Chapter 11, Problem 11.2COP

Recording Daily and Adjusting Entries, and Preparing and Evaluating Financial Statements (Part A: Chapters 3, 4, 6, 7, 8, 9, 10, and 11; Part B: Chapter 11 Supplement B; Part C: Appendix C)

One Product Corp. (OPC) incorporated at the beginning of last year. The balances on its post-closing trial balance prepared on December 31, at the end of its first year of operations, were:

The following information is relevant to the first month of operations in the following year:

• OPC sell its inventory at $150 per unit, plus sales tax of 6%. OPC’s January 1 inventory balance consists of 180 units at a total cost of $12,060. OPC’s policy is to use the FIFO method, recorded using a perpetual inventory system.
• The $1,600 in Prepaid Rent relates to a payment made in December for January rent this year.
• The equipment was purchased on July 1 of last year. It has a residual value of $1,000 and an expected life of five years. It is being depreciated using the straight-line method.
• Employee wages are $4,000 per month. Employees are paid on the 16th for the first half of the month and on the First day of the following month for the second half of each month. Withholdings each pay period include $250 of income taxes and $150 of FICA taxes. These withholdings and the employer’s matching contribution are paid monthly on the second day of the following month. In addition, unemployment laxes of $50 are accrued each pay period, and will be paid on March 31.
• Unearned Revenue is for 30 units ordered and paid for in advance by two customers in late December. One order of 25 units is to be filled in January, and the other will be filled in February.
• Note Payable arises from a three-year, 9 percent bank loan received on October 1 last year.
• The par value on the common stock is $2 per share.
• Treasury Stock arises from the reacquisition of 500 shares at a cost of $8 per share.

January Transactions

1. 1. On 1/01, OPC paid employees’ salaries and wages that were previously accrued on December 31.
2. 2. A truck is purchased on 1/02 for $10,000 cash. It is estimated this vehicle will be used for 50,000 miles, after which it will have no residual value.
3. 3. Payroll withholdings and employer contributions for December are remitted on 1/03.
4. 4. OPC declares a $0.50 cash dividend on each share of common stock on 1/04, to be paid on 1/10.
5. 5. A $950 customer account is written off as uncollectible on 1/05.
6. 6. On 1/06, recorded sales of 175 units of inventory on account. Sales tax is charged but not yet collected or remitted to the state.
7. 7. Sales taxes of $500 that had been collected and recorded in December are paid to the state on 1/07.
8. 8. On 1/08, OPC issued 300 shares of treasury stock for $2,400.
9. 9. Collections from customers on account, totaling $8,500, are recorded on 1/09.
10. 10. On 1/10, OPC distributes the $0.50 cash dividend declared on January 4. The company’s stock price is currently $5 per share.
11. 11. OPC purchases on account and receives 70 units of inventory on 1/11 for $4,410.
12. 12. The equipment purchased last year for $25,000 is sold on 1/15 for $23,000 cash. Record depreciation for the first half of January prior to recording the equipment disposal.
13. 13. Payroll for January 1–15 is recorded and paid on 1/16. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
14. 14. Having sold the equipment, OPC pays off the note payable in full on 1/17. The amount paid is $22,585, which includes interest accrued in December and an additional $90 interest through January 17.
15. 15. On 1/27, OPC records sales of 30 units of inventory on account. Sales tax is charged but not yet collected or remitted.
16. 16. A portion of the advance order from December (25 units) is delivered on 1/29. No sales tax is collected on this transaction because the customer is a United States governmental organization that is exempt from sales tax.
17. 17. To obtain funds for purchasing new equipment, OPC issued bonds on 1/30 with a total face value of $90,000, stated interest rate of 5 percent, annual compounding, and six-year maturity date. OPC received $81,420 from the bond issuance, which implies a market interest rate of 7 percent.
18. 18. 18. On 1/31, OPC records units-of-production depreciation on the vehicle (truck), which was driven 1,900 miles this month.
19. 19. OPC estimates that 2% of the ending accounts receivable balance will be uncollectible. Adjust the applicable accounts on 1/31, using the allowance method.
20. 20. On 1/31, adjust for January rent expired.
21. 21. Accrue January 31 payroll on 1/31, which will be payable on February 1. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
22. 22. Accrue OPC’s corporate income taxes on 1/31, estimated to be $3,750.

