Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Chapter 1: Business, Accounting, and You
Short Exercises
(5-10 min.) S 1-2 Answer: d. Cost Principle (10-15 min.) S 1-3
1. e
2. f
3. d
4. g
5. b
6. c
7. a
(5-10 min.) S 1-4 a. $82,000 ($106,000 − $24,000)
b. $91,000 ($63,000 + $28,000)
c. $49,000 ($94,000 − $45,000)
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(5-10 min.) S 1-5
Assets = Liabilities + Stockholder’s Equity Accounts Notes Stockholder’s
Cash + Equipment = payable + payable + equity
$13,000 + $35,000 = $9,000 + $5,000 + $34,000 Based on the accounting equation, Beach has $34,000 of equity in the business. Assets of $48,000
($13,000 + $35,000) − Liabilities of $14,000 ($9,000 + $5,000) = Stockholder’s equity of $34,000.
(5-10 min.) S 1-6
Assets = Liabilities + Stockholders’ Equity
Cash + Supplies = + Stockholders’ equity
$36,000 + $1,500 = $9,500 + $28,000 Based on the accounting equation, Boehms has $9,500 of liabilities. Assets of $37,500 ($36,000 +
$1,500) − Stockholders’ equity of $28,000 = Liabilities of $,500
(5-10 min.) S 1-7
Assets = Liabilities + Stockholders’ Equity Cash = Notes Payable + Common Stock
Investment + $15,000 = + $15,000 Borrowing + 18,000 = + $18,000 + ______
Bal. $33,000 = $18,000 + $15,000
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(5-10 min.) S 1-8 Assets = Liabilities + Stockholders’ Equity
Cash + Accounts receivable
Accounts payable
Common stock + Retained Earnings
Service revenue
– Salary - Dividends
expense a. +$62,000 + 62,000
b. -$33,000 + $33,000
(5-10 min.) S 1-9 1. e
2. a
3. c
4. a
5. e
6. e
7. a
8. e
9. d
10. b
11. a
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(5-10 min.) S 1-10
1. BS
2. BS
3. IS
4. IS
5. BS, RE
6. BS
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(5-10 min.) S 1-11 1. d
2. e
3. b
4. a
5. c
(5-10 min.) S 1-12 1. Increased total assets (Cash)
2. No effect on total assets. The increase in Land offset the decrease in Cash.
3. Decreased total assets (Cash)
4. Increased total assets (Machinery and equipment)
5. Increased total assets (Accounts receivable)
6. Decreased total assets (Cash)
7. No effect on total assets. The increase in Cash offset the decrease in Accounts receivable.
8. No effect on total assets. The increase in Cash offset the decrease in Land.
9. Increased total assets (cash)
(5-10 min.) S 1-13 1. True
2. False ( Increase Supplies; decrease Cash)
3. True
4. True
5. True
6. False (Decrease Cash; decrease Accounts payable)
7. True
8. True
9. False (Decrease Cash; increase Expense/decrease Stockholders’ equity)
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(5-10 min.) S 1-14 Req. 1 1. f. Sold stock to start the business.
2. e. Paid cash to purchase equipment.
3. g. Purchased equipment with a bank loan.
4. a. Earned revenue for services provided, but customer will pay later.
5. d. Paid cash for expenses incurred to operate the business.
6. c. Received cash for revenue earned by providing services.
7. b. Customers paid cash for services completed earlier in the month.
Req. 2 Revenues (transactions “4” and “6”)………………… $2,950 Less: Expenses (transaction “5”)………………..…… 1,350 Net income………………………………………..…. $1,600
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Exercises (10-15 min.) E 1-23B Corner Grocery Corp. $45,000 + $27,900 = $72,900 Sampson Hardware, Inc. $104,000 - $44,000 = $60,000 Perfect Cleaners, Inc. $108,800 - $92,600 = $16,200 (10-15 min.) E 1-24B Req. 1 Total Total Total Assets − Stockholders’ Equity = Liabilities Beginning….. $84,000 − $56,000 = $28,000 Ending……… $153,000 − $91,000 = $62,000 Increase during the year = $ 34,000 Req. 2 Possible reasons for the increase in Liabilities may include:
Made purchases on account
Borrowed money on a note payable
(10-15 min.) E 1-25B Req. 1 Total Total Total Assets − Liabilities = Stockholders’ Equity Beginning….. $50,000 − $40,000 = $10,000 Ending……… $57,000 − $8,000 = $49,000 Increase during the year = $ 39,000
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(10-15 min.) E 1-25B (cont) Req. 2 Possible reasons for the increase in Stockholders’ equity may include:
Sold stock
Earned net income
(15-20 min.) E 1-26B Oct. 31, 2014 Nov. 30, 2014
Total assets $127,000 $165,000
- Total liabilities $(92,000) $(119,000)
=
-
=
Stockholders’ equity
Common stock
Retained earnings
$35,000
(15,000)
$20,000
$46,000
(15,000)
$31,000
Assumption A: No dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends
$31,000 = $20,000 + Net income - 0 $11,000 = Net income
Assumption B: $7,000 of dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends
$31,000 = $20,000 + Net income – $7,000 $18,000 = Net income
Assumption C: $15,000 of dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends
$31,000 = $20,000 + Net income - $15,000 $26,000 = Net income
(15-20 min.) E 1-27B
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Assets = Liabilities + Stockholders’ Equity
Cash + Medical supplies + Land
Accounts payable
Common stock + Retained Earnings
March Service revenue –
Rent expense
2 + 45,000 + 45,000 6 - 20,000 + 20,000
11 + 1,000 + 1,000 15 No entry required 17 + 11,000 + 11,000 19 - 1,700 + 1,700 22 + 350 - 350 30 -700 - 700
Bal. $33,950 + $650 + $20,000 = $300 + $45,000 + $11,000 – $1,700
(10-15 min.) E 1-28B Req. 1 The business is a corporation, as shown by the fact that it has a common stock account.
Req. 2
Julie’s Coffee Shop, Inc. Balance Sheet
October 31, 2014 ASSETS LIABILITIES
Cash $ 19,000 Accounts payable $800 Accounts receivable 1,400 Note payable 4,000 Supplies 750 Total liabilities 4,800 Office equipment 14,200 STOCKHOLDERS’ EQUITY Common stock 18,000 Retained earnings 12,550 Total Stockholders’ equity 30,550 Total liabilities and Total assets $35,350 stockholders’ equity $35,350 Req. 3
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The balance sheet reports the financial position of a company at a given point in time and that
Assets = Liabilities + Stockholders’ Equity.
(15-20 min.) E 1-29B Req. 1
Account Type of Account Account Type of Account Office furniture Asset Rent expense Expense Utilities expense Expense Cash Asset Accounts payable Liability Office supplies Asset Notes payable Liability Salaries expense Expense Service revenue Revenue Salaries payable Liability Accounts receivable Asset Property tax expense Expense Supplies expense Expense Equipment Asset Req. 2
Alden Consulting, Inc. Income Statement
For the Year Ended December 31, 2014 Service Revenue $161,000 Expenses Salaries expense $43,000 Rent expense 18,000 Utilities expense 12,600 Supplies expense 3,400 Property tax expense 2,400 Total expenses 79,400 Net income $ 81,600 Results of operations for 2014: Net income of $81,600.
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(15-20 min.) E 1-29B Cont.
Req 3
Alden Consulting, Inc. Statement of Retained Earnings
For the Year Ended December 31, 2014 Retained earnings, Jan. 1, 2014 $0 Add: Net income 81,600 Subtotal 81,600 Less: Dividends 60,000 Retained earnings, Dec. 31, 2014 $21,600 The dividends for the year were $60,000 ($0 + $81,600 - $21,600). (15-20 min.) E 1-30B Req 1 Hastings, Inc. Beginning: Assets $ 83,000 − Liabilities 36,000 = Stockholders’ Equity $ 47,000
Req 2 Ending:
Assets $ 162,000 − Liabilities 31,000 = Stockholders’ Equity $ 131,000
Req 3 Ending Stockholders’ equity $131,000
- Beginning Stockholders’ equity 47,000 = Change in Stockholders’ equity 84,000 - Sale of stock 20,000
= Change in retained earnings 64,000 + Dividends 71,000 = Net income $135,000
Note: The change in Retained earnings equals Net income minus Dividends. So, Dividends are added back to the change in Retained earnings to arrive at Net income.
