1. Chapter 11 Demonstration Problems Current Liabilities and Payroll Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-1

2. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-2 Consider the following note payable transactions of Cadmium Manufacturing Company. E11-15D 2014 Mar.1Purchased equipment costing $30,000 by issuing a one-year, 8% note payable. Dec.31Accrued interest on the note payable. 2015 Mar.1Paid the note payable plus interest at maturity. Requirements Journalize the transactions for the company.

3. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-3 Mar. 1 Purchased equipment costing $30,000 by issuing a one-year, 8% note payable. E11-15D DateAccounts and ExplanationDebitCredit 2014 Mar. 1 Equipment 30,000 Notes Payable 30,000 To purchase equipment in exchange for one year, 8% note.

4. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-4 Dec. 31 Accrued interest on the note payable. E11-15D DateAccounts and ExplanationDebitCredit 2014 Dec. 31 Interest Expense ﴾$30,000 × 0.08 × 10/12﴿ 2,000 Interest Payable 2,000 To accrue interest expense at year-end.

5. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-5 Mar. 1, Paid the note payable plus interest at maturity. E11-15D DateAccounts and ExplanationDebitCredit 2015 Mar. 1 Notes Payable 30,000 Interest Expense ($30,000 × 0.08 × 2/12)400 Interest Payable2,000 Cash 32,400 To pay note and interest at maturity.

6. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-6 Lobo Industries completed the following transactions during 2014: E11-22D Sep.1Made sales of $20,000. Mr Lobo estimates that warranty expense is 5% of sales. (Record only the warranty expense.) 20Paid $250 to satisfy warranty claims. Dec.31Estimated vacation benefits expense to be $2,000 31Mr 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).

7. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-7 Sep. 1 Made sales of $20,000. Mr Lobo estimates that warranty expense is 5% of sales. (Record only the warranty expense.) E11-22D DateAccounts and ExplanationDebitCredit 2014 Sep. 1 Warranty Expense (5% × $20,000) 1,000 Estimated Warranty Payable 1,000

8. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-8 Sep. 20 Paid $250 to satisfy warranty claims. E11-22D DateAccounts and ExplanationDebitCredit 2014 Sep. 20 Estimated Warranty Payable 250 Cash 250

9. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-9 Dec. 31 Estimated vacation benefits expense to be $2,000. E11-22D DateAccounts and ExplanationDebitCredit 2014 Dec. 31 Vacation Benefits Expense 2,000 Vacation Benefits Payable 2,000

10. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-10 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. E11-22D DateAccounts and ExplanationDebitCredit 2014 Dec. 31 Employee Bonus Expense ﴾1% × 35,000﴿ / 1.01 347 Employee Bonus Payable 347* *Rounded

11. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-11 The following financial information was obtained from the year ending 2014 income statements for Smith Inc. and Brown Inc.: E11-24D SmithBrown Net income $ 30,000$ 75,000 Income tax expense 10,00028,000 Interest expense 5003,000 Requirements 1. Compute the times-interest-earned ratio for each company. 2. Which company was better able to cover its interest expense?

12. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-12 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

13. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-13 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$30,000 + $10,000 + $500 $500 SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

14. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-14 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$30,000 + $10,000 + $500 $500 ═$40,500 $500 SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

15. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-15 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$30,000 + $10,000 + $500 $500 ═$40,500 $500 ═81 SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

16. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-16 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$75,000 + $28,000 + $3,000 $3,000. SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

17. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-17 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$75,000 + $28,000 + $3,000 $3,000 ═$106,000 $3,000. SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

18. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-18 E11-24D—Req.1 Times-interest- earned ratio ═ Net income + Income tax expense + Interest expense Interest expense ═$75,000 + $28,000 + $3,000 $3,000 ═$106,000 $3,000 ═ 35 (Rounded). SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000

19. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall11-19 E11-24D—Req.2 Smith is better able to cover its interest expense.. SmithBrown Net income$30,000$75,000 Income tax expense10,00028,000 Interest expense5003,000 Times-interest-earned ratio8135

20. End of Chapter 11 11-20Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall