The following transactions of Plymouth Pharmacies occurred during 2017 and 2018:
Jan. 9 Purchased computer equipment at a cost of $12,000, signing a six-month, 9% note payable for that amount.
29 Recorded the week’s sales of $63,000, three-fourths on credit and onefourth for cash. Sales amounts are subject to a 6% state sales tax. Ignore cost of goods sold.
Feb. 5 Sent the last week’s sales tax to the state.
Jul. 9 Paid the six-month, 9% note, plus interest, at maturity.
Aug. 31 Purchased merchandise inventory for $9,000, signing a six-month, 10% note payable. The company uses the perpetual inventory system.
Dec. 31 Accrued warranty expense, which is estimated at 4% of sales of $609,000.
31 Accrued interest on all outstanding notes payable.
Feb. 28 Paid the six-month 10% note, plus interest, at maturity.
Journalize the transactions in Plymouth’s general journal. Explanations are not required. Round to the nearest dollar.
Credit Sales Amount: $50,085
Cash Sales Amount: $16,695
The following financial information was obtained from the year ended 2018 income statements for Cash Automotive and Pennington Automotive:
Net income $ 26,070 $ 74,188
Income tax expense 9,270 27,080
Interest expense 300 2,900
1. Compute the times-interest-earned ratio for each company. Round to two decimals.
2. Which company was better able to cover its interest expense?
Rios Raft Company had the following liabilities.
a. Accounts Payable
b. Note Payable due in 3 years
c. Salaries Payable
d. Note Payable due in 6 months
e. Sales Tax Payable
f. Unearned Revenue due in 8 months
g. Income Tax Payable
Determine whether each liability would be considered a current liability (CL) or a long-term liability (LTL).
Freeman Motors, a motorcycle manufacturer, had the following contingencies.
a. Freeman estimates that it is reasonably possible but not likely that it will lose a current lawsuit. Freeman’s attorneys estimate the potential loss will be $4,500,000.
b. Freeman received notice that it was being sued. Freeman considers this lawsuit to be frivolous.
c. Freeman is currently the defendant in a lawsuit. Freeman believes it is likely that it will lose the lawsuit and estimates the damages to be paid will be $75,000.
Determine the appropriate accounting treatment for each of the situations Freeman is facing.
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