Required:

Part A

1. 1. Prepare all January journal entries and adjusting entries for items (1)–(22).
2. 2. If you are completing this problem manually, set up T-accounts using the December 31 balances as the beginning balances, post the journal entries from requirement 1, and prepare an unadjusted trial balance at January 31. If you are completing this problem in Connect using the general ledger tool, this requirement will be completed using your previous answers.
3. 3. Prepare an income statement, statement of stockholders’ equity, and classified balance sheet at the end of January.
4. 4. What was OPC’s total payroll cost for January?
5. 5. Will the carrying value of the bond increase or decrease after recording interest in February?
6. 6. What is the interest payment OPC will need to pay annually on the bond?
7. 7. What was the gain or loss was recognized on the issuance of Treasury Stock on Jan. 8?

  Part B (Chapter 11 Supplement B)

1. 8. Rather than distribute a cash dividend in January, OPC considered issuing a 30% stock dividend on common stock. What journal entry would OPC record had a 30% stock dividend been issued?
2. 9. What journal entry would OPC record had a 10% stock dividend been issued?

  Part C (Appendix C)

1. 10. Show how the total bond issuance proceeds of $81,420 were determined in item 17 by calculating the present value of (a) the $90,000 face value and (b) the annual interest payments.
2. 11. Rather than issue bonds to obtain cash for purchasing new equipment, OPC could have saved up and invested cash over several years. If OPC can earn 7 percent interest compounded annually, what single lump sum would it have to invest now to reach $98,000 in three years?
3. 12. Instead of investing one large amount of cash, OPC could invest equal amounts over the next three years. If OPC can earn 7 percent interest compounded annually, how much cash would OPC need to invest equally at the end of each of the next three years to have saved $98,000?

To determine

To prepare: The necessary journal entries and adjusting entries of Company O.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Journal entries of Company O for the given transaction are as follows:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
1.	Salaries and wages payable		1,600
	Cash			1,600
	(To record accrued salaries and wages paid to employees)
2.	Vehicles		10,000
	Cash			10,000
	(To record the vehicles purchased in cash)
3.	Withheld income taxes payable		500
	FICA payable		600
	Cash			1,100
	(To record payroll withholdings and employer contribution)
4.	Dividends(2)		3,075
	Dividends payable			3,075
	(To record the dividends declared by board of directors)
5.	Allowance for doubtful accounts		950
	Accounts receivable			950
	(To record uncollectable amounts written off)
6.	Accounts receivables		27,825
	Sales revenue(3)			26,250
	Sales tax payable(4)			1,575
	(To record sales made on account and sales tax charged)
	Cost of goods sold(5)		11,725
	Inventory			11,725
	(To record the amount of inventory written off against the cost of goods sold)
7.	Sales tax payable		500
	Cash			500
	(To record sales tax collected from customer)
8.	Cash		2,400
	Treasury stock			2,400
	(To record the 300 treasury stock purchased at $8 each)
9.	Cash		8,500
	Accounts receivable			8,500
	(To record the cash received from the customer)
10.	Dividends payable		3,075
	Cash			3,075
	(To record the dividends paid to stockholders)
11.	Inventory		4,410
	Accounts payable			4,410
	(To record the inventory purchased on account)
12.	Depreciation expense(7)		200
	Accumulated depreciation - Equipment			200
	(To record the depreciation expense incurred during year)
	Cash		23,000
	Accumulated depreciation-Equipment(8)		2,600
	Equipment			25,000
	Gain on disposal(9)			600
	(To record sale of equipment and gain from the sales)
13.	Salaries and wages expense		2,000
	Payroll tax expense (10)		200
	Withheld income tax payable			250
	FICA payable (11)			300
	Unemployment tax payable			50
	Cash (12)			1,600
	(To record salaries and wages expense paid during the year)
14.	Notes payable		22,000
	Interest payable		495
	Interest expense		90
	Cash			22,585
	(To record cash paid to creditors along with interest)
15.	Accounts receivable		4,770
	Sales revenue (13)			4,500
	Sales tax payable (14)			270
	(To record sales made on account and sales tax charged)
	Cost of goods sold (15)		1,910
	Inventory			1,910
	(To record the amount of inventory written off against the cost of goods sold)
16.	Unearned revenue		3,750
	Sales revenue (16)			3,750
	(To record the sales revenue recognized during the year)
	Cost of goods sold (17)		1,575
	Inventory			1,575
	(To record the amount of inventory written off against the cost of goods sold)
17.	Cash		81,420
	Discount on bonds payable		8,580
	Bonds payable			90,000
	(To record the cash borrowed against the bonds)
18.	Depreciation expense (18)		380
	Accumulated depreciation-Vehicles			380
	(To record the depreciation expense incurred during the year)
19.	Bad debt expense(19)		693
	Allowance for doubtful accounts			693
	(To record the bad debt expense incurred during the year)
20.	Rent expense		1,600
	Prepaid rent			1,600
	(To record the rent expense incurred during the year)
21.	Salaries and wages expense		2,000
	Payroll tax expense (10)		200
	Withheld income tax payable			250
	FICA payable (11)			300
	Unemployment tax payable			50
	Salaries and wages payable			1,600
	(To record accrued salaries and wages expense during the year)
22.	Income tax expense		3,750
	Income tax payable			3,750
	(To record the income tax expense incurred during the current year)