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Problems
(20-25 min.) P 1-36B Req. 1 Assets = Liabilities + Stockholders’ Equity
Cash + Accounts receivable + Supplies +
Office furniture
Accounts payable
Common stock + Retained Earnings
June
Service revenue –
Rent expense – Dividends
3 *
5 + 70,000 + 70,000
Bal. $70,000 + $0 + $0 + $0 = $0 + $70,000 + $0 – $0 – $0
7 -1,300 + 1,300
Bal. $68,700 + $0 + $1,300 + $0 = $0 + $70,000 + $0 – $0 – $0
9 +3,500 +3,500
Bal. $68,700 + $0 + $1,300 + $3,500 = $3,500 + $70,000 + $0 – $0 – $0
10 *
14 **
20 +3,800 +3,800
Bal. $68,700 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $0 – $0
27 -2,400 +2,400
Bal. $66,300 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $2,400 – $0
30 -700 + 700
Bal. $65,600 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $2,400 – $700
* Represents a personal, not a business transaction ** Not a transaction as there was no financial impact
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Req. 2 a. Total assets = $74,200 ($65,600+ $3,800 + $1,300 + $3,500) b. Total liabilities = $3,500 c. Total stockholder’s equity = $70,700 ($70,000 + $3,800 - $2,400 - $700) d. Net income for June = $1,400 ($3,800 − $2,400)
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(25-30 min.) P 1-37B Req. 1 Assets = Liabilities + Stockholders’ Equity
Cash + Accounts receivable + Supplies + Equipment
Accounts payable
Common stock + Retained Earnings
June
Service revenue –
Salaries expense – Dividends
Beg. bal. $1,680 + $4,130 + $0 + $32,000 = $3,100 + $30,000 + $9,170 – $4,460 – $0
a. +10,000 + 10,000 Bal. $11,680 + $4,130 + $0 + $32,000 = $3,100 + $40,000 + $9,170 – $14,460 – $0
b. -3,100 -3,100 Bal. $8,580 + $4,130 + $0 + $32,000 = $0 + $40,000 + $9,170 – $4,460 – $0
c. + 2,500 + 2,500 Bal. $11,080 + $4,130 + $0 + $32,000 = $0 + $40,000 + $11,670 – $4,460 – $0
d. +2,130 - 2,130 Bal. $13,210 + $2,000 + $0 + $32,000 = $0 + $40,000 + $11,670 – $4,460 – $0
e. + 850 + 850 Bal. $13,210 + $2,000 + $850 + $32,000 = $850 + $40,000 + $11,670 – $4,460 – $0
f. 6,200 + 6,200 Bal. $13,210 + $8,200 + $850 + $32,000 = $850 + $40,000 + $17,870 – $4,460 – $0
g. +7,000 +7,000 Bal. $20,210 + $8,200 + $850 + $32,000 = $850 + $47,000 + $17,870 – $4,460 – $0
h. - 4,600 + 4,600 Bal. $15,610 + $8,200 + $850 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $0
i. +250 - 250 Bal. $15,860 + $8,200 + $600 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $0
j. -1,500 +1,500
Bal. $14,360 + $8,200 + $600 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $1,500
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(25-30 min.) P 1-37B (cont.) Req. 2
Interiors by Jill, Inc. Income Statement
Month Ended June 30, 2014 Revenues Service revenue $17,870 Expenses Salaries expense 9,060 Net income $8,810 Req. 3
Interiors by Jill, Inc. Statement of Retained Earnings
Month Ended June 30, 2014 Retained earnings, June 1, 2014 $0 Add: Net income 8,810 Subtotal 8,810 Less: Dividends 1,500 Retained earnings, June 30, 2014 $7,310 Req.4
Interiors by Jill, Inc. Balance Sheet June 30, 2014
ASSETS LIABILITIES Cash $ 14,360 Accounts payable $ 850Accounts receivable 8,200 Supplies 600 STOCKHOLDERS’ EQUITY Equipment 32,000 Common stock 47,000 Retained earnings 7,310 Total Stockholders’ equity 54,310 Total liabilities and Total assets $55,160 stockholder’s equity $55,160
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(20-25 min.) P 1-38B a.
McKnight, Inc. Income Statement
Year Ended December 31, 2014 Service revenue $88,000 Expenses Salaries expense $13,000 Insurance expense 8,000 Advertising expense 5,500 Total expenses 26,500 Net Income $61,500 b.
McKnight, Inc. Statement of Retained Earnings Year Ended December 31, 2014
Retained earnings, December 31, 2013 $23,500 Add: Net income 61,500 Subtotal 85,000 Less: Dividends 40,000 Retained earnings, December 31, 2014 $45,000 c.
McKnight, Inc. Balance Sheet
December 31, 2014 ASSETS LIABILITIES
Cash $17,000 Accounts payable $ 9,000 Accounts receivable 8,000 Note payable 16,000 Equipment 65,000 Total liabilities 25,000 STOCKHOLDERS’ EQUITY Common stock 20,000 Retained earnings 45,000 Total stockholders’ equity 65,000 Total liabilities and Total assets $90,000 stockholders’ equity $90,000
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(25-30 min.) P 1-39B Req. 1
Account Type of Account Account Type of Account Accounts payable Liability Interest expense Stockholders’ equity Accounts receivable Asset Land Asset Advertising expense Stockholders’ equity Note payable Liability Building Asset Property tax expense Stockholders’ equity Cash Asset Rent expense Stockholders’ equity Common stock Stockholders’ equity Salaries expense Stockholders’ equity Dividends Stockholders’ equity Salaries payable Liability Equipment Asset Service revenue Stockholders’ equity Insurance expense Stockholders’ equity Supplies Asset Req. 2
Alpha, Inc. Income Statement
Year Ended October 31, 2014 Service revenue $210,000 Expenses Salaries expense $91,300 Rent expense 24,000 Advertising expense 19,600 Interest expense 7,500 Property tax expense 4,900 Insurance expense 3,600 Total expenses 150,900 Net Income $ 59,100
Alpha, Inc. Statement of Retained Earnings Year Ended October 31, 2014
Retained earnings, October 31, 2013 $75,600 Add: Net income 59,100 Subtotal 134,700 Less: Dividends 28,000 Retained earnings, October 31, 2014 $106,700
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(continued) P 1-39B Req. 3
Alpha, Inc. Balance Sheet
October 31, 2014 ASSETS LIABILITIES
Cash $24,800 Accounts payable $ 13,700 Accounts receivable 15,100 Salaries payable 4,750 Supplies 2,250 Note payable 75,000 Land 40,000 Total liabilities 93,450 Equipment 51,000 Building 142,000 STOCKHOLDERS’ EQUITY Common stock 75,000 Retained earnings 106,700 Total stockholders’ equity 181,700 Total liabilities and Total assets $275,150 stockholders’ equity $275,150 Req. 4 a. $59,100 (Net profit = net income). b. Increase of $31,100 ($59,100 Net income minus $28,000 Dividends).
c. $275,150 (Total economic resources = total assets). d. $ 93,450 (Total owed = total liabilities).
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(20-25 min.) P 1-40B
On Call Realty, Inc. Balance Sheet
November 30, 2014 ASSETS LIABILITIES
Cash $31,000 Accounts payable $ 2,500 Accounts receivable 3,200 Salaries payable 1,100 Supplies 580 Notes payable 7,000 Equipment 8,100 Total liabilities 10,600 STOCKHOLDERS’ EQUITY Common stock 10,000 Retained earnings 22,280 Total stockholders’ equity 32,280 Total liabilities and Total assets $42,880 stockholders’ equity $42,880
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Chapter 2: Analyzing and Recording Business Transactions
Short Exercises
(5-10 min.) S 2-2
1. Accounts payable L
2. Cash A
3. Service revenue R
4. Prepaid rent A
5. Rent expense E
6. Common stock SE
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(5-10 min.) S 2-3
1. Transactions occur.
5. Prepare the financial statements
4. Prepare the trial balance.
3. Post the transactions from the journal to the ledger.
2. Record the transactions in the journal.
(5-10 min.) S 2-4
Example A, 1
1. R, 4
2. SE, 3
3. A, 1
4. E, 5
5. L, 2
6. SE, 3
7. E ,5
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(5-10 min.) S 2-5
The basic summary device in accounting is the account. The left side of an account is called the
debit side, and the right side is called the credit side. We record transactions first in a journal.
Then we post or copy the data to the ledger (or T-accounts). It is helpful to list all the accounts
with their balances on a trial balance.
(5-10 min.) S 2-6
DR 1. Rent expense
CR 2. Accounts payable
CR 3. Service revenue
DR 4. Office furniture
CR 5. Common stock
DR 6. Land
DR 7. Dividends
(5-10 min.) S 2-7
Supplies Note payable 3/8 250 3/27 400 3/20 1,250 3/5 9,5003/17 800 3/31 4,500 Bal. 650 Bal. 3,750
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(5-10 min.) S 2-8
Account Type
Office equipment Asset Dr. Cr.
Dividends Stockholder’s Equity
Dr. Cr.
Service revenue Revenue Cr. Dr.
Accounts payable Liability Cr. Dr.
Rent expense Expense Dr. Cr.
Cash Asset Dr. Cr.
(15-20 min.) S 2-9
Transaction Account Affected Type
Dr. or Cr.
(1) Cash Asset Increase Dr
Common stock Stockholders’ Equity Increase Cr
(2) Equipment Asset Increase Dr
Cash Asset Decrease Cr
(3) Supplies Asset Increase Dr
Accounts payable Liability Increase Cr
(4) Accounts receivable Asset Increase Dr
Service revenue Revenue Increase Cr
(5) Accounts payable Liability Decrease Dr
Cash Asset Decrease Cr
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(6) Operating expenses Expense Increase Dr
Cash Asset Decrease Cr
(7) Dividends Stockholders’ Equity Increase Dr
Cash Asset Decrease Cr
(10-15 min.) S 2-10
Journal
DATE ACCOUNTS POST. REF. Dr. Cr.
