Financial Accounting: An Integrated Statements Approach, 2nd Edition

Integrated Systems, Inc., recognized service revenue of $300,000 on its financial statements in

2007. Assume, however, that the Tax Code requires this amount to be recognized for tax pur-
      poses in 2008. The taxable income for 2007 and 2008 is $2,000,000 and $2,500,000, respectively.
      Assume a tax rate of 40%.
      Prepare the journal entries to record the tax expense, deferred taxes, and taxes payable for
      2007 and 2008, respectively.

In-Tune Audio Company warrants its products for one year. The estimated product warranty is

3% of sales. Assume that sales were $400,000 for January. In February, a customer received war-

ranty repairs requiring $205 of parts and $300 of labor.

a. Record the adjusting entry required at January 31, the end of the first month of the current

year, to record the accrued product warranty.

b. Record the entry for the warranty work provided in February.

During a recent year, Motorola, Inc., had sales of $31,323,000,000. An analysis of Motorola’s

product warranty payable account for the year was as follows:

Product warranty payable, January 1 $ 359,000,000

Product warranty expense 648,000,000

Warranty claims paid* (507,000,000)

Product warranty payable, December 31 $ 500,000,000

* The amount reported for Warranty Claims Paid includes other adjustments.

a. Determine the product warranty expense as a percent of sales. Round to two decimal places.

b. Record the adjusting entry for the product warranty expense for the year.

Several months ago, Endurance Battery Company experienced a hazardous materials spill at one of

its plants. As a result, the Environmental Protection Agency (EPA) fined the company $200,000. The

company is contesting the fine. In addition, an employee is seeking $600,000 damages related to the

spill. Lastly, a homeowner has sued the company for $150,000. The homeowner lives 20 miles from

the plant, but believes that the incident has reduced her home’s resale value by $150,000.

Endurance Battery’s legal counsel believes that it is probable that the EPA fine will stand.

In addition, counsel indicates that an out-of-court settlement of $250,000 has recently been

reached with the employee. The final papers will be signed next week. Counsel believes that the

homeowner’s case is much weaker and will be decided in favor of Endurance. Other litigation

related to the spill is possible, but the damage amounts are uncertain.

a. Record the contingent liabilities associated with the hazardous materials spill.

b. Prepare a note disclosure relating to this incident.

The current assets and current liabilities for Apple Computer Inc. andGateway Inc. are shown

as follows at the end of a recent fiscal period:

478 Chapter 10 Liabilities

Exercise 10-24

Current and quick ratios

Goal 6

a. Apple Computer Inc.

current ratio, 2.63

Apple Computer Inc. Gateway Inc.

(in thousands) (in thousands)

Sept. 29, 2004 Dec. 31, 2004

Current assets:

Cash and cash equivalents $2,969,000 $ 358,633

Short-term investments 2,495,000 284,876

Accounts receivable 774,000 342,121

Inventories 101,000 196,324

Other current assets* 716,000 217,663

Total current assets $7,055,000 $1,399,617

Current liabilities:

Accounts payable $1,451,000 $ 532,329

Accrued and other current liabilities 1,229,000 590,323

Total current liabilities $2,680,000 $1,122,652

* These represent deferred tax assets, prepaid expenses, and other nonquick current assets.

Exercise 10-22

Accrued product warranty

Goal 4

a. 2.07%

Exercise 10-23

Contingent liabilities

Goal 4

Exercise 10-20

Deferred income taxes

Goal 3

Exercise 10-21

Accrued product warranty

Goal 4