Table (1)

Working note:

Calculate the number of outstanding share

$\begin{array}{c}\begin{array}{l}\text{Number of }\\ \text{outstanding shares }\end{array}\}\text{= }\left[\left(\frac{\text{Total common stock}}{\text{Par value per share}}\right)-\text{Treasury share purchased}\right]\\ =\left[\frac{\$13,300}{2}\right]-500\text{ shares}\\ \text{=6,650 shares}-500\text{ shares}\\ =6,150\text{ shares}\end{array}$ (1)

Calculate the amount of dividends:

Here,

Number of outstanding shares is 6,150 shares (1)

Dividends per share is $0.50

$\begin{array}{c}\text{Dividends = Number of outstanding share}\times \text{Cash dividends per share}\\ \text{=6,150 shares}\times \text{\$0}\text{.50}\\ \text{=\$3,075}\end{array}$ (2)

Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales revenue = Sales value of inventory per unit}\times \text{Total inventory sold}\\ \text{=\$150 per unit}\times \text{175 units}\\ \text{=\$26,250}\end{array}$ (3)

Calculate the value of sales tax payable

$\begin{array}{c}\text{Sales tax payable = Sales value of invetory}\times \text{Percentage of sales tax}\\ \text{=\$26,250 (3)}\times \frac{6}{100}\\ =\$1,575\end{array}$ (4)

Calculate the cost of goods sold:

Inventory per unit is $67 per unit $\left(\frac{\$12,060}{180\text{ units}}\right)$

Units delivered is 175 units

$\begin{array}{c}\text{Cost of goods sold = Units delivered}\times \text{Inventory cost per unit}\\ \text{=175 units}\times \text{\$67 per units}\\ \text{=\$11,725}\end{array}$ (5)

Calculate the value of annual depreciation expense:

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{Purchase value of equipment }-\text{Residual value}}{\text{Expected life}}\\ =\frac{\$25,000-\$1,000}{5}\\ =\$4,800\text{ per year}\end{array}$ (6)

Calculate the depreciation expense during the current year:

$\begin{array}{c}\begin{array}{l}\text{Current year}\\ \text{ depreciation expense}\end{array}\}\text{ = Annual depreciation expense (6)}\times \left[\frac{\text{Number of months used}}{\text{Total months in a year}}\right]\\ =\$4,800\times \frac{0.5\text{ (half of January month)}}{12}\\ =\$200\end{array}$ (7)

Calculate the value of accumulated depreciation:

$\begin{array}{c}\text{Accumulated depreciation = }\left(\begin{array}{l}\text{Annual depreciation for prior year+}\\ \text{Current year depreciation expense (7)}\end{array}\right)\\ =\$2,400+200\\ =\$2,600\end{array}$ (8)