Aug 1 Cash 50,000 Common stock 50,000 Sold stock. 5 Dental supplies 6,300 Accounts payable 6,300 Purchased supplies on account. 7 Rent Expense 1,000 Cash 1,000 Paid office rent. 10 Cash 1,200 Accounts receivable 2,600 Service revenue 3,800 Performed service for patients.
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(10-15 min.) S 2-11
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Sep 3 Cash 35,000 Note payable 35,000 Borrowed money from the bank. 9 Accounts receivable 1,250 Service revenue 1,250 Performed service on account. 16 Cash 500 Accounts receivable 500 Received cash on account. 22 Utilities expense 380 Accounts payable 380 Received utility bill. 2,250 30 Salaries expense 2,600 Cash 2,250 Paid salary expense. 30 Interest expense 170 Cash 170 Paid interest expense.
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(10-15 min.) S 2-12
Audio Masters, Corp Trial Balance April 30, 2014
BALANCE
ACCOUNT TITLE DEBIT CREDIT Cash $18,300 Prepaid rent 750 Equipment 21,000 Accounts payable $ 1,700Note payable 11,500Common stock 15,000Dividends 22,600 Service revenue 63,000Rent expense 10,150 Utilities expense 18,400
Total $91,200 $91,200
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(5-10 min.) S 2-13
Mylar, Inc. Trial Balance December 31, 2014
ACCOUNT DEBIT CREDIT BS BS BS BS BS BS BS RE IS IS IS IS
Cash Accounts Receivable Supplies Equipment Accounts Payable Notes Payable Common Stock Dividends Service Revenue Salaries Expense Rent Expense Utilities Expense Total
$12,1001,900
2506,000
700
1,740800340
$23,830
$1,830 10,000 8,500
3,500
_______ $23,830
(5-10 min.) S 2-14
e 1 Posting
d 2 Normal balance
g 3 Payable
a 4 Journal
b 5 Receivable
h 6 Chart of accounts
c 7 Debit
f 8 Trial balance
i 9 Credit
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Exercises
(10-15 min.) E 2-23B
Transaction Account Affected Type
Dr. or Cr.
Apr. 1 Advertising expense Stockholders’ Equity Increase Dr
Cash Asset Decrease Cr
3 Equipment Asset Increase Dr
Cash Asset Decrease Cr
5 Cash Asset Increase Dr
Common stock Stockholders’ Equity Increase Cr
9 Cash Asset Increase Dr
Notes payable Liability Increase Cr
12 Utilities expense Stockholders’ Equity Increase Dr
Cash Asset Decrease Cr
17 Supplies Asset Increase Dr
Cash Asset Decrease Cr
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(15-20 min.) E 2-24B
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Apr. 1 Interest expense 1,000 Cash 1,000 5 Office furniture 3,000 Accounts payable 3,000 10 Accounts receivable 2,400 Service revenue 2,400 12 Cash 20,000 Notes payable 20,000 19 Cash 75,000 Land 75,000 21 Building 300,000 Notes payable 300,000 27 Accounts Payable 1,500 Cash 1,500
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(15-20 min.) E 2-25B
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Dec. 1 Cash 80,000 Common stock 80,000 3 Supplies 160 Accounts payable 160 5 Building 45,000 Cash 45,000 6 Cash 3,700 Service revenue 3,700 11 Accounts payable 120 Cash 120 18 Accounts receivable 2,650 Service revenue 2,650 24 Cash 2,100 Accounts receivable 2,100 31 Salaries expense 1,100 Rent expense 1,450 Cash 2,550
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(10-15 min.) E 2-26B
Req. 1
Cash Accounts Payable May 1 35,000 May. 4 12,700 May 9 600 May 2 900
6 3,000 9 600 Bal. 30023 750 29 1,500
Bal. 23,950
Accounts Receivable Common stock May 17 5,100 May 23 750 May 1 35,000Bal. 4,350 Bal. 35,000
Supplies Service revenue May 2 900 May 6 3,000Bal. 900 17 5,100 Bal. 8,100
Equipment Salaries Expense May 4 12,700 May 29 1,500 Bal. 12,700 Bal. 1,500
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Req. 2
Fun Time Daycare, Inc. Trial Balance May 31, 2014
BALANCE
ACCOUNT TITLE DEBIT CREDIT Cash $23,950 Accounts receivable 4,350 Supplies 900 Equipment 12,700 Accounts payable $ 300Common stock 35,000Service revenue 8,100Salaries expense 1,500 Total $43,400 $43,400
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(15-20 min.) E 2-27B
Req 1
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Dec 2 Rent expense 1,600 Cash 1,600 4 Cash 900 Service revenue 900 8 Supplies 225 Accounts payable 225 11 Cash 1,500 Accounts receivable 1,500 15 Cash 5,000 Common stock 5,000 19 Accounts payable 375 Cash 375 27 Accounts receivable 1,640 Service revenue 1,640 28 Notes payable 2,500 Cash 2,500
Req 2 & 3
Cash Accounts payable Dec 1 4,325 Dec 2 1,600 Dec 19 375 Dec 1 875Dec 4 900 Dec 19 375 Dec 8 225Dec 11 1,500 Dec 28 2,500 Bal. 725Dec 15 5,000 Bal. 7,250
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Accounts receivable Notes payable Dec 1 2,200 Dec 11 1,500 Dec 28 2,500 Dec 1 17,500Dec 27 1,640 Bal. 2,340 Bal. 15,000
Supplies Common stock Dec 1 450 Dec 1 30,000Dec 8 225 Dec 15 5,000Bal. 675 Bal. 35,000
Office furniture Service revenue Dec 1 3,100 Dec 1 5,300Bal. 3,100 Dec 4 900 Dec 27 1,640 Bal. 7,840
Building Rent expense Dec 1 42,000 Dec 1 1,600 Bal. 42,000 Dec 2 1,600 Bal. 3,200
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Req 4
Going Green, Inc. Trial Balance
December 31, 2014 ACCOUNT TITLE DEBIT CREDIT
Cash $ 7,250 Accounts receivable 2,340 Supplies 675 Office furniture 3,100 Building 42,000 Accounts payable $ 725Notes payable 15,000Common stock 35,000Service revenue 7,840Rent expense 3,200 Total $58,565 $58,565
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(20-25 min.) E 2-28B
Req. 1
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Jun 1 Cash 28,000 Common stock 28,000 Sold stock. 2 Supplies 1,100 Accounts Payable 1,100 Purchased supplies on acct. 3 Building 50,000 Notes payable 50,000 Purchased building signing note payable. 4 Equipment 9,000 Cash 9,000 Paid cash to purchase equipment 5 Notes Payable 2,500 Cash 2,500 Made payment on note payable. 6 Accounts payable 500 Cash 500 Made payment on account.
Req. 2
Cash Accounts payable (1) 28,000 (4) 9,000 (6) 500 (2) 1,100
(5) 2,500 Bal. 600 (6) 500
Bal. 16,000
Supplies Notes payable
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(2) 1,100 (5) 2,500 (3) 50,000Bal. 1,100 Bal. 47,500
Equipment Common stock (4) 9,000 (1) 28,000
Bal. 9,000 Bal. 28,000
Building (3) 50,000
Bal. 50,000
Req. 3
Grinko, Inc. Trial Balance June 30, 2014
BALANCE
ACCOUNT TITLE DEBIT CREDIT Cash $16,000 Supplies 1,100 Equipment 9,000 Building 50,000 Accounts payable $ 600Notes payable 47,500Common stock 28,000Total $76,100 $76,100
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Req. 4
Grinko, Inc. Balance Sheet June 30, 2014
ASSETS LIABILITIES Cash $ 16,000 Accounts payable $ 600Supplies 1,100 Notes payable 47,500Equipment 9,000 Total liabilities 48,100Building 50,000 STOCKHOLDERS’ EQUITY Common stock 28,000 Total liabilities and Total assets $76,100 stockholder’s equity $76,100
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(25-30 min.) E 2-29B
Req. 1
Journal
DATE ACCOUNTS POST.REF. Dr. Cr.
