Ac1220 Lab 53 Introduction Jake's Computer Sales And Repair

Ac1220 Lab 53introductionjakes Computer Sales And Repair Acquired La

Ac1220 Lab 5.3 Introduction Jake’s Computer Sales and Repair acquired land, land improvements, and a building in exchange for a $180,000 note payable. The building was renovated at a cost of $15,000 before being placed into use. The cost of the renovation work was capitalized, and Jake’s Computer Sale and Repair signed a note payable for the full amount. Notes payable are dated June 1, 20x1, totaling $195,000. The notes are payable over 10 years at an annual interest rate of 6 percent.

The principal is to be repaid in equal annual installments of $19,500 each. Interest and principal payments are scheduled for June 1 each year, from 20x1 to 2x11.

Paper For Above instruction

Introduction

Financial accounting plays a crucial role in documenting the acquisition, utilization, and management of assets and liabilities for a business. The scenario involving Jake’s Computer Sales and Repair exemplifies processes such as recording long-term debt, calculating interest expense, adjusting entries, issuing bonds, handling unearned revenue, estimating warranty expenses, payroll accounting, and tax obligations. These activities are fundamental to accurate financial reporting and decision-making within a business environment.

Journal Entry for Issuance of Long-term Note Payable

On June 1, 20x1, Jake’s Computer Sales and Repair issued a long-term note payable to finance the acquisition of land, improvements, and a building. The journal entry reflects the inflow of assets in exchange for a liability.

Debit: Land, Land Improvements, and Building (at total cost) – $195,000

Credit: Notes Payable – $195,000

This entry recognizes the asset acquisition backed by the note payable, including the additional $15,000 spent on renovations, which was capitalized.

Interest Accrual at December 31, 20x1

The interest on the note payable accrues over time, and at the end of the fiscal year (December 31, 20x1), it must be recognized. The annual interest rate is 6 percent on a principal of $195,000, prorated for the period from June 1, 20x1, to December 31, 20x1.

Interest for six months = $195,000 × 6% × 6/12 = $5,850

The journal entry to accrue interest is:

Debit: Interest Expense – $5,850

Credit: Interest Payable – $5,850

Reclassification of Principal as Current Portion

The first annual installment of $19,500 includes principal repayment scheduled on June 1, 20x2. As of December 31, 20x1, this amount is reclassified from long-term to current liabilities.

Debit: Long-term Notes Payable – $19,500

Credit: Current Portion of Long-term Notes Payable – $19,500

Balance Sheet and Income Statement Summary at December 31, 20x1

Interest payable of $5,850 is reported under current liabilities, reflecting accrued interest. The current portion of long-term debt ($19,500) is recognized under current liabilities, while the remaining $175,500 is classified as long-term debt.

Interest expense for the year, $5,850, appears on the income statement, impacting net income.

Issuance of Bonds

Jake considers issuing $100,000 in bonds with a 6% stated interest rate and 10-year maturity. The annual interest payment is straightforward:

Interest payment = $100,000 × 6% = $6,000

To determine the present value at a market interest rate of 8%, the bond's cash flows are discounted using present value tables or Excel formulas. The present value of the bond’s interest payments (annuity) and the principal (lump sum) are calculated to find the total bond value.

Given that the market rate (8%) exceeds the coupon rate (6%), the bonds will be issued at a discount, reflecting a lower bond price than face value.

This discount is the difference between the face value and present value and must be amortized over life of the bond using straight-line or effective interest methods.

The journal entry at issuance records cash received and a discount on bonds payable:

Debit: Cash – amount received

Debit: Discount on Bonds Payable – amount of discount

Credit: Bonds Payable – $100,000

Amortization of Bond Discount

Using straight-line amortization over ten years, the annual amortization amount is the discount divided by ten. This amortization increases interest expense reported each period.

Unearned Revenue and Revenue Recognition

On July 25, 20x1, Inner-Tech paid Jake’s for advance services, creating unearned revenue of $45,000. As services are rendered, the revenue is earned and recognized gradually. The initial entry records cash received:

Debit: Cash – $45,000

Credit: Unearned Revenue – $45,000

By December 31, 20x1, revenue earned ($38,500) is recognized, adjusting the unearned revenue account:

Debit: Unearned Revenue – $6,500

Credit: Revenue – $38,500

Warranty Expenses and Estimations

Manufacturers provide warranties as part of product sales, leading to estimated warranty expenses. For July sales of $74,500, with 2% estimated to require repairs, the warranty expense is:

Warranty expense = $74,500 × 2% = $1,490

The journal entry to record estimated warranty expense on July 31, 20x1, is:

Debit: Warranty Expense – $1,490

Credit: Estimated Warranty Payable – $1,490

During August, actual repair costs are incurred, totaling $800. The entry to record this expense is:

Debit: Estimated Warranty Payable – $800

Credit: Cash or Accounts Payable – $800

The warranty expense reported on the income statement for August includes the earlier estimated amount, totaling $1,490, with additional expenses of $800 considered in the warranty payable account.

Payroll Accounting

Employee Dave earns a gross salary of $3,415 monthly. The total gross wages earned so far in 20x1 amount to $23,905. Deductions include FICA taxes (7.65%), income tax (10%), health insurance ($200), retirement contributions ($400 per pay period), and charitable donations ($20 per pay period).

Calculating net salary involves subtracting these deductions from gross pay. The payroll deductions are as follows:

FICA deduction = $3,415 × 7.65% = $261.35

Income tax = $3,415 × 10% = $341.50

Health insurance = $200

Retirement contribution (per pay period) = $400

Charitable contribution (per pay period) = $20

Total deductions per month = $261.35 + $341.50 + $200 + $400 + $20 = $1,242.85

Net salary = $3,415 - $1,242.85 = $2,172.15

Journal entries for payroll include recording salaries payable, benefits, payroll taxes, and payment:

Debit: Salaries Expense – $3,415

Credit: Salaries Payable – $2,172.15

Credit: Employee FICA Tax Payable – $261.35

Credit: Income Tax Payable – $341.50

Credit: Other benefits payable – sum of other deductions

Upon payment, the journal entry reduces liabilities and cash accordingly.

Employer Payroll Taxes

The employer matches FICA taxes, amounting to 7.65% of gross wages:

Employer FICA liability = $3,415 × 7.65% = $261.35 per employee

Employer payroll tax expense and liability are recorded as:

Debit: Payroll Tax Expense – $261.35

Credit: Payroll Tax Payable – $261.35

When paid, the liability is settled with a corresponding entry to cash or bank accounts.

These comprehensive journal entries and calculations exemplify the essential accounting procedures for managing long-term liabilities, revenue recognition, warranty estimates, and payroll processing, fostering transparent and compliant financial reporting in accordance with GAAP standards.

References

• Beasley, M. S., & Geary, N. (2020). Principles of Accounting. Cengage Learning.
• Dechow, P. M., & Roychowdhury, S. (2018). Advances in Financial Accounting. Journal of Financial Reporting.
• Horngren, C. T., et al. (2019). Financial & Managerial Accounting. Pearson.
• Revsine, L., et al. (2015). Financial Reporting & Analysis. McGraw-Hill Education.
• Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2020). Intermediate Accounting. Wiley.
• FASB. (2022). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
• McGraw-Hill. (2021). Principles of Financial Accounting. McGraw-Hill Education.
• IRS. (2023). Employer's Tax Guide. Internal Revenue Service.
• Standard & Poor's. (2020). Corporate Bonds and Ratings Analysis. S&P Global.
• Ohlson, J. A. (2021). Financial Accounting and Reporting. Routledge.