Question

A company incurred the following transactions:

1. Wages of $4,100 accrued at the end of the prior fiscal period were paid this fiscal period.
2. Real estate taxes of $5,500 applicable to the current period have not been accrued.
3. Interest on bonds payable has not been accrued for the current month.
4. The company has outstanding $920,000 of 6.3% bonds.
5. The premium related to the bonds in part c has not been amortized for the current month.
6. The current-month amortization is $310.
7. Based on past experience with its warranty program, the estimated warranty expense for the current period should be 0.4% of sales of $740,000.
8. Analysis of the company's income taxes indicates that taxes currently payable are $61,000 and that the deferred tax liability should be increased by $22,000.

Required:
Show the effect, if any, of each of the transactions/adjustments on the appropriate balance sheet category or on the income statement by selecting the amount and indicating whether it is an addition (+) or a subtraction (−).

Answer 1

1. Reduction (-) in accruals.
2. Increase (+) in income tax payable
3. Increase (+) in interest accrual and interest expense
4. Increase in long-term liabilities (+)
5. & 6: Reduction in interest expense (-)

7. Increase (+) in operating expense by $2,960

8. Increase (+) in income tax payable by $61,000 and increase in deferred tax liability by $22,000

Step-by-step explanation:

1. The wages accrual paid would lead to reduction in the wages accrual, as wages accruals would be debited while cash credit.
2. Real estate taxes not yet accrued for would lead to increase in income tax payable
3. Interest on bonds payable not yet accrued for would result in increase in interest payable on bonds and interest expense.
4. The outstanding bonds in an increase in bonds payable.
5. The premium associated with the bond would lead to reduction in interest expense, basically.
6. Same as (5) above.
7. The estimated warranty of $2,960 leads to increase in operating expense.
8. There would be an increase in income tax payable of $61,000 and deferred tax liability of $22,000.