CHAPTER 22

1 CHAPTER 22 Liabilities entries for various journal entries for employee Provision for warranty claim Finance of an asset purchase by mortgage Comparative ratios for analysing liabilities and comparing different 22: LIABILITIES WILEY Mad Prices Ltd completed the following selected transactions during 2002 and financial year for the company ends on 30 June. Required: Show how the above transactions, including any necessary adjusting entries on 30 June2003, would be recorded in the general and cash journals of the company. office furniture and equipment from Office Supplies Ltd for $9600, and issued a 9%, 90-day promissory note for the purchase price plus Office Supplies Ltd 50% of the amount due on the 4 August promissory note. Accepted a new 10%, 30-day bill of exchange to cover the balance owing on the original an invoice dated 1 October from Office Renovations for $25 000 for work performed in the company s administration building.

2 A 2% discount is offered for payment within 15 Office Supplies Ltd for the 15 September Office Renovations the amount owing on 1 October at a discount rate of 9% its own $120 000, 30-day commercial bill of exchange, accepted by the Australia the Australia Bank the amount to Queen s Electrics Ltd a 9%, 90-day promissory note for $30 000 in settlement of account at a discount rate of 10% its own $120 000, 60-day bill made out to the Australia company decided to provide $5000 to cover the costs of damages associated with an accident which occurred to one of its customers while shopping in a store. Legal proceedings are in company became aware that one of its manufacturing plants had caused environmental damages to a suburban creek. Investigations revealed that the company would be legally obliged to clean up the creek at a cost of some $14 the Australia Bank the amount the amount due for the note issued on 1 May PROBLEMSP roblem entries for various 22: LIABILITIES WILEY MAD PRICES LTDG eneral journal 2002 Furniture & Equipment9 Payable - Office Supplies Ltd 9 record purchase of furniture & Payable - Office Supplies Ltd9 Payable9 record 90 day bill at 9% and interest.

3 (Interest = 9 600 90/365)Sept. 15 Bills Payable9 Unexpired Payable - Office Supplies Ltd 9 write back 45 day bill unpaid and 15 Interest Office Supplies To record interest expense to renewal of bill.(9 600 42/365 = $ ) Accounts Payable - Office Supplies Ltd4 Payable5 record new 30 day bill at 10 % for balance owing.(Owing $9 (9 2) = $4 Interest 4 30/365 = )Oct. 1 Building Improvements25 000 Office Renovations25 000To record cost of renovationsNov. 1 Unexpired record interest charge on 30 day bill at 9%(Interest = 120 000 30/365.)Dec 1 Interest Interest record interest expense on 30 day bill. 2003 May 1 Accounts Payable - Queen s Electrics Ltd30 Payable30 record 90 day bill at 9% plus interest.

4 (Interest = 30 000 90/365)May 31 Unexpired Interest1 Bills Payable1 record interest charge on 60 day bill at 10%.(Interest = 120 000 60/365)Damages in Lawsuit5 for Damages in Lawsuit5 provide for legal costs in 22: LIABILITIES WILEY June 30 Environmental Damages Expense14 for Environmental Damages14 provide for cost of environmental To record interest expense on 90 day bill to 30 To record interest expense on 60 day commercial bill to 30 31 Interest Unexpired To record expired interest expense on 30 day 31 Interest Expense Unexpired Interest record expired interest expense on 30 day bill. Cash Receipts journal (extract) DebitsCreditsDateAccounts Credited Cash atBankDiscountAllowedAccountsReceivable OtherAccounts 2002 Nov.

5 12003 May 31 Bills PayableBills Payable119 Cash Payments journal (extract) DebitsCreditsDateAccounts DebitedChNoOtherAccountsAccountsPayableC ash atBankDiscount Received2002 Sept. 15 Oct. 15 Dec. 1 2003 July 30 Office Supplies LtdBills PayableOffice RenovationsBills Payable Bills Payable Bills Payable4 000. 004 22: LIABILITIES WILEY Lagoon Ltd provided the following account balances as they appeared in the ledger on31 May 2000:The following transactions occurred during June and July: Required: Prepare journal entries to record the above transactions.( continued ) Provision for Annual LeaveProvision for Sick LeaveProvision for Long-Service LeaveCommissioner of TaxationSuperannuation FundMedical Insurance PayableCharity Contributions Payable$16 522 Cr6 400 Cr52 450 Cr13 215 Cr3 800 Cr1 890 Cr160 CrJuneJuly143030518282831 Paid workers compensation premium for year to 30 June 2001, $22 cheque payable to the Commissioner of Taxation in payment of employees tax instalment deductions for May.