Sep 2 Cash 50,000 Common stock 50,000 3 Rent expense 1,750 Cash 1,750 6 Equipment 1,400 Cash 1,400 8 Furniture 2,700 Accounts payable 2,700 11 Supplies 225 Accounts payable 225 19 Accounts receivable 1,835 Service revenue 1,835 20 Utility expense 285 Cash 285 28 Cash 975 Service revenue 975 Req. 2
Cash Accounts payable Sep 2 50,000 Sep 3 1,750 Sep 8 2,700
28 975 6 1,400 11 225 20 285 Bal 2,925
Bal. 47,540
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Accounts receivable Common stock Sep 19 1,835 Sep 2 50,000
Bal. 50,000Bal. 1,335
Supplies Service revenue Sep 11 225 Sep 19 1,835
Bal. 225 28 975 Bal. 2,810
Equipment Rent Expense Sep 6 1,400 Sep 3 1,750 Bal. 1,400 Bal. 1,750
Furniture Utilities expense Sep 8 2,700 Sep 20 285 Bal. 2,700 Bal. 285
Req. 3
Nolan Consulting, Inc. Trial Balance
September 30, 2014
BALANCE
ACCOUNT TITLE DEBIT CREDIT Cash $ 47,540 Accounts receivable 1,835 Supplies 225 Equipment 1,400 Furniture 2,700 Accounts payable $ 2,925Common stock 50,000Service revenue 2,810Rent expense 1,750 Utilities expense 285 Total $55,735 $55,735
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Req. 4
Nolan Consulting, Inc. Income Statement
Month Ended September 30, 2014
Service revenue $2,810Expenses: Rent expense $1,750 Utilities expense 285 Total expenses 2,035 Net Income $775
Nolan Consulting, Inc. Statement of Retained Earnings
Month Ended September 30, 2014
Retained earnings, September 1, 2014 $0Add: Net income 775Retained earnings, September 30, 2014 $775
Note: There were no dividends during the month of September
Nolan Consulting, Inc. Balance Sheet
September 30, 2014
ASSETS LIABILITIES Cash $ 47,540 Accounts payable $ 2,925Accounts receivable 1,835 Supplies 225 STOCKHOLDERS’ EQUITY Equipment 1,400 Common stock 50,000Furniture 2,700 Retained earnings 775 Total Stockholders’ equity 50,775 Total liabilities and Total assets $53,700 stockholder’s equity $53,700
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 2-30B
Effect on Trial Balance Account(s) Misstated
a. Total debits = Total credits Cash
$810 too high
Rent expense
$810 too low
b. Total debits = Total credits Accounts receivable
$700 too high
Accounts Payable
$700 too high
c. Total debits = Total credits Cash
$90 too low
Service revenue
$90 too low
d. Total debits = Total credits Supplies
$380 too low
Accounts payable
$380 too low
e. Total debits > Total credits Notes payable
$95,000 too low
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Problems
(15-20 min.) P 2-37B
Journal
DATE ACCOUNTS POST. REF. Dr. Cr.
Sep 1 Cash 60,000 Common stock 60,000 3 Supplies 450 Cash 450 8 Land 43,000 Cash 43,000 12 Office equipment 4,300 Accounts payable 4,300 17 Cash 65,000 Notes payable 65,000 26 Accounts payable 2,800 Cash 2,800 30 Cash 12,000 Accounts receivable 16,500 Service revenue 28,500 30 Salaries expense 3,240 Rent expense 1,800 Utilities expense 675 Cash 5,715 30 Dividends 4,300 Cash 4,300
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) P 2-38B
Journal
DATE ACCOUNTS POST. REF. Dr. Cr.
May 1 Cash 150,000 Notes payable 150,000 3 Building 135,000 Cash 135,000 6 Accounts receivable 11,800 Service revenue 11,800 9 Supplies 1,100 Accounts payable 1,100 13 Cash 8,100 Service revenue 8,100 15 Dividends 5,000 Cash 5,000 17 Cash 7,500
Accounts Receivable 7,500 18 Property tax expense 1,250 Cash 1,250 22 Salaries expense 3,350 Cash 3,350 26 Supplies 1,300 Cash 1,300 31 Accounts payable 5,000 Cash 5,000
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(20-25 min.) P2-39B
Req. 2
Journal
DATE ACCOUNTS POST. REF. Dr. Cr.
July 1 Cash 100,000 Common stock 100,000 3 Supplies 575 Furniture 2,300 Accounts payable 2,875 5 Cash 1,600 Service revenue 1,600 8 Land 28,000 Cash 28,000 11 Accounts receivable 1,850 Service revenue 1,850 14 Salaries expense 575 Cash 575
16 Accounts payable 2,300 Cash 2,300 19 Cash 2,450 Service revenue 2,450 23 Accounts receivable 3,300 Service revenue 3,300 28 Cash 1,450 Accounts receivable 1,450 31 Salaries expense 575 Cash 575 31 Rent expense 1,720 Cash 1,720 31 Dividends 2,500 Cash 2,500
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 1, 3, and 4
Cash Accounts Payable Jul 1 100,000 Jul 8 28,000 Jul 16 2,300 Jul 3 2,875
5 1,600 14 575 Bal 57519 2,450 16 2,300 28 1,450 31 575
31 1,720 Common stock 31 2,500 Jul 1 100,000Bal. 69,830 Bal. 100,000
Accounts Receivable Dividends Jul 11 1,850 Jul 28 1,450 Jul 31 2,500 23 3,300 Bal. 2,500 Bal. 3,700
Supplies Service revenue Jul 3 575 Jul 5 1,600Bal. 575 11 1,850 19 2,450 23 3,3009,200 Bal. 8,400
Furniture Salaries Expense Jul 3 2,300 Jul 14 575 Bal. 2,300 31 575 Bal. 1,150
Land Rent Expense Jul 8 28,000 Jul 31 1,720 Bal. 28,000 Bal. 1,720
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Req. 5
Slater & Associates, Inc. Trial Balance July 31, 2014
BALANCE
ACCOUNT TITLE DEBIT CREDIT Cash $ 69,830 Accounts receivable 3,700 Supplies 575 Furniture 2,300 Land 28,000 Accounts payable $ 575Common stock 100,000Dividends 2,500 Service revenue 9,200Salaries expense 1,150 Rent expense 1,720 Total $109,775 $109,775
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(25-30 min.) P 2-40B
Req. 1
Journal Page 6
DATE ACCOUNTS POST.REF. Dr. Cr.
Jan 16 Cash 110 3,400 Accounts receivable 112 3,400 Received payment on account. 18 Accounts receivable 112 1,200 Service revenue 411 1,200 Performed service on account. 21 Cash 110 2,700 Service revenue 411 2,700 Performed service for cash. 23 Supplies 115 400 Accounts Payable 210 400 Purchased supplies on account. 25 Dividends 315 1,400 Cash 110 1,400 Paid dividends. 27 Accounts payable 210 2,100 Cash 110 2,100 Made payment on account. 29 Cash 110 3,800 Service revenue 411 3,800 Received cash for services performed. 30 Rent Expense 515 1,000 Cash 110 1,000 Paid rent. 30 Salaries Expense 511 2,400 Cash 110 2,400 Paid employee salaries.
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Req. 2
CASH ACCOUNT NO. 110 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 2,700 16 J.6 3,400 6,100 21 J.6 2,700 8,800 25 J.6 1,400 7,400 27 J.6 2,100 5,300 29 J.6 3,800 9,100 30 J.6 1,000 8,100 30 J.6 2,400 5,700
ACCOUNTS RECEIVABLE ACCOUNT NO. 112 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 8,000 16 J.6 3,400 4,600 18 J.6 1,200 5,800
SUPPLIES ACCOUNT NO. 115 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 1,000
23 J.6 400 1,400
EQUIPMENT ACCOUNT NO. 140 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 14,600
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
ACCOUNTS PAYABLE ACCOUNT NO. 210 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 4,500 23 J.6 400 4,900 27 J.6 2,100 2,800
COMMON STOCK ACCOUNT NO. 311 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 21,600
DIVIDENDS ACCOUNT NO. 315 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 2,800 25 J.6 1,400 4,200
SERVICE REVENUE ACCOUNT NO. 411 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 6,600 18 J.6 1,200 7,800 21 J.6 2,700 10,500 29 J.6 3,800 14,300
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SALARIES EXPENSE ACCOUNT NO. 511 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 2,300 30 J.6 2,400 4,700
RENT EXPENSE ACCOUNT NO. 515 POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Jan 15 Bal. √ 1,300 30 J.6 1,000 2,300
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 3
XYZ Systems, Inc. Trial Balance
January 31, 2014
ACCOUNT DEBIT CREDIT Cash $ 5,700 Accounts receivable 5,800 Supplies
1,400 Equipment 14,600 Accounts payable $ 2,800 Common stock 21,600 Dividends 4,200 Service revenue 14,300 Salaries expense 4,700 Rent expense 2,300 Total $38,700 $38,700
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(20-25 min.) P 2-41B
Req. 1
BakerConsulting, Inc. Trial Balance
December 31, 2014
BALANCE
ACCOUNT DEBIT CREDIT Cash 9,120 Accounts receivable 7,370 Supplies 650 Building 135,000 Land 82,000 Accounts payable $ 4,100Notes payable 85,000Common stock 120,000Retained earnings 12,320Dividends 15,000 Service revenue 101,700Salaries expense 48,750 Rent expense 11,340 Utilities expense 6,750 Supplies expense 1,840 Insurance expense 5,300 Total $323,120 $323,120
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 2
Baker Consulting, Inc. Income Statement
Year Ended December 31, 2014 Service revenue $101,700Expenses Salaries expense $48,750 Rent expense 11,340 Utilities expense 6,750 Insurance expense 5,300 Supplies expense 1,840 Total expenses 73,980 Net Income $27,720
Baker Consulting , Inc. Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings, January 1, 2014 $12,320Add: Net income 27,720 Subtotal 40,040Less: Dividends 15,000Retained earnings, December 31, 2014 $25,040
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BakerConsulting, Inc. Balance Sheet
December 31, 2014
ASSETS LIABILITIES Cash $ 9,120 Accounts payable $ 4,100Accounts receivable 7,370 Note payable 85,000Supplies 650 Total liabilities 89,100Land 82,000 STOCKHOLDERS’ EQUITY Building 135,000 Common stock 120,000 Retained earnings 25,040 Total stockholders’ equity 145,040 Total liabilities and Total assets $234,140 stockholders’ equity $234,140
Req 3
It was a profitable year for Baker Consulting, Inc. from the standpoint that the business generated $27,720 of Net income.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) P 2-42B
Req. 1
Journal Page 3
DATE ACCOUNTS POST.REF. Dr. Cr.
