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Chapter 11 Current Liabilities and Payroll
Demonstration Problems © 2016 Pearson Education, Inc.
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© 2016 Pearson Education, Inc.
Demonstration of E11-15 Consider the following note payable transactions of Cadmium Manufacturing Company. 2015 Mar. 1 Purchased equipment costing $30,000 by issuing a one-year, 8% note payable. Dec. 31 Accrued interest on the note payable. 2016 Paid the note payable plus interest at maturity. Requirements Journalize the transactions for the company. © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-15 Mar. 1 Purchased equipment costing $30,000 by issuing a one-year, 8% note payable. Date Accounts and Explanation Debit Credit 2015 Mar. 1 Equipment 30,000 Notes Payable To purchase equipment in exchange for one year, 8% note. © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-15 Dec. 31 Accrued interest on the note payable. Date Accounts and Explanation Debit Credit 2015 Dec. 31 Interest Expense ﴾$30,000 × 0.08 × 10/12﴿ 2,000 Interest Payable To accrue interest expense at year-end. © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-15 Mar. 1, Paid the note payable plus interest at maturity. Date Accounts and Explanation Debit Credit 2016 Mar. 1 Notes Payable 30,000 Interest Expense ($30,000 × 0.08 × 2/12) 400 Interest Payable 2,000 Cash 32,400 To pay note and interest at maturity. © 2016 Pearson Education, Inc.
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© 2016 Pearson Education, Inc.
Demonstration of E11-22 Lobo Industries completed the following transactions during 2016: Sep. 1 Made sales of $20,000. Mr Lobo estimates that warranty expense is 5% of sales. (Record only the warranty expense.) 20 Paid $250 to satisfy warranty claims. Dec. 31 Estimated vacation benefits expense to be $2,000 Mr Lobo expected to pay its employees a 1% bonus on net income after deducting the bonus. Net income for the year is $35,000. Requirements Journalize the transactions (explanations are not required). © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-22 Sep. 1 Made sales of $20,000. Mr Lobo estimates that warranty expense is 5% of sales. (Record only the warranty expense.) Date Accounts and Explanation Debit Credit 2016 Sep. 1 Warranty Expense (5% × $20,000) 1,000 Estimated Warranty Payable © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-22 Sep. 20 Paid $250 to satisfy warranty claims. Date Accounts and Explanation Debit Credit 2016 Sep. 20 Estimated Warranty Payable 250 Cash © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-22 Dec. 31 Estimated vacation benefits expense to be $2,000. Date Accounts and Explanation Debit Credit 2016 Dec. 31 Vacation Benefits Expense 2,000 Vacation Benefits Payable © 2016 Pearson Education, Inc.
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Accounts and Explanation
Demonstration of E11-22 Dec. 31 Mr Lobo expected to pay its employees a 1% bonus on net income after deducting the bonus. Net income for the year is $35,000. Date Accounts and Explanation Debit Credit 2016 Dec. 31 Employee Bonus Expense ﴾1% × 35,000﴿ / 1.01 347 Employee Bonus Payable 347* *Rounded © 2016 Pearson Education, Inc.
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© 2016 Pearson Education, Inc.
Demonstration of E11-24 The following financial information was obtained from the year ending 2016 income statements for Smith Inc. and Brown Inc.: Smith Brown Net income $ 30,000 $ 75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Requirements 1. Compute the times-interest-earned ratio for each company. 2. Which company was better able to cover its interest expense? © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $30,000 + $10,000 + $500 $500 © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $30,000 + $10,000 + $500 $500 $40,500 © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $30,000 + $10,000 + $500 $500 $40,500 81 © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $75,000 + $28,000 + $3,000 $3,000 . © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $75,000 + $28,000 + $3,000 $3,000 $106,000 . © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 1 Times-interest-earned ratio
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio ═ Net income + Income tax expense + Interest expense Interest expense $75,000 + $28,000 + $3,000 $3,000 $106,000 35 (Rounded) . © 2016 Pearson Education, Inc.
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Demonstration of E11-24-Req. 2
Smith Brown Net income $30,000 $75,000 Income tax expense 10,000 28,000 Interest expense 500 3,000 Times-interest-earned ratio 81 35 Smith is better able to cover its interest expense. . © 2016 Pearson Education, Inc.
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© 2016 Pearson Education, Inc.
End of Chapter 11 © 2016 Pearson Education, Inc.
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