Accounting

Answer:

The warranty programs are meant to assure customers that the company will be with them even in the case of failure of products purchased by them due to manufacturing defects. It is an effective tool to convert customers and increase sales. Companies that have warranty programs need to estimate the probable warranty related servicing costs and expense them in the same year the sales were made.
The actual costs of servicing the products will be different from the estimates. If they are widely deviant from the estimate, the company may decide to change the provision estimate for the next year accordingly. However, no adjustment to expenses will be done with reference to provisions made at the start of the year (i.e. at the end of previous year).
a.
Effect of having the warranty program during 2016.
Since the company was not having program before 2016, it would not have made liability provisions for these expenses. Hence, the servicing costs of products sold during 2016 would be directly debited to the servicing costs expense account. The impact on the financial statements is shown below:
Since the company had warranty program only from 2016, and since it has not made any provisions in this regard at the close of the previous year, the servicing expenses during 2016 were directly debited to the income statement as shown above. The credit leg of the accounting entry will be cash as shown below:
b.
Accrual adjustment at the end of 2016:
• The company has started selling its products with warranty features in 2016. It has also arrived at an estimate of warranty costs based on past experience as 0.3%. Hence, it would make a liability provision of 0.3% of sales for warranty costs.
• However, the company has already started servicing products under warranty program in the year 2016 itself. Hence, the provision should take cognizance of this fact while making the accrual adjustment. It means the liability provision will be less to the extent of servicing costs already encountered during the same year in which sales are made.
• Note that in the given problem, owing to the nature of the products sold by the company, most of the warranty related costs are experienced in the same year during which the sales are made.
• Hence, the liability provision will be less to that extent. While solving the previous problems, we assumed as if all the warranty costs will be encountered in future years for sales done in the current year. In these kind of situations, it is more proper to estimate the warranty costs that would spill over to future years alone instead of overall warranty costs as a percentage of sales.
c.
Amount of accrual adjustment to be made:
As explained before, the accrual adjustment should take into account any warranty expenses already debited to the income statement for the sales made during the current year, since the provision is estimated on the sales figure.
The additional expense to be debited for the year 2016 can be expressed as follows:
Additional warranty expense to be debited in year 2016
= Warranty provision required for 2017 for sales made in 2016
= 0.3% of sales of 2016 - Servicing costs already expensed during 2016
The servicing costs already expensed during 2016 can be found from the year end balance of warranty expense account maintained for this purpose. This amount is given as $19,400.
Hence, warranty liability provision required
= $1,300
The accrual adjustment entry will be made as follows at the end of 2016:
Dr. Warranty Expenses Account…………………. 1,300
Cr. Accrued Liability - Warranty………………………1,300
Being warranty liability accrued
Note that the above entry and liability provision implies that the company expects $1,300 worth of servicing costs in year 2017 for sales made in 2016. Thus, the company has debited its income statement by 0.3% of sales of year 2016 in the same year in tune with the matching principle.
As pointed out before, in cases where most of the warranty costs occur in the same year, it is more proper to estimate only the warranty costs that would spill over to future years instead of overall warranty costs calculated as a percentage of sales.

Answer:

For the period ended on June 25, 2016, the company should recognize an expense due to pay roll in terms of gross pay amount of $28,600. Since the amount is not paid immediately from the cash account, the amount should be recognized as part of the liability accounts.
This means the expense account goes up by this amount while the liability account also increases by the same amount. Whenever the actual payment is done to the employees, the cash will decrease by that amount thereby also reducing the liability.
• The entire gross amount is not the actual wages payable to the employees. The employees will be paid only the net pay amount. Hence, only the net pay should be recorded as part of the wages payable liability account.
• The rest of the amount should be recorded as part of the withholding liability accounts. The amount from the gross pay is withheld and added to respective withholding liability accounts.
• For example, the medical insurance contributions should go to the medical insurance payable account. Whenever the company pays medical insurance on behalf of the employees, the cash will decrease while reducing the medical insurance payable account. The other components of the gross pay will also be treated in the same manner.
The impact on the financial statements will be as shown below:
The accounting entry to record the payroll accrual will be as follows:
The above accounting entry recognizes the payroll expense applicable for the period thereby impacting the income statement. The respective liability accounts impact the balance sheet which will show that quantum of liability in terms of pay roll expenses. As and when actual cash payment is made, the respective liability accounts will be reduced to the extent of cash disbursal.

Answer:

Note Payable:
Note payable is a promissory note, by which a borrower, borrows money and promise to pay it back with interest before predetermined period.
a.
Calculate the discount rate used by the lender as follows:
Firstly, calculate the discount amount.
It is notes payable on discount basis. The maturity amount is face value of the note and is given as $480,000 payable on December 31, 2016 and net proceeds are $114,000. The discount amount is equivalent to an interest paid in advance, that is the difference between face value and net proceeds from note.
The discount rate used by the lender can be calculated by dividing discount amount with the note value multiplied with period of note payable.
Therefore, discount rate used by lender is 12%.
b.
Calculate effective interest Rate (APR) on the loan.
Firstly, compute the discount amount.
The APR of the loan gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated as below:
Therefore, effective interest rate paid by the borrower is 12.6%.
c.
Prepare a horizontal model and record the journal entry to show the effect for the transaction as follows:
1.
Show the effect on financial statement for receipts of cash proceeds on August 1, 2016 is shown below:
The cash asset goes up along with liability in terms of Notes Payable. Note that the Discount Interest on Notes Payable is a Contra liability account. Hence, it is shown with negative sign on the liabilities side above.
Record the accounting entry pertaining to receipt of loan proceeds will be as follows:
Cash is an asset. Increase in cash is debited. Hence, cash is debited for receipt. Notes payable is a liability. Increase in note payable is credited and discount on note payable is a contra liability, decrease in discount on note payable is debited.
2.
Prepare a horizontal model and record the journal entry to show the effect for the transaction as follows:
Firstly, compute the interest expense for the month of September.
The discount interest will be amortized over the loan period. The interest to be accrued for the month of September. The interest to be expensed can be calculated as follows:
Now, show the transaction in horizontal model.
Record the accounting entry of interest expense for September.
Interest expense is an expense. Increase in expense is debited. Hence, interest expense is debited. Discount on note payable is a liability. Increase in liability is credited. Hence, discount on note payable is credited.
3.
Prepare a horizontal model and record the journal entry to show the effect for the transaction as follows:
The effect of repayment of note on the financial statements will be as follows:
The loan will be repaid for the maturity amount of $480,000 on December 31, 2016. This will extinguish the Notes Payable amount pertaining to this loan. The cash account will be credited accordingly. The Discount interest on Notes Payable account will be zero consequent to interest amortized for the month of December, 2016.
Record the accounting entries for the payment of maturity amount of note will be recorded as below:
Cash is an asset. Decrease in asset is credited, as cash is paid. Hence, it is credited. Notes payable is a liability. Decrease in liability is debited. Hence, notes payable is debited.