Week 4 Assignment – Liability

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Week Four Exercise Assignment


1. Payroll accounting. Assume that the following tax
rates and payroll information pertain to Brookhaven Publishing:

Social Security taxes: 4% on the first $55,000
earned per employee

Medicare taxes: 1.5% on the first $130,000
earned per employee

Federal income taxes withheld from wages: $7,500

State income taxes: 4% of gross earnings

Insurance withholdings: 1% of gross earnings

State unemployment taxes: 5.4% on the first
$7,000 earned per employee

Federal unemployment taxes: 0.8% on the first
$7,000 earned per employee

The company incurred a salary expense of $50,000 during
February. All employees had earned less than $5,000 by month-end and no wages
have been paid during the month.

a. Prepare the necessary entry to
record Brookhaven’s February payroll. The entry will include deductions for the

Social Security taxes

Medicare taxes

Federal income taxes withheld

State income taxes

Insurance withholdings

b. Prepare the journal entry to
record Brookhaven’s payroll tax expense. The entry will include the following:

Matching Social Security taxes

Matching Medicare taxes

State unemployment taxes

Federal unemployment taxes

2.  Current
liabilities: entries and disclosure.
A review of selected financial
activities of Visconti’s during 20XX disclosed the following:

Borrowed $10,000 from the First City Bank by signing a 3-month, 15% note

and principal are due at maturity.

Established a warranty liability for the XY-80, a new product. Sales are
expected to

1,000 units during the month.  Past
experience with similar products indicates

that 3%
of the units will require repair, with warranty costs averaging $27 per unit
(parts only).

Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10,

Borrowed $5,000 from First City Bank; signed a 15% note payable due in 60
days. (Assume 360 day year for interest)

Repaired six XY-80s during the month at a total cost of $162

Accrued three days of salaries at a total cost of $1,400.


a. Prepare journal entries to
record the transactions.

b. Prepare adjusting entries on
December 31 to record accrued interest for each of the notes payable.

3. Notes
. Red Bank Enterprises was involved in
the following transactions during the fiscal year ending October 31:

Borrowed $55,000 from the Bank of Kingsville by signing a 90-day, 12% note.

Issued a $50,000 note to Harris Motors for the purchase of a $50,000 delivery
truck. The note is due in 180 days and carries a 12% interest r ate.

Purchased merchandise from Pans Enterprises in the amount of $15,000.  Issued

30-day, 12% note in settlement of the balance owed.

Issued a $60,000 note to Datatex Equipment in settlement of an overdue

of the same amount.  The note is due in
30 days and carries a 14% interest rate.

The note to Pans Enterprises was paid in full.

The note to Datatex Equipment was paid in full.

Paid note to Bank of Kingsville.


a. Prepare
journal entries to record the transactions.

b. Prepare
adjusting entries on December 31 to record accrued interest. (Daily interest is
calculated utilizing the 360 day method).

Prepare the Current Liability section of Red Bank’s balance sheet as of
December 31. Assume that the Accounts Payable account totals $203,600 on this



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