Notes payable PDF

Preview

Summary

Intro to Notes payable...

Description

Chapter Review: 11-12 Chapter 11 1. Does a discounted note payable provide credit without interest? Discuss. A discounted note payable does not provide credit without interest. It provides interest by discounting the note proceeds. The discount is said to be the interest and is accounted in the financial statement. It is defined as the difference between the proceeds and the face of the note.

2. Employees are subject to taxes withheld from their paychecks. a. List the federal taxes withheld from most employee paychecks. The federal taxes withheld from most employee paychecks are employee’s federal income taxes, social security and Medicare. b. Give the title of the accounts credited by amounts withheld. The title of the accounts credited by amounts withheld are Employees Federal Income Tax Payable, Social Security Tax Payable and Medicare Tax Payable.

3. Why are deductions from employees’ earnings classified as liabilities for the employer? The deductions from employees’ earnings are classified as liabilities for the employer as they are the amounts owed to others. The examples of the liabilities in this case are federal taxes, state and local income tax and contributions to pension plan.

4. For each of the following payroll-related taxes, indicate whether they generally apply to (a) employees only, (b) employers only, or (c) both employees and employers: 1. Federal income tax Federal income tax applies to employees only. 2. Medicare tax Medicare tax applies to both employees and employers.

3. Social security tax Social security tax applies to both employees and employers. 4. Federal unemployment compensation tax Federal unemployment compensation tax applies to employers only. 5. State unemployment compensation tax State unemployment compensation tax applies to employers only.

5. What are the principal reasons for using a special payroll bank account? The principal reason for using a special payroll bank account is the process of reconciling the bank statements is simplified. This eases the company to give out the payroll. Other than that, using a special payroll bank account prevents theft or misuse since there is control over payroll checks.

6. In a payroll system, what types of input data are referred to as (a) constants and (b) variables? a) In a payroll system, constants are data that remain unchanged from payroll to payroll. The examples of the constant input data include the employee names, social security number, marital status, number of income tax withholding allowance, rates of pay, tax rates and withholding tables. b) In a payroll system, variables are data that change from payroll to payroll. The examples of the variable input data include numbers of hours or days worked for each employee, accrued days of sick leave, vacation credits, total earnings to date and total taxes withheld.

7. To match revenues and expenses properly, should the expense for employee vacation pay be recorded in the period during which the vacation privilege is earned or during the period in which the vacation is taken? Discuss. To match revenues and expenses properly, the expense for employee vacation pay should be recorded in the period during which the vacation privilege is earned or during the period in which the vacation is taken. This is to avoid imbalance in revenues and expenses in the income statement.

8. Explain how a defined contribution pension plan works. A defined contribution pension plan is a plan where both employee and employer contribute to the plan. The company will invest contributions on behalf of the employee during the working years of the employee. The pension of the employee will then depend on the total contributions and the investment returns earned on those contributions.

9. When should the liability associated with a product warranty be recorded? Discuss. The liability associated with a product warranty should be recorded in the period during which the sale of the product is recorded in order to match the revenues and expenses properly.

10. General Motors Corporation reported $2.6 billion of product warranties in the Current Liabilities section of a recent balance sheet. How would costs of repairing a defective product be recorded? The costs of repairing a defective product should be recorded by debiting Product Warranty Payable and crediting Cash or Supplies.

Chapter 12 1. What are the main advantages of (a) proprietorships, (b) partnerships, and (c) limited liability companies? a) The main advantage of proprietorship is the ease of formation. The proprietorship is also a nontaxable entity. b) The partnership is a nontaxable entity that has moderate complexity of formation. Another advantage is partnership has expanded owner expertise and capital. c) The main advantage of limited liability companies is they have expanded access to capital. It is also a nontaxable entity that is moderate complexity of formation. There is a limited liability to owners.

2. What are the disadvantages of a partnership over a limited liability company form of organization for a profit-making business? The disadvantage of a partnership over a limited liability company form of organization for a profit-making business is partnership has a limited life. Each partner has unlimited liability and only one partner can bind the partnership to contracts. Another disadvantage is raising large amounts of capital is more difficult for a partnership than a limited liability company.