Calculate the gain from sale of equipment:

$\begin{array}{c}\text{Gain from sale of equipment = }\left[\begin{array}{l}\text{Sales value }-\\ \left(\text{Purchase cost }-\text{ Accumulated depreciation}\right)\end{array}\right]\\ =\$23,000-\left(\$25,000-\$2,600\right)\\ =\$23,000-\$22,400\\ =\$600\end{array}$ (9)

Calculate the amount of payroll tax expense:

$\begin{array}{c}\text{Payroll tax expense = FICA tax+Unemployment tax}\\ \text{=\$150+\$50}\\ \text{=\$200}\end{array}$ (10)

Calculate the value of FICA payable:

$\begin{array}{c}\text{FICA payable = Employee contribution tax + Employer contribution tax}\\ \text{=\$150+\$150}\\ \text{=\$300}\end{array}$ (11)

Calculate the value of cash paid behalf of salaries and wages expenses:

$\begin{array}{c}\text{Amount of cash =}\left(\begin{array}{l}\text{Gross pay}-\text{Withheld income taxes}-\\ \text{FICA employer contribution}\end{array}\right)\\ =\$2,000-\$250-\$150\\ =\$1,600\end{array}$ (12)

Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales revenue = Sales value of inventory per unit}\times \text{Total inventory sold}\\ \text{=\$150 per unit}\times 30\text{ units}\\ \text{=\$4,500}\end{array}$ (13)

Calculate the value of sales tax payable

$\begin{array}{c}\text{Sales tax payable = Sales value of invetory}\times \text{Percentage of sales tax}\\ \text{=\$4,500 (13)}\times \frac{6}{100}\\ =\$270\end{array}$ (14)

Calculate the cost of goods sold:

Inventory per unit for first 5 units is $67 per unit $\left(\frac{\$12,060}{180\text{ units}}\right)$

Inventory per unit for last 25 units is $63 per unit $\left(\frac{\$4,410}{70\text{ units}}\right)$

Units delivered is 30 units

$\begin{array}{c}\text{Cost of goods sold = Units delivered}\times \text{Inventory cost per unit}\\ \text{=}\left(\text{5 units}\times \text{\$67 per unit}\right)+\left(25\text{ units}\times \text{\$63 per unit}\right)\\ =\$335+\$1,575\\ =\$1,910\end{array}$ (15)

Calculate the value of unearned revenue:

$\begin{array}{c}\text{Unearned revenue = Sales price per unit}\times \text{Number of unit}\\ \text{=\$150 per unit}\times \text{25 units}\\ \text{=\$3,750}\end{array}$ (16)

Calculate the cost of goods sold:

Inventory per unit for last 25 units is $63 per unit $\left(\frac{\$4,410}{70\text{ units}}\right)$

Units delivered is 25 units

$\begin{array}{c}\text{Cost of goods sold = Units delivered}\times \text{Inventory cost per unit}\\ \text{=}\left(25\text{ units}\times \text{\$63 per unit}\right)\\ =\$1,575\\ =\$1,575\end{array}$ (17)

Calculate the value of annual depreciation expense:

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\left(\frac{\text{Purchase value of vehicle }-\text{Residual value}}{\text{Total number of miles}}\right)\times \\ \text{Number of miles during the year}\end{array}\right]\\ =\frac{\$10,000-\$0}{50,000\text{ miles}}\times 1,900\text{ miles}\\ =\$380\end{array}$ (18)

Calculate the value of bad debt expenses:

$\begin{array}{c}\text{Bad debt expense = }\left(\begin{array}{l}\text{Accounts receivable (opening)}-\\ \text{Allowances for bad and doubtful debts+}\\ \text{Sales revenue from 175 units}-\\ \text{Cash received from customer+}\\ \text{Sales revenue from 25 units}\end{array}\right)\times \text{Allowances perecentage}\\ =\left(\$8,250-\$950+\$27,825-8,500+\$4,770\right)\times \frac{2}{100}\\ =\$31,395\times \frac{2}{100}\\ =\$628\end{array}$

$\begin{array}{c}\text{Bad debt expense = Bad debts}-\left(\begin{array}{l}\text{Allowances for bad and doubtful debts (opening)}-\\ \text{Allowances for bad and doubtful debts (current)}\end{array}\right)\\ =\$628-\left(\$885-\$950\right)\\ =\$628+\$65\\ =\$693\end{array}$ (19)

To determine

To post: The journal entries to T-accounts and prepare adjusted trial balance of Company O.

