Chapter 13 In-Class Exercise Set

E13.2B (L0 1) (Accounts and Notes Payable) The following are selected 2020 transactions of
Palmeiro Corporation.
Sept. 1 Purchased inventory from Ripken Company on account for $125,000. Palmeiro
records purchases gross and uses a periodic inventory system.
Oct. 1 Issued a $125,000, 12-month, 12% note to Ripken in payment of account.
Oct. 1 Borrowed $125,000 from the Shore Bank by signing a 12-month, zero-interest-
bearing $142,000 note.

Instructions
Prepare journal entries for the selected transactions above.

E13.3B (L0 1) (Compensated Absences)

Zeile Company began operations on January 2, 2019.
 It employs 9 individuals who work 8-hour days and are paid hourly.
 Each employee earns 10 paid vacation days annually
 Vacation days may be taken after January 15 of the year following the year in which
they are earned.
Additional information is as follows:
Actual Hourly Vacation Days Used
 
Wage Rate by each employee
2019 $15 0
2020 $18 9

Zeile Company has chosen to accrue the cost of compensated absences at rates of pay in
effect during the period when earned.
(a) Prepare journal entries to record transactions related to compensated absences during
2019 and 2020
(b) Compute the amounts of any liability for compensated absences that should be
reported on the balance sheet at December 31, 2019 and 2020.

E13.5B (L0 1) (Adjusting Entry for Sales Tax) During the month of June, Bench Co. had cash
sales of $300,000 and credit sales of $180,000, both of which include the 8% sales tax that
must be remitted to the state by July 15.

Instructions
Prepare the adjusting entry that should be recorded to fairly present the June 30 financial
statements

E13.11B (L0 3) (Warranties) Gonzalez Equipment Company sold 600 Rollomatics during 2020
at $4,000 each. During 2020, Gonzalez spent $30,000 servicing the 2-year warranties that
accompany the Rollomatic. All applicable transactions are on a cash basis.

Instructions
(a) Prepare 2020 entries for Gonzalez using the expense warranty approach. Assume that
Gonzalez estimates the total cost of servicing the warranties will be $150,000 for 2 years.
(b) Prepare 2020 entries for Gonzalez assuming that the warranties are not an integral part of
the sale. Assume that of the sales total, $200,000 relates to sales of warranty contracts.
Gonzalez estimates the total cost of servicing the warranties will be $150,000 for 2 years.
Estimate revenues earned on the basis of costs incurred and estimated costs.

E13.12B (L0 3) (Premium Entries) Edmonds Company includes 1 coupon in each box of soap
powder that it packs, and 5 coupons are redeemable for a premium (a kitchen utensil). In 2020,
Edmonds Company purchased 10,000 premiums at 50 cents each and sold 55,000 boxes of
soap powder at $3.75 per box; 28,000 coupons were presented for redemption in 2020. It is
estimated that 60% of the coupons will eventually be presented for redemption.

Instructions
Prepare all the entries that would be made relative to sales of soap powder and to the premium
plan in 2020.

E13.14B (L0 3) (Asset Retirement Obligation) Oil Products Company purchases an oil tanker
depot on January 1, 2020, at a cost of $2,400,000. Oil Products expects to operate the depot for
10 years, at which time it is legally required to dismantle the depot and remove the underground
storage tanks. It is estimated that it will cost $300,000 to dismantle the depot and remove the
tanks at the end of the depot’s useful life.

Instructions
(a) Prepare the journal entries to record the depot and the asset retirement obligation for the
depot on January 1, 2020. Based on an effective interest rate of 6%, the present value of the
asset retirement obligation on January 1, 2020, is $167,516.
(b) Prepare any journal entries required for the depot and the asset retirement obligation at
December 31, 2020. Oil Products uses straight-line depreciation; the estimated residual value
for the depot is zero.
(c) On December 31, 2029, Oil Products pays a demolition firm to dismantle the depot and
remove the tanks at a price of $320,000. Prepare the journal entry for the settlement of the
asset retirement obligation.
 Chapter 13 Multiple Choice
1) Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
e. none of the above.

2) An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50%
discount. The coupons expire in one year. The store normally recognized a gross profit
margin of 40% of the selling price on video games. How would the store account for a
purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium
expense.
b. The difference between the cost of the video game and the cash received is
recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
e. none of the above.

3) Valley, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2017 Valley remitted $203,700 tax to the state tax division for March 2017
retail sales. What was Valley's March 2017 retail sales subject to sales tax?
a. $4,074,000.
b. $3,990,000.
c. $4,200,000.
d. $4,112,500.
e. none of the above.
4) A company gives each of its 75 employees (assume they were all employed
continuously through 2017 and 2018) 12 days of vacation a year if they are employed at
the end of the year. The vacation accumulates and may be taken starting January 1 of
the next year. The employees work 8 hours per day. In 2017, they made $21 per hour
and in 2018 they made $24 per hour. During 2018, they took an average of 9 days of
vacation each. The company’s policy is to record the liability existing at the end of each
year at the wage rate for that year. What amount of vacation liability would be reflected
on the 2017 and 2018 balance sheets, respectively?
a. $151,200; $210,600
b. $172,800; $216,000
c. $151,200; $216,000
d. $172,800; $210,600
e. none of the above.

5) A company buys an oil rig for $5,000,000 on January 1, 2018. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $1,000,000
 (present value at 10% is $385,550). 10% is an appropriate interest rate for this company.
What expense should be recorded for 2018 as a result of these events?
a. Depreciation expense of $600,000
b. Depreciation expense of $500,000 and interest expense of $38,555
c. Depreciation expense of $500,000 and interest expense of $100,000
d. Depreciation expense of $538,555 and interest expense of $38,555
e. none of the above.

6) Composite provides extended service contracts on electronic equipment sold through

major retailers. The standard contract is for four years. During the current year,
Composite provided 42,000 such warranty contracts at an average price of $162 each.
Related to these contracts, the company spent $800,000 servicing the contracts during
the current year and expects to spend $4,200,000 more in the future. What is the net
profit that the company will recognize in the current year related to these contracts?
a. $1,804.
b. $6,004,000.
c. $800,000.
d. $901,000.
e. none of the above.
7) A company offers a cash rebate of $1 on each $4 package of light bulbs sold during
2018. Historically, 10% of customers mail in the rebate form. During 2018, 3,750,000
packages of light bulbs are sold, and 200,000 $1 rebates are mailed to customers. What
is the rebate expense and liability, respectively, shown on the 2018 financial statements
dated December 31?
a. $375,000; $375,000
b. $375,000; $175,000
c. $175,000; $175,000
d. $200,000; $175,000
e. none of the above.
8) Sawyer Company self-insures its property for fire and storm damage. If the company
were to obtain insurance on the property, it would cost them $2,000,000 per year. The
company estimates that on average it will incur losses of $1,600,000 per year. During
2018, $700,000 worth of losses were sustained. How much total expense and/or loss
should be recognized by Sawyer Company for 2018?
a. $700,000 in losses and no insurance expense
b. $700,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,600,000 in insurance expense
d. $0 in losses and $2,000,000 in insurance expense
e. none of the above.