3. Emilio Alvarez and Graciela Zavala joined together to form a partnership. Is it possible for them to lose a greater amount than the amount of their investment in the partnership? Explain. Yes, it is possible for Emilio Alvarez and Graciela Zavala to lose a greater amount than the amount of their investment in the partnership. This is because there is unlimited liability of each partner for partnership debts. Therefore, a particular partner may actually lose a greater amount than his or her capital balance. The division of loses among the partners is made according to their agreement.

4. What are the major features of a partnership agreement for a partnership or an operating agreement for a limited liability company? The major feature of a partnership agreement for a partnership or an operating agreement for a limited liability company is it established income-sharing ratio among partners. This includes the amounts to be invested as well as the admission and withdrawal of partners.

Another feature of operating agreement for a limited liability company is it will specify if the company is owner-managed or manager-managed.

5. Josiah Barlow, Patty DuMont, and Owen Maholic are contemplating the formation of a partnership. According to the partnership agreement, Barlow is to invest $60,000 and devote one-half time, DuMont is to invest $40,000 and devote three-fourths time, and Maholic is to make no investment and devote full time. Would Maholic be correct in assuming that since he is not contributing any assets to the firm, he is risking nothing? Explain. No, although he is not contributing any assets to the firm, he still has to bear his share of losses. In the case of division of net income or net loss, his share would be one-third even without any agreement. If one partner is unable to bear the share of the losses, Maholic has to bear more than one-third of losses due to unlimited liability of each partner.

6. During the current year, Marsha Engles withdrew $4,000 monthly from the partnership of Engles and Cox Water Management Consultants. Is it possible that her share of partnership net income for the current year might be more or less than $48,000? Explain. Yes, her share of partnership net income for the current year might be more or less than $48,000. This is because the amount of the withdrawals by the partners will not affected the net income as the net income in partnership is divided according to the incomesharing ratio.

7. a. What accounts are debited and credited to record a partner’s cash withdrawal in lieu of salary? To record a partner’s cash withdrawal in lieu of salary, the partner’s drawing account is debited and the cash is credited. b. The articles of partnership provide for a salary allowance of $6,000 per month to partner C. If C withdrew only $4,000 per month, would this affect the division of the partnership net income? Explain. No, this will not affect the division of the partnership net income as the salary allowance to partners and the division of net income are separate. Therefore, the amount of salary allowance does not affect the amount of the other.

c. At the end of the fiscal year, what accounts are debited and credited to record the division of net income among partners? At the end of the fiscal year, income summary account for the amount of the net income is debited and the partners’ capital accounts for their respective shares of the net income is credited to record the division of net income among partners.

8. Explain the difference between the admission of a new partner to a partnership (a) by purchase of an interest from another partner and (b) by contribution of assets to the partnership. a) By purchase of an interest, the capital interest of the new partner is obtained from the old partner and neither the total assets nor the total equality of the partnership is affected. b) By contribution of assets to the partnership which can be known as investment, both the total assets and the total equity of the partnership are increased.

9. Why is it important to state all partnership assets in terms of current prices at the time of the admission of a new partner? It is important to state all partnership assets in terms of current prices at the time of the admission of a new partner because failure to do so might result in participation on by the new partner in gains or losses attributable to the period prior to admission to the partnership.

10. Why might a partnership pay a bonus to a newly admitted partner? A partnership might pay a bonus to a newly admitted partner as he or she is expected to improve the fortunes of the partnership, so he or she is given equity in excess of the amount invested to join the partnership.

EX 11-2 Entries for notes payable Cosimo Enterprises issues a $260,000, 45-day, 5% note to Dixon Industries for merchandise inventory. a. Journalize Cosimo Enterprises’ entries to record: 1. the issuance of the note. 2. the payment of the note at maturity.

b. Journalize Dixon Industries’ entries to record: 1. the receipt of the note. 2. the receipt of the payment of the note at maturity....