Explanation of Solution

T-account:

T-account refers to an individual account, where the increasesor decreases in the value of specific asset, liability, stockholder’s equity, revenue, and expenditure items are recorded.

This account is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.’ An account consists of the three main components which are as follows:

1. (a) The title of the account
2. (b) The left or debit side
3. (c) The right or credit side

Adjusted trial balance:

Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.

T-accounts of company O are as follows:

Cash (A)
Beg.	19,500
		1,600	1
		10,000	2
8	2,400	1,100	3
9	8,500	500	7
12	23,000	3,075	10
17	81,420	1,600	13
		22,585	14
End.	94,360

Accounts receivable (A)
Beg.	8,250
6	27,825	950	5
15	4,770	8,500	9
End.	31,395

Allowance for doubtful accounts (x A)
		885	Beg.
5	950
		693	19
		628	End.

Inventories
Beg.	12,060
		11,725	6
11	4,410	1,910	15
		1,575	16
End.	1,260

Prepaid Rent (A)
Beg.	1,600
		1,600	20
End.	0

Equipment (A)
Beg.	25,000
		25,000	12
End.	0

Vehicles (A)
Beg.	0
2	10,000
End.	10,000

Acc. Depreciation-Equipment (xA)
		2,400	Beg.
12	2,600	200	12
		0	End.

Acc. Depreciation -Vehicle (x A)
		0	Beg.
		380	18
		380	End.

Accounts Payable (L)
		0	Beg.
		4,410	11
		4,410	End.

Sales Tax Payable (L)
		500	Beg.
		1,575	6
7	500	270	15
		1,845	End.

FICA Payable (L)
		600	Beg.
3	600	300	13
		300	21
		600	End.

Withheld Inc. Tax. Pay. (L)
		500	Beg.
3	500	250	13
		250	21
		500	End.

Note Payable (L)
		22,000	Beg.
14	22,000
		0	End.

Interest Payable (L)
		495	Beg.
14	495
		0	End.

Unemployment Tax Pay. (L)
		300	Beg.
		50	13
		50	21
		400	End.

Salaries/Wage Pay. (L)
		1,600	Beg.
1	1,600	1,600	21
		1,600	End.

Unearned Revenue (L)
		4,500 Beg.	Beg.
16	3,750
		750	End.

Income Tax Pay. (L)
		0	Beg.
		3,750	22
		3,750	End.

Dividends Payable (L)
		0	Beg.
10	3,075	3,075
		0	End.

Bonds Payable (L)
		0	Beg.
		90,000	17
		90,000	End.

Discount on Bonds Payable (x L)
Beg.	0
17	8,580
End.	8,580

Dividends (SE)
Beg.
4	3,075
End.	3,075

Common Stock (SE)
		13,300	Beg.
		13,300	End.

APIC-Common (SE)
		19,210	Beg.
		19,210	End.

Retained Earnings (SE)
		4,120	Beg.
		4,120	End.

Treasury Stock (SE)
Beg.	4,000
		2,400	8
End.	1,600

Retained Earnings (SE)
		4,120	Beg.
		4,120	End.

Sales Revenue (R)
		0	Beg.
		26,250	6
		4,500	15
		3,750	16
		34,500	End.

Cost of Goods Sold (E)
Beg.	0
6	11,725
15	1,910
16	1,575
End.	15,210

Depreciation Expense (E)
Beg.	0
12	200
18	380
End.	580

Salaries and Wages  Expense (E)
Beg.	0
13	2,000
21	2,000
End.	4,000

Payroll Tax Expense (E)
Beg.	0
13	200
21	200
End.	400

Rent Expense (E)
Beg.	0
20	1,600
End.	1,600

Interest Expense (E)
Beg.	0
14	90
End.	90

Income Tax Expense (E)
Beg.	0
22	3,750
End.	3,750

Gain on Disposal (R)
		0	Beg.
		600	12
		600	End.

