Comprehensive – Selected transactions of the Shadrach Computer Corporation during November and December of 2007 are as follows:
Nov. 1 Borrowed money from the bank by issuing a non-interest-bearing, $40,000, 90-day note. The note is discounted on a 12% basis.
9 Sold 100 computers with a one-year warranty for $5,000 each on credit (ignore cost of goods sold). Past experience indicates that warranty costs average $125 per computer. The corporation uses the expense warranty accrual method for record keeping.
12 Sold 100 software packages at $300 each on credit (ignore cost of goods sold). With each software package the corporation offered a premium in the form of a package of disks for the return of one proof of purchase. The offer expires June 30, 2008. The cost of each package of disks is $5, and the company estimates that 80% of the premiums will be redeemed; therefore, 80 packages of disks were purchased on credit. 20 Paid $2,900 in fulfillment of the warranty agreement on several of the computers sold on November 9. 30 Accrued monthly vacation pay. Shadrach Computer Corporation has 90 employees, who are each paid an average of $160 per day. The corporation has a policy of allowing each employee 12 days’ paid vacation per year; the related liability is recorded on a monthly basis. Employees are paid monthly; two-thirds of the employees work in the sales force and one-third work in the office.
30 Paid monthly payroll. Gross salaries for the sales force were $288,000 and for the office staff were $144,000. No vacations were taken during November. Income tax withholdings of 20% are applicable to the salaries of all employees. An 8% F.I.C.A. tax for both employees and employers is also applicable. These rates apply to all salaries because no employee’s salary has exceeded the maximum wage limit. The state allows the corporation a 1% unemployment compensation merit-rating reduction from the normal rate of 5.4%. The federal unemployment rate is 0.8%. Prior to October, each individual employee had accumulated a gross salary in excess of $7,000 for 2007.
Dec.14 Twenty proofs of purchase were returned from the November 12 sale. 29 An individual filed suit against Shadrach Computer Corporation for damages caused in a November 5 accident that resulted when a member of the sales force hit the individual’s car while on personal business. The amount of the suit filed was $1,500. Because the employee was on personal business, the company’s insurance company will not pay the claim. In the opinion of the company’s attorney, the amount of the suit is reasonable; furthermore, the company believes it is likely to lose the suit.
31 Accrued monthly vacation pay.
31 Paid monthly payroll. Gross salaries for the sales force were $290,000 and for the office staff were $145,000. The salaries included $6,800 of vacation pay in the sales force and $3,200 of vacation pay in the office staff. The F.I.C.A. tax rate still applies to all wages, because no employee’s salary exceeded the maximum wage limit.
31 Recorded president’s bonus. The president receives a 10% bonus computed on income after deducting income taxes but before deducting the bonus. The corporation’s effective income tax rate is 30%, and income before income taxes and bonus for 2007 was $560,000. The bonus will be paid in January 2008.
Prepare journal entries to record the preceding transactions of the Shadrach Computer Corporation for 2007. Include yearend accruals. Round all calculations to the nearest dollar.