a. Cash 270 Service revenue 270 ($740 – $470 = $270) b. Supplies 450 Accounts payable 450 The original entry was recorded “backwards”
so an entry for double the amount needs to be made
c. Cash 10,800 Rent expense 10,800 ($12,000 - $1,200 = $10,800)
d. Accounts payable 825 Accounts receivable 825
Req 2
a. Net income is understated because Service revenue was credited (increased) by only $470 instead of the correct amount of $740.
b. Net income would be unchanged because the entry did not effect a revenue or an expense.
c. Net income would be understated because Rent expense was debited (increased) by $12,000 instead of the correct amount of $1,200.
d. Net income would be unchanged because the entry did not effect a revenue or an expense.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Chapter 3: Adjusting and Closing Entries
Short Exercises
(5-10 min.) S 3-2
1. d
2. c
3. b
4. f
5. a
6. e
7. g
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 3-3
Type of Adjusting Entry Related Income Statement Account
a. Accrued expense Interest expense
b. Deferred revenue Service revenue
c. Accrued revenue Service revenue
d. Deferred expense Supplies expense
e. Deferred expense Depreciation expense
(5-10 min.) S 3-4
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
July 31 Rent expense ($4,500 X 1/6)
750
Prepaid rent 750
Record rent expense for July.
Prepaid rent Rent expense Bal. 4,500 July 31 750 July 31 750 Bal. 3,750
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 3-5
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Oct 31 Supplies expense ($1,200 − $480)
720
Office supplies 720
Record supplies expense for October
Office supplies Supplies expense Bal. 1,200 Oct. 31 720 Oct. 31 720 Bal. 480
(5-10 min.) S 3-6
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Dec. 31 Interest expense ($140 × 5 months)
700
Interest payable 700
Accrue interest expense for
August – December.
Interest payable Interest expense
Dec. 31 700 Dec. 31 700
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 3-7
Journal
DATE ACCOUNTS
POST.
REF. Dr. Cr.
Dec. 31 Unearned subscription revenue
($2,700/12× 7 months)
1,575
Subscription revenue 1,575
Record subscription revenue
Earned for June – December.
Unearned subscription revenue Subscription revenue
Dec. 31 1,575 Jun. 1 2,700 Dec. 31 1,575
Bal. 1,125 Bal 1,575
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 3-8
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
1. Aug. 31 Accounts receivable
2,700
Service revenue 2,700
Accrue service revenue.
2. Salaries expense 3,200
Salaries payable 3,200
Accrue salary.
3. Interest expense 260
Interest payable 260
Accrue interest.
(5-10 min.) S 3-9
You would record $915 of service revenue at the end of July. Under the accrual basis of accounting, revenues are recorded when earned regardless of when cash is received. Therefore, both the $750 you have received as well as the $165 that is still owed to you would be recorded as service revenue.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 3-10
Account Type of Account Permanent/Temporary Closed
Depreciation expense Expense Temporary Yes
Sales revenue Revenue Temporary Yes
Building Asset Permanent No
Cash Asset Permanent No
Unearned service
revenue
Liability Permanent No
Prepaid rent Asset Permanent No
Dividends Stockholders’
equity
Temporary Yes
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 3-11
Req 1
Net income = $575 ($1,800 service revenue - $1,225 total expenses)
Req 2
Change in Retained earnings = $275 ($575 net income - $300 dividends)
Req 3
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
July 31 Service revenue
1,800
Retained earnings 1,800
Close revenue account
Retained earnings 1,225
Rent expense 650
Salaries expense 575
Close expense accounts
Retained earnings 300
Dividends 300
Close dividends
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 3-12
Type of
Entry (ADJ or CL)
Accounts
Post. Ref.
Dr.
Cr.
ADJ Salaries expense 725 Salaries payable 725
CL Service revenue 4,200 Retained earnings 4,200 CL Retained earnings 1,500 Dividends 1,500 ADJ Unearned revenue 940 Service revenue 940
(5-10 min.) S 3-13
Anderson Realty, Inc. Post-Closing Trial Balance July 31, 2014
ACCOUNT DEBIT CREDIT Cash Accounts receivable Prepaid insurance Prepaid rent Equipment Accumulated deprecition – Equipment Accounts payable Notes payable Common Stock Retained earnings Total
$3,800 2,300 4,200 1,600
45,500
________ $57,400
4,6002,1005,000
35,00010,700
$57,400
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(10-15 min.) E 3-28B
Req 1
The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue.
Req 2
Journal
DATE ACCOUNTS POST REF. Dr.
Cr.
Cash 170 Unearned service revenue 170 Collect revenue in advance. Accounts receivable 375 Service revenue 375 Accrue service revenue. Cash 80 Service revenue 80 Collect cash for services performed
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) E 3-29B
Missing amounts are in italics. A B C D Beginning prepaid insurance $ 400 600 $ 1,100 $ 800 Payments for Prepaid insurance during the year 1,500 $1,000 2,200 900 Total amount to account for 1,900 1,600 3,300 1,700 Ending Prepaid insurance 700 400 300 1,200 Insurance expense $1,200 $ 1,200 $ 3,000 $ 500
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
A. Insurance expense 1,200 Prepaid insurance 1,200 Record insurance expense.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 3-30B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. Salaries expense 4,500 Salaries payable 4,500 b. Unearned service revenue 1,250 Service revenue 1,250 c. Depreciation expense 1,900 Accumulated depreciation 1,900
d. Rent expense 350
Prepaid rent 350 e. Interest receivable 980 Interest revenue 980
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 3-31B
Net Income:
Transaction Overstated/Understated Amount a. Overstated $1,400 b. Overstated $2,600 c. Overstated $3,750 d. Overstated $450 e. Understated $2,200
(15-20 min.) E 3-32B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Unearned rent revenue ($6,600 × 2/6) 2,200 Rent revenue 2,200 Record revenue earned. b. Interest receivable 520 Interest revenue 520 Accrue interest revenue. c. Salaries expense ($3,100 × 4 days) 12,400 Salaries payable 12,400 Accrue salary expense. d. Supplies expense 300 Supplies ($1,000− $700) 300 Record supplies expense. e. Depreciation Expense ($4,000 / 5 years) 800 Accumulated Depreciation 800 Record depreciation expense. f. Insurance expense 390 Prepaid insurance ($936 × 5/12) 390 Record insurance expense.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 3-33B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. Accounts receivable 1,650 Service revenue 1,650 Accrue revenue. b. Unearned service sevenue 350 Service revenue 350 Record revenue earned. c. Supplies expense ($900 − $240) 660 Supplies 660 Record supply expense. d. Salaries expense 980 Salaries payable 980 Accrue salary expense.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(continued) E 3-33B
Accounts receivable Supplies Bal. 2,100 Bal. 900 (c) 660(a) 1,650 Bal. 240 Bal. 3,750
Salaries payable Unearned service revenue (d) 980 (b) 350 Bal. 750 Bal. 980 Bal. 400
Service revenue Salaries expense Bal. 4,100 Bal. 1,850 (a) 1,650 (d) 980 (b) 350 Bal. 2,830 Bal. 6,100
Supplies expense (c) 660 Bal. 660
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 3-34B Req. 1
a. To record supplies used b. To record depreciation expense on equipment c. To record depreciation expense on the building d. To record accrued salaries e. To record accrued revenues
Req. 2
Accounts receivable Supplies 29,300 3,000 (a) 600(e) 1,200 Bal. 2,400 Bal 30,500
Accumulated depreciation, equipment Accumulated depreciation, building
5,200 46,000 (b) 1,800 (c) 6,000 Bal 7,000 Bal 52,000
Depreciation expense, equipment Depreciation expense, building
(b) 1,800 (c) 6,000 Bal 1,800 Bal 6,000
Salaries expense Supplies expense
14,000 (a) 600 (d) 1,700 Bal 600
Bal 15,700
Service revenue 38,000 (e) 1,200 Bal. 39,200
Salaries payable (d) 1,700 Bal 1,700
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Cyclone Construction, Inc. Income Statement
Year Ended July 31, 2014
Revenues Service revenue $39,200Expenses Salaries expense $15,700 Depreciation expense, building 6,000 Depreciation expense, equipment 1,800 Supplies expense 600 Total expenses 24,100Net Income $ 15,100
Req. 3 Operations were successful from the standpoint that the business earned net income of $15,100
during the year. The reason is revenues were greater than expenses.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 3-35B Req. 1
Williams Industrial, Inc. Statement of Retained Earnings Year Ended December 31, 2014
Retained earnings, January 1, 2014 $ 19,600 Less: Net loss (2,700) Subtotal 16,900 Less: Dividends ($800 × 12 months) (9,600) Retained earnings, December 31, 2014 $ 7,300 Req. 2 Retained earnings had a net decrease of $12,300 for the year (End $7,300 – Beg $19,600). This
resulted from the current net loss ($2,700) and dividends paid ($9,600).