Bad Debt Expense (E)
Beg.	0
19	693
End.	693

Adjusted trial balance of Company O is as follows:

Company O
Adjusted Trial balance
January 31
Account titles	Debit ($)	Credit ($)
Cash	$94,360
Accounts Receivable	31,395
Allowance for Doubtful Accounts		$628
Inventory	1,260
Prepaid Rent	0
Equipment	0
Vehicles	10,000
Accumulated Depreciation—Equipment		0
Accumulated Depreciation—Vehicles		380
Accounts Payable		4,410
Sales Tax Payable		1,845
FICA Payable		600
Withheld Income Taxes Payable		500
Unemployment Taxes Payable		400
Salaries and Wages Payable		1,600
Unearned Revenue		750
Note Payable		0
Interest Payable		0
Income Taxes Payable		3,750
Dividends Payable		0
Bonds Payable		90,000
Discount on Bonds Payable	8,580
Common Stock		13,300
Additional Paid-In Capital, Common		19,210
Treasury Stock	1,600
Retained Earnings		4,120
Dividends	3,075
Sales Revenue		34,500
Cost of Goods Sold	15,210
Salaries and Wages Expense	4,000
Rent Expense	1,600
Bad Debt Expense	693
Depreciation Expense	580
Payroll Tax Expense	400
Interest Expense	90
Income Tax Expense	3,750
Gain on Disposal		600
Totals	$176,593	$176,593

Table (2)

Therefore, the total of debit, and credit columns of adjusted trial balance is $176,593 and agree.

To determine

To prepare: An income statement, statement of stockholders’ equity and classified balance sheet at the end of January.

Explanation of Solution

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Statement of stockholder's equity:

This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and drawings or dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Classified balance sheet:

This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.

Income statement of Company O is as follows:

Company O
Income Statement
For the Month Ended January 31
	$
Sales Revenue	$34,500
Cost of Goods Sold	15,210
Gross Profit	19,290
Salaries and Wages Expense	4,000
Rent Expense	1,600
Bad Debt Expense	693
Depreciation Expense	580
Payroll Tax Expense	400
Loss (Gain) on Disposal	-600
Income from Operations	12,617
Interest Expense	90
Income before Income Tax Expense	12,527
Income Tax Expense	3,750
Net Income	$8,777

Table (3)

Statement of stockholder’s equity of Company O is as follows:

Company O
Statement of Stockholders’ Equity
For the Month Ended January 31
	Common Stock	Additional Paid-In Capital, Common	Retained Earnings	Treasury stock
	$	$	$	$
Beginning	13,300	19,210	4,120	4,000
Stock Issuances	-	-	-	(2,400)
Net Income	-	-	8,777	-
Dividends: Common	-	-	(3,075)	-
Ending	13,300	19,210	9,822	1,600

Table (4)

Classified balance sheet of Company O is as follows:

Company O
Balance Sheet
At January 31
Assets:	$
Current Assets:
Cash	94,360
Accounts Receivable	31,395
Allowance for Doubtful Accounts	(628)
Inventory	1,260
Total Current Assets	126,387
Vehicles	10,000
Accumulated Depreciation	(380)
Total Assets	136,007
Liabilities and Stockholders’ Equity :
Liabilities
Current Liabilities:
Accounts Payable	4,410
Sales Tax Payable	1,845
Salaries and Wages Payable	1,600
FICA Payable	600
Withheld Income Taxes Payable	500
Unemployment Taxes Payable	400
Unearned Revenue	750
Income Taxes Payable	3,750
Total Current Liabilities	13,855
Bonds Payable	90,000
Discount on Bonds Payable	(8,580)
Total Liabilities	95,275
Stockholders’ Equity
Common Stock	13,300
Additional Paid-In Capital, Common Stock	19,210
Retained Earnings	9,822
Treasury Stock	(1,600)
Total Stockholders’ Equity	40,732
Total Liabilities and Stockholders’ Equity	136,007

Table (5)

Therefore, the total assets of Company O are $136,007, and the total liabilities and stockholders’ equity are $136,007.