6 Also forwarded cheques to other organisations to cover liabilities for deductions made on behalf of a general journal entry to record monthly payroll:Gross wages$65 700 Income tax instalments15 017 Superannuation contributions3 942 Medical insurance1 840 Charity contributions240 Paid monthly wages by cheque drawn on the Cash at Bank long-service leave expense for June, $ annual leave expense for June, $ sick leave expense for June, $ workers compensation expense for June, $ cheque payable to Commissioner of Taxation for amount other deduction liabilities from June a cheque as an advance payment to an employee taking part of his long-service entitlement, $6000. Deductions were: tax $1548; life assurance premiums, $144; and medical insurance, $ journal entry to record payroll for July:Gross wages$68 722 Income tax instalments15 649 Superannuation4 010 Medical insurance1 848 Charity contributions261 Drew cheque to pay July wages to cheque to pay fringe benefits tax, $ long-service leave expense for July, $ annual leave expense for July, $ sick leave expense for July, $ entries for employee 22.

7 LIABILITIES WILEY LAGOON LTDG eneral journal 2000 June1 Prepaid Workers' Compensation 470 Cash at Bank22 4704 Commissioner of Taxation13 215 Superannuation Fund3 800 Medical Insurance Payable1 890 Charity Contributions Payable160 Cash at Bank19 06530 Wages Expense65 700 Commissioner of Taxation15 017 Superannuation Fund3 942 Medical Insurance Payable1 840 Charity Contributions Payable240 Wages Payable44 66130 Wages Payable44 661 Cash at Bank44 66130 Long-Service Leave Expense1 300 Annual Leave Expense9 200 Sick Leave Expense4 300 Provision for Long-Service Leave1 300 Provision for Annual Leave9 200 Provision for Sick Leave4 30030 Workers' Compensation Expense1 955 Prepaid Workers' Comp. Insurance1 955 July5 Commissioner of Taxation15 017 Superannuation Fund3 942 Medical Insurance Payable1 840 Charity Contributions Payable240 Cash at Bank21 03918 Provision for Long-Service Leave8 052 Commissioner of Taxation1 548 Life Assurance Payable144 Medical Insurance Payable360 Cash at Bank6000 July 28 Wages Expense68 722 Commissioner of Taxation15 649 Superannuation Fund4 010 Medical Insurance Payable1 848 Charity Contributions Payable261 Wages Payable46 95428 Wages Payable46 954 Cash at Bank46 95428 Fringe Benefits Tax Expense350 Cash at Bank35030 Long-Service Leave Expense1 300 Annual Leave Expense9 300 Sick Leave Expense4 400 Provision for Long-Service Leave1 300 Provision for Annual Leave9 300 Provision for Sick Leave4 22.

8 LIABILITIES WILEY Kozy Kitchenware Ltd specialises in the supply of microwave ovens. Three models aresold: a 650W which sells for $450, a 750W which sells for $650, and a 1000W whichsells for $850. Each oven comes with a 12 months manufacturer s warranty, and thecompany supplements this warranty with its own 1-year full parts and labour warrantyexcept for the first $25 which must be met, and prepaid, by the customer. To the end ofthe financial year ended 30 June 2001, warranty expenses incurred by the companyfrom repairing 23 units after customer contributions was $2600. At 1 July 2000, thebalance in the Provision for Warranty account stood at $ the year ended 30 June 2001, records showed that the following sales in unitswere achieved: 650W, 120 units; 750W, 108 units; and 1000W, 84 units.

9 Past recordsshow that, on average, one in ten units is subject to a claim under the warranty offered,and this rate was equalled over the past year. The total warranty costs incurred duringthe year, including the customer contributions, to repair defective ovens were: 650W,$110; 750W, $130; and 1000W, $120. At 30 June 2001, it was decided to provide forfuture warranty costs on the assumption that there would be no increase in the costs ofwarranty repairs, and the customer contribution would be held at $ the year ended 30 June 2002, the company sales of ovens were: 650W, 130units; 750W, 112 units; and 1000W, 96 units. The number of ovens returned for repairwith the $25 cash contribution was: 650W ovens, 12 units, 750W ovens, 8 units; and1000W ovens, 9 units.

10 In providing for future warranty costs at 30 June 2002, it isanticipated that warranty costs will increase by 5%, but the customer contribution willremain the same. Due to improved quality control by the manufacturer, it was expectedthat the percentage of ovens requiring repairs under warranty in the future would bereduced to one in twelve ovens sold. No increase in sales prices is planned. Required: A. Show the following accounts as they would appear at 30 June 2001 after all adjust-ing and closing entries Revenue from Warranty Contributions, Warranty Expense,Provision for Show general journal entries to record the receipt of customer contributions, thepayment of warranty costs, and the adjustment of the Provision for Show the following accounts for the past year as they would appear at 30 June 2002after all adjusting and closing entries Revenue from Warranty Contributions,Warranty Expense, Provision for Warranty.