(10-15 min.) E 3-36B
Supplies Bal. 4,000 Purchase of supplies 6,500 Supplies expense 9,000Bal. 1,500
Salaries payable Bal. 1,700Cash payment 59,800 Salary expense 62,500 Bal. 4,400
Unearned service revenue Bal. 17,000Service revenue 73,500 Cash receipts 66,400 Bal. 9,900
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(15-20 min.) E 3-37B
Five Star Catering, Inc. Income Statement Month Ended October 31, 2014
Revenue: Service revenue Expenses: Salaries expense Rent expense Depreciation expense, equipment Supplies expense Total Expenses Net Income
$4,750 1,200
675 450
$20,400
7,075$13,325
Five Star Catering, Inc. Statement of Retained Earnings Month Ended October 31, 2014
Retained earnings, October 1, 2014 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, October 31, 2014
$15,925 13,325 29,250 2,500 $26,750
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Five Star Catering, Inc. Balance Sheet
October 31, 2014 Assets Liabilities
Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Total Assets
$32,000(8,400)
$9,1003,800
600
23,600
$37,100
Accounts payable Salaries payable Unearned service revenue Total liabilities
Stockholders’ Equity Common stock Retained earnings Total stockholders’ equity Total Liabilities & Stockholders’ equity
$2,1001,3501,9005,350
5,00026,75031,750
$37,100
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 3-38B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Apr 30 Service revenue 54,000 Interest revenue 500 Retained earnings 54,500 Close revenue accounts Retained earnings 33,500 Salaries expense 20,800 Rent expense 5,900 Depreciation expense 2,600 Interest expense 2,400 Supplies expense 1,800 Close expense accounts Retained earnings 16,000 Dividends 16,000 Close dividends
Jona & Son Electrical, Inc.’s ending retained earnings is $9,200($4,200 + $54,500- $33,500 - $16,000).
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 3-39B
Christianson & Associates, Inc. Statement of Retained Earnings Year Ended July 31, 2014
Retained earnings, August 1, 2013 Add: Net Income Subtotal Less: Dividends Retained earnings, July 31, 2014
$84,000 78,000
162,000 46,000
$116,000
(10-15 min.) E 3-40B
Photo Finish, Inc. Post-Closing Trial Balance
July 31, 2014 ACCOUNT DEBIT CREDIT Cash Accounts receivable Supplies Equipment Accumulated depreciation, equipment Accounts payable Salaries payable Unearned service revenue Common stock Retained earnings Total
$10,25013,2001,700
23,000
.
$48,150
$5,000 5,200 4,700 3,000
15,000 15,250
$48,150
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 3-41B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jan 31 Service revenue 96,400 Retained earnings 96,400 Close revenue account Retained earnings 50,460 Salaries expense 32,600 Rent expense 14,800 Depreciation expense, equipment 1,550 Depreciation expense, furniture 730 Supplies expense 480 Close expense accounts Retained earnings 20,000 Dividends 20,000 Close dividends
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Problems
(15-20 min.) P 3-48B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Dec. 31 Insurance expense ($1,200× 8/12 months) 800 Prepaid insurance 800 Record insurance expense.
b. 31 Salaries expense ($12,500 × 1/5) 2,500 Salaries payable 2,500 Accrue salary expense.
c. 31 Interest receivable 640 Interest revenue 640 Accrue interest revenue.
d. 31 Supplies expense ($1,025 + $4,300 − $2,500) 2,825 Supplies 2,825 Record supply expense.
e. 31 Unearned service revenue 4,700 Service revenue 4,700 Record revenue earned.
f. 31 Depreciation expense, vehicles 2,550 Accumulated depreciation, vehicles 2,550 Depreciation expense, equipment 1,300 Accumulated depreciation, equipment 1,300 Record depreciation expense.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(15-20 min.) P 3-49B
Journal
DATE ACCOUNTS
POST REF. Dr. Cr.
Nov 30 Supplies expense ($1,125 - $0) 1,125 Supplies ($1,950− $825) 1,125 Record supplies used. 30 Rent expense ($3,200 - $2,200) 1,000 Prepaid rent ($3,800 - $2,800) 1,000 Record Prepaid rent expired 30 Depreciation expense, equipment ($4,130-
$2,480) 1,650
Accumulated depreciation, equipment ($6,750 − $5,100) 1,650 Record depreciation. 30 Salaries expense ($23,775 - $22,600) 1,175 Salaries payable ($1,175 − $0) 1,175 Accrue salary expense. 30 Interest expense ($420 - $275) 145 Interest payable ($145 - $0) 145 Accrue interest expense 30 Unearned service revenue ($2,900 - $1,300) 1,600 Service revenue ($47,750 - $46,150) 1,600 Record unearned revenue earned.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(25-30 min.) P 3-50B
Req 1& 2
Journal
DATE ACCOUNTS
POST REF. Dr. Cr.
a. Jun 30 Insurance expense 1,900 Prepaid insurance ($2,300 - $400) 1,900 Record prepaid insurance expired b. 30 Supplies expense 800 Supplies 800 Record supplies used. c. 30 Depreciation expense, equipment 2,500 Accumulated depreciation, equipment 2,500 Record depreciation. d. 30 Utilities expense 900 Accounts payable 900 Accrue utilities expense e. 30 Salaries expense 800 Salaries payable 800 Accrue salary expense. f. 30 Unearned service revenue ($2,500 - $1,200) 1,300 Service revenue 1,300 Record unearned revenue earned
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Req 1 & 2
Cash
Supplies
Accounts payable Bal 22,800 Bal 1,700 800 b. 2,000 Bal 900 d.
Bal 900 2,900 BalBal 22,800 Equipment Salaries payable
Accounts receivable Bal 85,000 800 e.Bal 19,700
Bal 85,000 800 BalBal 19,700 Accumulated depreciation,
equipment Unearned service
revenue 24,000 Bal f. 1,300 2,500 Bal
Prepaid insurance 2,500 c.
Bal 2,300 1,900 a. 26,500 Bal 1,200 Bal
Bal 400
Common stock
Service revenue
70,000 Bal 11,000 Bal 1,300 f. 70,000 Bal 12,300 Bal Retained
earnings
Salaries
expense
33,500 Bal Bal 3,400 e. 800 33,500 Bal Bal 4,200
Dividends
Insurance
expense
Bal 8,100 a. 1,900 Bal 8,100 Bal 1,900
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Depreciation expense, equipment
c. 2,500
Bal 2,500 Utilities
expense
d. 900
Bal 900 Supplies
expense
b. 800
Bal 800
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Req 3
Novelty Nook, Inc., Adjusted Trial Balance
June 30, 2014 ACCOUNT TITLE Dr. Cr.
Cash $22,800 Accounts receivable 19,700 Prepaid insurance 400 Supplies 900 Equipment 85,000 Accumulated depreciation, equipment $26,500 Accounts payable 2,900 Salaries payable 800 Unearned service revenue 1,200 Common stock 70,000 Retained earnings 33,500 Dividends 8,100 Service revenue 12,300 Salaries expense 4,200 Insurance expense 1,900 Depreciation expense, equipment 2,500 Utilities expense 900 Supplies expense 800 ______ Total $147,200 $147,200
Req 4
The adjusted trial balance will be used to prepare Novelty Nook, Inc.’s financial statements.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 3-51B Req 1
Revenues and Expenses for January
Date Impact on Revenues or Expenses $ Affect on Revenues or
Expenses Jan. 1 No effect
3 Increase revenues $4,150 6 No effect 8 Increase expenses $1,160
12 No effect 18 Increase revenues $1,600 23 No effect 26 No effect 30 Increase expenses $1,615 31 Increase expenses $1,200 31 Increase revenues $875
Req 2
Revenues ($4,150 + $1,600 + $875) $6,625
Expenses ($1,160 + $1,615 + $1,200) $3,975
Net Income ($6,625 - $3,975) $2,650
Req 3
The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.