To determine

To calculate: Company O’s total payroll cost for January.

Explanation of Solution

Payroll tax

The costs incurred by an employer to pay the employee for his labor, including other employee benefits, plus the payroll taxes the employer pays to the government, are called payroll tax.

Company O’s total payroll cost is as follows:

Total payroll cost includes the salaries and wages expense and payroll tax expense.

Therefore, the total payroll cost is $4,400 (20).

Working note:

Calculate the value of total payroll cost:

$\begin{array}{c}\text{Total payroll cost = Salaries and wages expense+Payroll tax expense}\\ \text{=\$4,000+\$400}\\ \text{=\$4,400}\end{array}$ (20)

To determine

To explain: Whether the carrying value of bond is increased or decreased after recording the February month interest.

Explanation of Solution

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Whether the carrying value of bond is increased or decreased after recording the February month interest as follows:

The carrying value of the bond is increased after recording the February month interest because the interest expense of bond will be greater than the interest payment. The difference between the interest expense and interest payment is recorded as a Discount on bonds payable and it is contra-liability account. Hence, the contra-liability account is increased the carrying value of bond which is reported on the balance sheet.

To determine

To calculate: The amount of interest payment which is needed to pay annually on the bond.

Explanation of Solution

Bonds

Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.

Interest:

Interest is the amount charged on the principal value, for the privilege of borrowing money. Interest is to be paid by the borrower, and to be received by the lender.

Calculate the amount of interest payment as follows:

Here,

Face value of bond is$90,000

Interest rate is 5%

Length of time is 1 year (12monts)

$\begin{array}{c}\text{Interest payament = Face value of bond}\times \text{Interest rate}\times \text{Time period}\\ \text{=\$90,000}\times \frac{5}{10}\times \frac{12}{12}\\ =\$4,500\end{array}$

Therefore, the interest payment of bond (annually) is $4,500.

To determine

The recognized gain or loss on the issuance of treasury stock on January 8.

Explanation of Solution

Treasury Stock:

It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

The recognized gain or loss on the issuance of treasury stock on January 8 as follows:

In this case, no gain or losses are reported on the balance sheet for issued treasury stock. Treasury stock is shown under the stockholder’s equity on the balance sheet as a contra entry. The gain or loss on the reissuance of treasury stock is recorded under the additional paid-in capital, the reissuance are not reported in the income statement because they are not considered as profit-making activities.

To determine

To prepare: The journal entry for stock dividends.

Explanation of Solution

Stock Dividend:

Stock dividend refers to the dividends that are paid in the form of additional shares to stockholders rather than the cash.

The journal entry for stock dividends is as follows:

If the 30% of stock dividends would be considered as a larger stock dividend:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Retained earnings (-SE) (21)		3,690
	Common stock (+SE)			3,690
	(To record stock dividend paid to stockholder’s)

Table (6)

• Retained earnings are a component of stockholder’s equity and it decreased the value of stockholder’s equity by $3,690. Hence, debit the retained earnings accounts for $3,690.
• Common stock is component of stockholder’s equity and it increased the value of stockholder’s equity by $3,690. Hence, credit the common stock accounts for $3,690.

Working note:

Calculate the amount of stock dividends:

$\begin{array}{c}\text{Stock dividends = }\left(\begin{array}{l}\text{Outstanding common shares}\times \text{Par value per share}\\ \times \text{Percentage of stock dividends}\end{array}\right)\\ =6,150\text{ shares}\times \text{\$2}\times \frac{30}{100}\\ =\$3,690\end{array}$ (21)

To determine

To prepare: The journal entry for stock dividends.

Explanation of Solution

Stock Dividend:

Stock dividend refers to the dividends that are paid in the form of additional shares to stockholders rather than the cash.

