Chapter 9, Problem 18P

To determine

Prepare the journal entries in the books of Corporation SC for the year 2016.

Explanation of Solution

Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.

Discount on notes payable: This is the value that arises when the note is issued at less than par value. The discount which is the interest value is included in the face value of note, and is recording as contra-liability to Notes Payable account with a normal debit balance.

Warranty:

Warranty is a written guarantee that is given by the seller to the buyer for the product against product’s defect.

Income tax:

Income tax is the compulsory contribution made by the individuals and companies for the benefits that are received from the government. This income tax will be paid on the amount that is earned by the individual or company.

Bonus:

Bonus is an extra payment given by the employer to the employees with the regular salary to increase the company earnings.

Payroll tax:

Payroll tax refers to the tax that are equally contributed by employees and employer based on the salary and wages of an employee. Payroll tax includes taxes like federal tax, local income tax, state tax, social security tax and federal and state unemployment tax.

Prepare the journal entries in the books of Corporation SC for the month November.

Date	Account titles and explanation	Debit ($)	Credit ($)
November 1, 2016	Cash	38,800
	Discount on notes payable $\left(\$40,000\times 0.12\times \frac{3}{12}\right)$	1,200
	Notes Payable		40,000
	(To record the amount borrowed by issuing 90-days, non-interest bearing note)
November 9, 2016	Accounts receivable	500,000
	Sales $\left(100\times \$5,000\right)$		500,000
	(To record the sale of 100 computers on credit)
November 9, 2016	Warranty expense $\left(100\times \$125\right)$	12,500
	Estimated warranty liability		12,500
	(To record the estimated warranty liability)
November 12, 2016	Accounts receivable	30,000
	Sales $\left(100\times \$300\right)$		30,000
	(To record the sale of 100 software packages on credit)
November 12, 2016	Inventory of premiums	400
	Accounts payable $\left(80\times \$5\right)$		400
	(To record the purchase of 80 USB drives on credit)
November 12, 2016	Premium expense $\left(100\times 0.80\times \$5\right)$	400
	Estimated premium liability		400
	(To record estimated premium liability)
November 20, 2016	Estimated warranty liability	2,900
	Cash		2,900
	(To record payment of estimated premium liability)
November 30, 2016	Salaries expenses	14,400
	Liabilities for compensated     absences (1)		14,400
	(To record the liability of compensated absences for the month of November)
November 30, 2016	Salaries expenses	432,000
	Federal income taxes withholding     payable $\left(0.20\times \$432,000\right)$		86,400
	F.I.C.A taxes payable $\left(0.08\times \$432,000\right)$		34,560
	Cash (Balancing figure)		311,040
	(To record salaries expenses and employees withholding items)
November 30, 2016	Payroll tax expenses	34,560
	F.I.C.A taxes payable $\left(0.08\times \$432,000\right)$		34,560
	(To record the employer payroll taxes)

Table (1)

Working note (1):

Determine the liability for compensated absences for the month of November.

$\begin{array}{c}\text{Liability for compensated absences = }\left[\begin{array}{l}\text{Number of employees }\times \text{Average salary}\\ \text{paid for each employess by Corporation S}\\ \text{per day}\times \text{12days paid vacation per year}\times \\ \text{vacation leave paid monthly}\end{array}\right]\\ =\left[90\times \text{\$160}\times \text{12}\times \frac{1}{12}\right]\\ =14,400\end{array}$

Prepare the journal entries in the books of Corporation SC for the month December.

Date	Account titles and explanation	Debit ()	Credit()
December 14, 2016	Estimated premium liability $\left(20\times \$5\right)$	100
	Inventory of premiums		100
	(To record the 20 proof of purchase were returned from the November 12 sale)
December 29, 2016	Loss from accident	1,500
	Estimated liability from lawsuit		1,500
	To record the estimated liability and accrue of loss)
December 31, 2016	Salaries expenses	14,400
	Liabilities for compensated     absences		14,400
	(To record the liability of compensated absences for the month of December)
December 31, 2016	Salaries expenses $\left(\$435,000-\$6,800-\$3,200\right)$	425,000
	Liability for compensated absences $\left(\$6,800+\$3,200\right)$	10,000
	Federal income taxes withholding     payable $\left(0.20\times \$435,000\right)$		87,000
	F.I.C.A taxes payable     $\left(0.08\times \$435,000\right)$		34,800
	Cash		313,200
	(To record salaries expenses and employees withholding items)
December 31, 2016	Payroll tax expenses	34,800
	F.I.C.A taxes payable     $\left(0.08\times \$435,000\right)$		34,800
	(To record the employer payroll taxes)
December 31, 2016	Salaries expenses(Officer’s bonus)	36,000
	Bonus payable (2)		36,000
	(To record the bonus payable to the president for the year 2016)
December 31, 2016	Income tax expenses (3)	157,200
	Income taxes payable		157,200
	(To recognize the income tax expenses of the year 2016)
December 31, 2016	Interest expenses	800
	Discount on notes payable     $\left(\frac{2}{3}\times \$1,200\right)$		800
	(To recognize the interest expenses for 2 months)

Table (2)

Working note (2):

Calculate the amount of president bonus for 2016.

$\begin{array}{c}\begin{array}{l}\text{President's bonus for}\\ \text{the year 2016 }\end{array}\}\text{=}\left[\begin{array}{l}\text{ Profit of Corporation S before}\\ \text{income taxes and bonus }-\\ \text{Bonus applicable only to the}\\ \text{profits above \$200,000}\end{array}\right]\times \text{Percentage of bonus}\\ \text{=}\left[\text{\$560,000}-\$200,000\right]\times 10\%\\ \text{=\$36,000}\end{array}$

Working note (3):

Calculate the income tax expense Corporation SC for the year 2016.

$\begin{array}{c}\begin{array}{l}\text{Corporation SC income tax}\\ \text{expenses of the year 2016}\end{array}\}=\left[\begin{array}{l}\text{Profit of Corporation S’s}\text{before allowing}\\ \text{bonus}-\text{Bonus payable for president}\end{array}\right]\times \text{Tax rate}\\ \text{=}\left[\text{\$560,000}-\$36,000\right]\times 30\%\\ =\$157,200\end{array}$