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(20-25 min.) P 3-52B Req 1
Ocean Realty, Inc. Income Statement
Year Ended March 31, 2014
Revenue: Service revenue $88,000 Interest revenue 960 Total Revenues $88,960Expenses: Salaries expense $43,000 Rent expense 14,000 Depreciation Expense, Equipment 4,200 Utilities expense 2,800 Interest Expense 600 Supplies Expense 300 Total expenses 64,900Net Income $24,060
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Ocean Realty, Inc. Statement of retained earnings
Year Ended March 31, 2014
Retained earnings, April 1, 2013 $10,900Add: Net income 24,060Subtotal 34,960Less: Dividends 19,000Retained earnings, March 31, 2014 $15,960
Req. 2
a. The Income statement reports Ocean Realty’s results of operations. Operations were
moderately successful, as shown by the fact that Ocean Realty earned net income of $24,060
for the year.
b. The Balance sheet reports Ocean Realty’s financial position
Ocean Realty, Inc. Balance Sheet
March 31, 2012
ASSETS LIABILITIES Cash $ 10,200 Accounts payable $ 3,300Accounts receivable 11,600 Unearned service revenue 1,800Prepaid rent 1,000 Interest payable 540Supplies 1,300 Salaries payable 1,500Equipment 46,000 Notes payable 9,000Less Accum. Depr., equipmment (12,000) 34,000
Total liabilities 16,140
STOCKHOLDERS’ EQUITY Common stock 26,000 Retained earnings 15,960 Total Stockholders’ equity 41,960 Total liabilities and Total assets $58,100 stockholder’s equity $58,100
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(20-25 min.) P 3-53B Req 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jun 30 Service revenue 41,400 Interest revenue 650 Retained earnings 42,050 Close revenue accounts Retained earnings 27,120 Salaries expense 18,100 Rent expense 6,350 Depreciation expense, equipment 1,325 Utilities expense 960 Supplies expense 385 Close expense accounts Retained earnings 4,000 Dividends 4,000 Close dividends
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 2
KLR Inc.’s ending retained earnings is $21,455 ($10,525 + $42,050 - $27,120 - $4,000).
Req 3
KLR, Inc. Post-Closing Trial Balance
June 30, 2014 ACCOUNT DEBIT CREDIT Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation, equipment Accounts payable Unearned service revenue Salaries payable Notes payable Common stock Retained earnings Total
$6,20012,7002,650
42031,000
.
$52,970
$4,750 5,900 1,240 2,125
10,000 7,500
21,455 $52,970
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Chapter 4: Accounting for a Merchandising Business
Short Exercises
(5-10 min.) S 4-2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,200 Inventory 1,200 Adjust inventory to physical count
(5-10 min.) S 4-3 Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec 1 Inventory 83,000 Accounts Payable – Outdoor Wear 83,000 Purchase inventory on account Dec 8 Accounts Payable – Outdoor Wear 83,000 Cash ($83,000 × .98) 81,340 Inventory ($83,000 × .02) 1,660 Record payment of inventory purchases within the discount period.
Req 2 Final cost of Inventory = Inventory $83,000 – discount taken $1,660 = $81,340.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 4-4
a. $17,400 - $1,600 = $15,800
b. ($17,400- $1,600) x .99 = $15,642
(5-10 min.) S 4-5
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Inventory 11,800 Accounts Payable –Pool Palace 11,800 b. Accounts Payable –Pool Palace 2,300 Inventory 2,300
c. Accounts Payable –Pool Palace 9,500 Cash ($9,500 × .98) 9,310 Inventory ($9,500 × .02) 190
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(5-10 min.) S 4-6
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Inventory 4,200 Accounts Payable 4,200 Purchase inventory on account b. Inventory 140 Cash 140 Paid freight charges to have inventory delivered c. Accounts Payable 4,200 Cash ($4,200 × .97) 4,074 Inventory ($4,200 × .03) 126 Record payment of inventory purchases within the discount period.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 4-7
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Accounts Receivable – Regal Spas 81,000 Sales Revenue 81,000 Cost of Goods Sold 44,500 Inventory 44,500 b. Cash ($81,000 × .96) 77,760 Sales Discount ($81,000 × .04) 3,240 Accounts Receivable – Regal Spas 81,000
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 4-8
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Mar 17 Accounts Receivable 640.00 Sales Revenue 640.00 Cost of Goods Sold 360.00 Inventory 360.00 Record sale of inventory on account. 21 Sales Returns and Allowances 185.00 Accounts Receivable 185.00 Inventory 110.00 Cost of Goods Sold 110.00 Record receipt of returned goods. 26 Cash [($640– 185) × .98] 445.90 Sales Discount [($640 – 185) × .02] 9.10 Accounts Receivable ($640 - $185) 455.00 Record payment received within the discount period.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 4-9 Req 1 Net Sales Revenue: Sales Revenue……………………………..…. $ 920.00 Less: Sales Returns and Allowances ………. (290.00) Sales Discounts [($920 − $290) ×.01]... (6.30) Net Sales Revenue……………………………. $ 623.70 Req 2 Net Sales Revenue: $ 623.70 Less: Cost of Goods Sold…(550-175)……………… (375.00) Gross profit……………………………………………. $ 248.70
(5-10 min.) S 4-10 Req 1 a. Cash 6,400 Accounts Receivable 5,700 Inventory 27,000 Supplies 1,950 Prepaid Rent 2,400 Total Current Assets $ 43,450 b. Accounts Payable $ 14,800 Salaries Payable 2,150 Unearned Revenue 7,300 Total Current Liabilities $ 24,250 c. Equipment $ 43,000 Less: Accumulated Depreciation, Equipment (4,200) $38,800 Building $ 121,000 Less: Accumulated Depreciation, Building (53,000) 68,000 Book Value of Plant Assets $ 106,800 d. Total Long-Term Liabilities (Note Payable, Long Term) $46,000
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(10-15 min.) S 4-11 Req. 1
The Skate Shed, Inc. Income Statement
Year Ended January 31, 2014 Net sales revenue $41,500Cost of goods sold 21,000Gross profit 20,500Operating expense 6,475Operating income 14,025Other Expense: Interest expense 375Net income $13,650
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 4-12
The Skate Shed, Inc. Balance Sheet
January 31, 2014 Assets
Current assets: Cash $ 2,750 Accounts Receivable 3,100 Inventory 4,700 Prepaid Rent 1,200 Total current assets 11,750 Long-term assets: Equipment, net 25,700 Total assets $37,450
Liabilities
Current liabilities: Accounts Payable $ 4,800 Salaries Payable 1,150 Accrued Liabilities 2,475 Total current liabilities 8,425 Long-term liabilities: Long-Term Notes Payable 23,000 Total liabilities 31,425
Stockholders’ equity Total stockholders’ equity 6,025 Total liabilities and stockholders’ equity $37,450
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(10-15 min.) S 4-13
Gross Profit Percentage
= Gross Profit
=($41,500 - $21,000)
= 0.494 or 49.4% Net Sales Revenue $41,500
Net income percentage
=
Net income
= ($41,500 - $21,000 - $6,475 - $375)
= 0.329 or 32.9% Net sales
revenue $41,500
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(5-10 min.) E 4-25B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Cost of Goods Sold 2,400 Inventory 2,400 Adjust inventory to physical count Req 2 The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 4-26B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Nov 15 Inventory 4,300 Accounts Payable 4,300 18 Inventory 350 Cash 350 20 Accounts payable 300 Inventory 300 28 Accounts Payable ($4,300 - $300) 4,000
Cash ($4,000 × .97) 3,880 Inventory ($4,000 × .03) 120
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 4-27B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Dec 3 Inventory 7,775 Accounts Payable 7,775 Purchased inventory on account. 6 Accounts payable 1,250 Inventory 1,250 Returned damaged inventory to supplier. 12 Accounts Payable ($7,775 - $1,250) 6,525
Cash ($6,525 - 121) 6,404 Inventory [($7,300-1,250) x .02] 121 Paid invoice in full.
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(10-15 min.) E4-28B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Nov 14 Accounts Receivable 2,700 Sales Revenue 2,700 Cost of Goods Sold 1,050 Inventory 1,050 16 Delivery Expense 195 Cash 195 20 Sales Returns and Allowances 300 Accounts Receivable 300 Inventory 115 Cost of Goods Sold 115 23 Cash ($2,400 × .97) 2,328 Sales Discount ($2,400 × .03) 72 Accounts Receivable ($2,700 - $300) 2,400
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 4-29B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Nov 3 Accounts Receivable 1,800.00 Sales Revenue 1,800.00 Cost of Goods Sold ($1,800.00 x .55) 990.00 Inventory 990.00 Record sale of inventory on account. 3 Accounts Receivable 75.00 Cash 75.00 Record prepayment of shipping charges. 7 Sales Returns and Allowances 150.00 Accounts Receivable 150.00 Inventory (150.00 x .55) 82.50 Cost of Goods Sold 82.50 Record return of goods from customer. 16 Cash ($1,800 + $75 - $150 - $33) 1,692.00 Sales Discounts [($1,800– $150) × .02] 33.00 Accounts Receivable ($1,800 + $75 - $150) 1,725.00 Record receipt of payment from customer.