The journal entry for stock dividends is as follows:

If the 10% of stock dividends would be considered as a small stock dividend:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Retained earnings (-SE) (22)		3,075
	Common stock (+SE)(23)			1,230
	Addition paid in capital			1,845
	(To record stock dividend paid to stockholder’s)

Table (7)

• Retained earnings are a component of stockholder’s equity and it decreased the value of stockholder’s equity by $3,075. Hence, debit the retained earnings accounts for $3,075.
• Common stock is component of stockholder’s equity and it increased the value of stockholder’s equity by $1,230. Hence, credit the common stock accounts for $1,230.
• Additional paid in capital is component of stockholder’s equity and it increased the value of stockholder’s equity by $1,845. Hence, credit the additional paid in capital accounts for $1,845.

Working note:

Calculate the amount of stock dividends utilized from retained earnings:

$\begin{array}{c}\text{Stock dividends = }\left(\begin{array}{l}\text{Outstanding common shares}\times \text{Stock per share}\\ \times \text{Percentage of stock dividends}\end{array}\right)\\ =6,150\text{ shares}\times \text{\$5}\times \frac{10}{100}\\ =\$3,075\end{array}$ (22)

Working note:

Calculate the amount of stock dividends transfer to common stock:

$\begin{array}{c}\text{Stock dividends = }\left(\begin{array}{l}\text{Outstanding common shares}\times \text{Stock per share}\\ \times \text{Percentage of stock dividends}\end{array}\right)\\ =6,150\text{ shares}\times \text{\$2}\times \frac{10}{100}\\ =\$1,230\end{array}$ (23)

To determine

To calculate: The amount of present value (a) face value of investment and (b) the annual interest payment.

Explanation of Solution

Present value:

Present value refers to the present worth of the money that is received in future in a lump sum or as series of cash flows at a specified interest rate. When these future sums of money are discounted at a higher rate, the present value of the future cash flows gets lower.

(a) Face value of bond:

Particulars	Amount ($)
Face value of bond (a)	$90,000
PV factor at an annual market rate of 7% for 6 periods (b)	0.66634
Present value of face value of principal $\left(\text{a}\right)\text{×}\left(\text{b}\right)$	$59,971

Table (8)

Therefore, the present value of principle amount of bond is $59,971.

(a) Annual interest payment:

Particulars	Amount ($)
Interest payments amount (a)(24)	$4,500
PV factor at an annual market rate of 7% for 6 periods (b)	4.76654
Present value of interest payments $\left(\text{a}\right)\text{×}\left(\text{b}\right)$	$21,449

Table (9)

Therefore, the interest payment of bond is $21,449.

Working note:

Calculate the amount of annual interest payment:

$\begin{array}{c}\text{Interest payament = Face value of bond}\times \text{Interest rate}\times \text{Time period}\\ \text{=\$90,000}\times \frac{5}{10}\times \frac{12}{12}\\ =\$4,500\end{array}$ (24)

To determine

To calculate: The present value of investment to reach $98,000 in three years, if Company O earns 7% interest compounded annually.

Explanation of Solution

Present value:

Present value refers to the present worth of the money that is received in future in a lump sum or as series of cash flows at a specified interest rate. When these future sums of money are discounted at a higher rate, the present value of the future cash flows gets lower.

Present value of given investment is as follows:

Particulars	Amount ($)
Face value of investment (a)	$98,000
Present factor of 7% for 3 periods (b)	0.81630
Present value of investment $\left(\text{a}\right)\text{×}\left(\text{b}\right)$	$79,997

Table (10)

Therefore, the present value of investment is $79,997.

To determine

To calculate: The future value of investment to reach $98,000 in three years if Company O earns 7% interest compounded annually.

Explanation of Solution

Future amount of single sum:

The future amount of single sum is the sum of original amount and compound interest earned on the amount till a particular future date.

Future value of given investment is as follows:

Particulars	Amount ($)
Face value of investment (a)	$98,000
Future annuity of 7% for 3 periods (b)	3.21490
Future value of single sum annually $\left(\frac{\left(\text{a}\right)}{\left(\text{b}\right)}\right)$	$30,483

Table (11)

Therefore, the future value of single sum of investment annually is $30,483 per year.