Exercise 9-1.

Dudley Corporation is preparing its Year 1 balance sheet. The company records
show the following selected amounts at the end of the accounting period, December
31, Year 1:

Total assets $344,500

Total noncurrent assets 235,300

Liabilities:
Notes payable (8%, due in 5 years) 9,750
Accounts payable 36,400
Income taxes payable 9,100
Liability for withholding taxes 1,950
Rent revenue collected in advance 4,550
Bonds payable (due in 15 years) 58,500
Wages payable 4,550
Property taxes payable 1,950
Note payable (10%, due in 6 months) 7,800
Interest payable 260
Common Stock 65,000

Required:
Compute working capital.

Solution
Current assets: ($344,500 – $235,300) $109,200
Current liabilities:
Accounts payable $36,400
Income taxes payable 9,100
Liability for withholding taxes 1,950
Rent revenue collected in advance 4,550
Wages payable 4,550
Property taxes payable 1,950
Note payable (10%, due in 6 months) 7,800
Interest payable 260 (66,560)
Working capital $ 42,640
 Exercise 9-2.

Alex Company completed the salary and wage payroll for February. The payroll
provided the following details:

Salaries and wages earned by employees $159,000

Employee income taxes withheld 31,800
Employee government insurance premiums withheld 795
FICA payroll taxes* 11,925

* $11,925 each for employer and employees.

Required:
1. Provide the journal entry to record the payroll for February, including employee
deductions. Assume employees have been paid, but that Alex has yet to
transfer any withholdings to the government.
2. Provide the journal entry to record the employer’s payroll taxes, which have
not yet been paid to the government.
3. Provide a combined journal entry to show the payment of all amounts owed to
governmental agencies.

Requirement solution 1

Debit Credit

February 28
Compensation Expense (+E, –SE) 159,000
Liability for Income Taxes Withheld (employees) (+L) 31,800
Liability for Insurance Premiums Withheld (employees) (+L) 795
FICA Taxes Payable (employees) (+L) 11,925
Cash (–A) 114,480
Payroll for February including employee deductions.
 Requirement solution 2 (employer)
February 28
Compensation Expense (+E, –SE) 11,925
FICA Taxes Payable (employer) (+L) 11,925
Employer payroll taxes on February payroll.

Requirement solution 3 (government)

Liability for Income Taxes Withheld (employees) (–L) 31,800

Liability for Insurance Premiums Withheld (employees) (–L) 795
FICA Taxes Payable (employees) (–L) 11,925
FICA Taxes Payable (employer) (–L) 11,925
Cash (–A) 56,445

Remittance of payroll taxes and deductions for February payroll.

 Exercise 9-4.
Southport Boutiques is a nationwide retailer. Each Christmas season, Southport
Boutiques builds up its inventory to meet the needs of Christmas shoppers. A large
portion of these Christmas sales are on credit. As a result, Southport often collects
cash from the sales several months after Christmas. Assume that on November 1 of
this year, Southport borrowed $5.4 million cash from Wells Fargo Bank to meet short-
term obligations. Southport signed an interest-bearing note and promised to repay the
$5.4 million in six months. The annual interest rate was 8%. All interest will accrue and
be paid when the note is due in six months. Southport’s accounting period ends
December 31.
Required:
1. Provide the journal entry to record the note on November 1, Year 1.
2. Provide any adjusting entry required at the end of the accounting period on
December 31, Year 1.
3. Provide the journal entry to record payment of the note and interest on the
maturity date, April 30, Year 2.

Requirement solution 1

Debit Credit
November 1, Year 1
Cash (+A) 5,400,000

Notes Payable (+L) 5,400,000

Borrowed on 6-month, 8%, notes payable.

Requirement solution 2

December 31, Year 1 (end of the accounting period):

Interest Expense (+E, −SE) ($5,400,000 × 0.08 × 2/12) 72,000

Interest Payable (+L) 72,000

Adjusting entry for 2 months’ accrued interest.

Requirement solution 3
April 30, Year 2 (maturity date):

Notes Payable (−L) 5,400,000

Interest Payable (−L) 72,000
Interest Expense (+E, −SE) ($5,400,000 × 0.08 × 4/12) 144,000
Cash (−A) 5,616,000

Paid note plus interest at maturity.

