coupon transactions?
(b) At June 30, year 2, Northan Retailers should report
the coupon transactions as unearned revenues because the sale of
the coupons is not the culmination of the earnings process (i.e.,
Northan must allow customers to exchange the coupons for merchandise
or refund the cost of the coupons at some later date).
The unearned revenues should be recorded at the amount of the
cash received by debiting cash and crediting an unearned revenue
account. The retail price of the merchandise for which coupons
may be redeemed does not impact the monetary amount of
Northan’s liability to its customers, and each coupon redeemed
will ultimately result in the recognition of sales of $10, the
amount of cash previously received.
Delect Co. provides repair services for the AZ195 TV set.
Customers prepay the fee on the standard one-year service contract.
The year 1 and year 2 contracts were identical, and the
number of contracts outstanding was substantially the same at
the end of each year. However, Delect’s December 31, year 2
deferred revenues’ balance on unperformed service contracts was
significantly less than the balance at December 31, year 1. Which
of the following situations might account for this reduction in the
deferred revenue balance?
(b) The requirement is to determine the situation that
might account for the reduction in the deferred revenue balance.
When a service contract is purchased by a customer and the fee
prepaid, deferred revenue is recognized at the date of payment.
Revenue cannot be recorded because revenue has not yet been
earned. Revenue is only recorded when services are performed
under the contract. The deferred revenue balance is reduced by
the actual amount of revenue earned when services are performed
under the services contract. If more contracts were
signed earlier in one year than another year, there is a greater
period of time in which to perform actual services. As previously
stated, when actual services are performed, the deferred revenue
balance is decreased. Therefore, the more actual services that are
performed, the greater the reduction in the deferred revenue
balance. If more year 2 contracts were signed later in year 2 than
year 1, the deferred revenue balance in year 2 would be larger
than year 1. There would be less time to perform actual services,
therefore less actual revenue would be recognized, creating a
larger deferred revenue balance at year-end. There is no contribution
margin recognized on service contracts.
Brad Corp. has unconditional purchase obligations associated
with product financing arrangements. These obligations are
reported as liabilities on Brad’s balance sheet, with the related
assets also recognized. In the notes to Brad’s financial statements,
the aggregate amount of payments for these obligations
should be disclosed for each of how many years following the
date of the latest balance sheet?
(c) The aggregate amount of payments for unconditional
purchase obligations that have been recognized on the
purchaser’s balance sheet shall be disclosed for each of the five
years following the date of the latest balance sheet presented.
Under IFRS, if a long-term debt becomes callable due to
the violation of a loan covenant
(b) The requirement is to identify the response to a
violation of a loan covenant on a long-term debt under IFRS.
Answer (b) is correct because the debt must be reclassified as
Under IFRS, which of the following accounts would not be
considered a “provision”?
(d) The requirement is to identify the account that
would not be considered a “provision.” Answer (d) is correct
because provisions are accounts that are uncertain as to amount
or timing. They involve estimated amounts, such as warranty
liabilities, bad debts, and taxes. A note payable is not uncertain as
to amount or timing.