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Current Liability Journal Entry

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Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31st, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain. What journal entry would be made for the days worked and what entry would be made when the wages are paid on Saturday?

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Solution Summary

The solution contains a formatted MS Excel spreadsheet which illustrates the proper journal entry for salaries payable entry, and the journal entry necessary when the debt obligation is paid.

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Current liabilities and contingencies - Journal Entries

Please show work and follow GAAP unless otherwise stated

The following selected transactions relate to contingencies of Eastern Products Inc. which began operations in July, 2006. Eastern's fiscal year ends on December 31. Financial statements are published in April 2007.

(a) No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 4% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2006.

(b) Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $4.0 million in 2006 and were recorded as warranty expense when incurred.

(c) In December 2006, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $2.3 million.

(d) In November 2006, the State of Vermont filed a suit against Eastern, asking for $5 million in civil penalties and injunctive relief for violations of clean water laws. On February 3, 2007, Eastern reached a settlement with state authorities to pay $3.8 million in penalties.

(e) Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2006. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.

Required: Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is to be made, state why.

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