 Exercise 9-5.
Many businesses borrow money during periods of increased business activity to finance
inventory and accounts receivable. Southport Boutiques is a nationwide retailer. Each
Christmas season, Southport Boutiques builds up its inventory to meet the needs of
Christmas shoppers. A large portion of these Christmas sales are on credit. As a result,
Southport often collects cash from the sales several months after Christmas. Assume that
on November 1 of this year, Southport borrowed $5.4 million cash from Wells Fargo Bank
to meet short-term obligations. Southport signed an interest-bearing note and promised
to repay the $5.4 million in six months. The annual interest rate was 8%. All interest will
accrue and be paid when the note is due in six months. Southport’s accounting period
ends December 31.
Required:
Determine the financial statement effects for each of the following:
(a) the issuance of the note on November 1,
(b) the impact of the adjusting entry at the end of the accounting period, and
(c) payment of the note and interest on April 30, Year 2 (the next year). Indicate
the effects (e.g., cash + or −) using the schedule below.

Date Assets Liabilities Stockholders’ Equity

Requirement solution

Date Assets Liabilities Stockholders’ Equity

November 1, Year 1 Cash + Notes Payable + Not Affected

December 31, Year 1 Not Affected Interest Payable + Interest Expense −

Notes Payable −
April 30, Year 2 Cash − Interest Expense −
Interest Payable −
 Exercise 9-6.

Audio Solution, Inc. designs, markets, and distributes audio and gaming
headphones, earbuds, and speakers. Last year, Audio Solution reported cost
of goods sold of $290 million. This year, cost of goods sold was $320 million.
Accounts payable was $20 million at the end of last year, and $14 million at
the end of this year.
Required:
For this year, compute the average number of days that Audio Solution’s accounts
payable are outstanding.

Solution

Average number of days payables are outstanding = 365 Days ÷ Accounts Payable Turnover

Accounts Payable Turnover Ratio = Cost of Goods Sold ÷ Average Accounts Payable

Average Accounts Payable = (Beginning Balance + Ending balance) ÷ 2

Average number of days payables are outstanding = 365 Days ÷ 20 = 18.25 Days

Accounts Payable Turnover Ratio = $320 million ÷ $16 million = 20.0

Average Accounts Payable = ($20 million + $14 million) ÷ 2 = $16 million

 Exercise 9-8.

Outerwear Inc., is one of the world’s most popular outdoor apparel companies.
Assume that Outerwear, Inc. borrows $1.5 million from First National Bank and signs
a note promising to pay the $1.5 million back in nine months, at which time
Outerwear will also pay any accrued interest. The interest rate on the note is 10%.
Required:
1. Prepare the journal entry Outerwear will record when it signs the note and
receives the cash.
2. Prepare the journal entry that Outerwear will record when it pays off the note
and any accrued interest after nine months.

Requirement solution 1

Debit Credit

Cash (+A) 1,500,000

Notes Payable (+L) 1,500,000

Signed a nine-month note with an interest rate of 10%

Requirement solution 2
Interest on note = $1,500,000 x 0.10 x 9/12 = $112,500

Interest Expense (+E, −SE) 112,500

Notes Payable (−L) 1,500,000
Cash (−A) 1,612,500

Paid off note plus nine months of accrued interest

 Exercise 9-21.

The following information pertains to the Holmes Corporation.

Year 1 Year 2

Income taxes payable $223,750 $259,550

Increase in deferred tax liability 48,330 51,910

Required:
1. For each year, compute income tax expense (assume that no
taxes have been paid).
2. Explain why tax expense is not simply the amount of cash paid
during the year.

Requirement solution 1
Year 1 Year 2

Income taxes payable $223,750 $259,550

Increase in deferred tax liability 48,330 51,910

Income tax expense $272,080 $311,460

Requirement solution 2

Tax expense is based on income reported on the income statement while tax
liability is based on income reported on the tax return. Because different rules
govern the preparation of the two statements, the tax expense and taxes
currently payable are usually different.