Exercise 9-4A Recognizing Sales Tax Payable

Accounting for Current Liabilities and Payroll

Exercise 9-4A Recognizing Sales Tax Payable

The following selected transactions apply to Topeca Supply for November and December Year 1. November was the first month of operations. Sales tax is collected at the time of sale but is not paid to the state sales tax agency until the following month.

1. Cash sales for November Year 1 were $165,000, plus sales tax of 7 percent.
2. Topeca Supply paid the November sales tax to the state agency on December 10, Year 1.
3. Cash sales for December Year 1 were $180,000, plus sales tax of 7 percent.

Required

a. Record the preceding transactions in general journal form.

b. Show the effect of the preceding transactions on a horizontal statements model like the one shown next.

c. What was the total amount of sales tax paid in Year 1?

d. What was the total amount of sales tax collected in Year 1?

e. What amount of sales tax expense will be reported on the Year 1 income statement?

Exercise 9-5A Contingent Liabilities

The following three independent sets of facts relate to contingent liabilities:

1. In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. A flaw in the battery cable was discovered, and the recall provides for replacement of the defective cables. The estimated cost of this recall is $2 million.

2. The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs, penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,000,000 or as little as $500,000, and insurance could reimburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time.

3. Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined.

Required

a. Discuss the various categories of contingent liabilities.

b. For each item in the preceding list, determine the correct accounting treatment. Prepare any required journal entries.