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(15-20 min.) E 4-30B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
June 3 Inventory 3,900 Accounts Payable 3,900 6 Accounts Payable 400 Inventory 400 8 Inventory 70 Cash 70 11 Accounts Receivable 1,900 Sales Revenue 1,900 Cost of Goods Sold 800 Inventory 800 12 Accounts Payable ($3,900 - $400) 3,500 Cash ($3,500 × .98) 3,430 Inventory ($3,500 × .02) 70 18 Sales Returns and Allowances 200 Accounts Receivable 200 25 Cash ($1,700× .97) 1,649 Sales Discounts ($1,700 × .03) 51 Accounts Receivable ($1,900 - $200) 1,700
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 4-31B
a. Sales * = Net Sales + Sales Discounts = $99,700 + $3,100
= $102,800
b. Net Sales = Gross Profit + Cost of Goods Sold = $27,200 + $72,500
= $99,700
c. Net Sales = Sales – Sales Discounts = $71,000 − $2,600
= $68,400
d. Gross Profit = Net Sales − Cost of Goods Sold = $68,400 − $43,900
= $24,500
e. Sales Discounts = Sales – Net Sales = $112,000 – 98,400
= $13,600
f. Cost of Goods Sold = Net Sales – Gross Profit = $98,400 – 43,600
= $54,800
g Sales = Net Sales + Sales Discounts = $106,500 + 1,200
= $107,700
h. Gross Profit = Net Sales – Cost of Goods Sold = $106,500 - $37,600
= $68,900
* You must find (b) before you find (a).
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(10-15 min.) E 4-32B Req 1
Borden’s Furniture, Inc. Income Statement
Year Ended August 31, 2014 Revenues: Net Sales Revenue $ 244,600 Expenses: Cost of Goods Sold $128,700 Selling Expenses 32,400 General Expenses 13,800 Interest expense 1,700 Total Expenses 176,600Net Income $ 68,000
Computations: Net Sales Revenue: $249,000 - $2,500 - $1,900 = $244,600 Req 2 The single-step income statement is not recommended for Borden’s’s Furniture because they are a merchandiser. A merchandiser should use a multi-step income statement to provide more detailed information to the financial statement users.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 4-33B Req 1
Borden’s Furniture, Inc. Income Statement
Year Ended August 31, 2014 Sales Revenue $249,000 Less: Sales Returns and Allowances $2,500 Sales Discounts 1,900 4,400 Net Sales Revenue 244,600Cost of Goods Sold 128,700Gross Profit 115,900Operating Expenses: Selling Expenses 32,400 General Expenses 13,800 46,200Operating Income 69,700Other Expense: Interest expense 1,700Net income $68,000
Req 2
Gross Profit Percentage
= Gross Profit
=$115,900
= .474or 47.4% Net Sales Revenue $244,600
Req 3 Borden’s Furniture, Inc.’s gross profit rate of 47.4% in 2014 has improved from the gross profit rate of 41.3% in 2013. Borden’s Furniture, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses, interest expense and generating net income than it did in 2013.
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(15-20 min.) E 4-34B Req 1
Borden’s Furniture, Inc. Balance Sheet
August 31, 2014 Assets Liabilities
Current assets: Current Liabilities: Cash 11,600 Accounts Payable $ 5,100 Accounts Receivable 6,300 Salaries Payable 2,600 Inventory 8,300 Unearned Revenues 3,100 Prepaid Rent 1,900 Total Current
Liabilities $ 10,800
Supplies 2,400 Long-term liabilities: Total current assets $ 30,500 Long-Term Notes
Payable 60,000
Long-term assets: Mortgage Payable 21,500 81,500 Equipment 32,000 Total liabilities 92,300 Less Accumulated Depreciation, Equip 12,700 19,300 Stockholders’ Equity Common Stock 15,000 Building 155,000 Retained Earnings* 58,800 Less Accumulated Total Stockholders’
Equity 73,800
Depreciation, Bldg 38,700 116,300 Total Liabilities and Total assets $ 166,100 Stockholders’ Equity $ 166,100
*Retained Earnings = ($56,000 Beginning Balance + $68,000 Net Income - $65,200 Dividends) = $58,800.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 4-35B
Earnings per Share =Net Income
=$9,000,000
= $15 per share Ave. Shares Outstanding 600,000
Gross Profit Percentage
= Gross Profit **
= $31,600,000
= .504 or 50.4% Net Sales Revenue * $62,600,000
* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($67,000,000 - $2,800,000 - $1,600,000) = ($62,600,000) ** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($62,600,000 - $31,000,000) = $36,000,000
Net Income Percentage
= Net Income
= 9,000,000
= .143 or 14.3% Net Sales Revenue * $62,600,000
* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($67,000,000 - $2,800,000 - $1,600,000) = ($62,600,000)
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Problems
(15-20 min.) P 4-43B Req. 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jun 3 Inventory 7,700 Cash 7,700 9 Supplies 650 Accounts Payable – Supplies Unlimited 650 16 Inventory 5,600
Accounts Payable – Brown International, Inc.
5,600
22 Accounts Payable – Brown International, Inc. 450 Inventory 450 30 Accounts Payable – Supplies Unlimited 650 Cash 650
30 Accounts Payable – Brown
International, Inc. ($5,600- $450) 5,150
Cash ($5,100 x .98) 5,047 Inventory ($5,100 x .02) 103
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) P4-44B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Apr 3 Accounts Receivable – B. Levin 3,200 Sales Revenue 3,200 Cost of Goods Sold 1,400 Inventory 1,400 4 Delivery Expense 85 Cash 85 10 Cash 2,300 Sales Revenue 2,300 Cost of Goods Sold 1,025 Inventory 1,025 17 Cash ($3,200 x .99) 3,168 Sales Discount ($3,200 x .01) 32 Accounts Receivable – B. Levin 3,200 22 Accounts Receivable – A. Klecans 4,800 Sales Revenue 4,800 Cost of Goods Sold 2,800 Inventory 2,800 26 Sales Returns and Allowances 900 Accounts Receivable – A. Klecans 900 30 Cash ($3,900 × .98) 3,822 Sales Discount ($3900× .02) 78 Accounts Receivable – A. Klecans ($4,800 -
$900) 3,900
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(20-25 min.) P 4-45B Req 1 Tanaka’s Antique Furniture
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Aug 4 Inventory 7,100 Accounts Payable - R.S. Furniture
Warehouse 7,100
Record purchase of inventory on account. 7 Inventory 275 Cash 275 Record payment of freight charges. 10 Accounts Payable – R.S. Furniture Warehouse 1,300 Inventory 1,300 Record inventory returned to supplier. 18 Accounts Payable – R.S. Furniture Warehouse 1,800 Cash ($1,800x .98) 1,764 Inventory ($1,800 × .02) 36 Record partial payment of invoice. 31 Accounts Payable – R.S. Furniture Warehouse
($7,100– $1,300 - $1,800)
4,000 Cash 4,000 Record payment of remainder of invoice in full.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 2 R.S. Furniture Warehouse
Aug 4 Accounts Receivable - Tanaka’s Antique Furniture 7,100 Sales Revenue 7,100 Cost of Goods Sold 3,900 Inventory 3,900 Record sale of inventory on account. 10 Sales Returns and Allowances 1,300 Accounts Receivable - Tanaka’s Antique
Furniture 1,300
Inventory 700 Cost of Goods Sold 700 Record receipt of returned goods. 18 Cash ($1,800 .98) 1,764 Sales Discount ($1,800 x .02) 36 Accounts Receivable - Tanaka’s Antique
Furniture 1,800
Record partial payment received. 31 Cash 4,000 Accounts Receivable - Tanaka’s Antique
Furniture ($7,100- $1,300 - $1,800)
4,000
Record payment on remainder of invoice received.
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(20-25 min.) P 4-46B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Nov 4 Inventory ($5,100 + $75) 5,175 Accounts Payable – Salem Tire 5,175 Record purchase of inventory on account 7 Supplies 600 Accounts Payable – Office Maxx 600 Record purchase of supplies on account 9 Accounts Receivable – T. Thompson 1,250 Sales Revenue 1,250 Cost of Goods Sold 750 Inventory 750 Record sale on account 11 Delivery Expense 50 Cash 50 Record payment of freight charges 13 Accounts Payable – Salem Tire 700 Inventory 700
Record return of merchandise to supplier
15 Cash 1,300 Sales Revenue 1,300 Cost of Goods Sold 780 Inventory 780 Record cash sales.
16 Accounts Payable – Office Maxx 600 Cash ($600 x .97) 582 Supplies (600 x .03) 18 Record payment for supplies 18 Accounts Payable – Salem Tire ($5,100+ $75 − $700) 4,475 Cash ($4,475 – $88) 4,387 Inventory [($5,100- $700) × .02] 88 Record payment on account within discount period.
20 Sales Returns and Allowances 250
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Accounts Receivable – T. Thompson 250 Inventory 170 Cost of Goods Sold 170 Record receipt of returned goods. 22 Inventory 3,500
Cash 3,500
Record purchase of inventory for cash. 23 Cash ($1,000× .99) 990 Sales Discounts ($1,000 × .01) 10
Accounts Receivable – T. Thompson
($1,250 - $250) 1,000
Record payment received on account Req. 2 Sales Revenue ($1,250 + $1,300) $2,550 Less: Sales Returns and Allowance $ 250 Sales Discounts 10 260 Net Sales Revenue 2,290 Cost of Goods Sold ($750+ $780 -$170) 1,360 Gross Profit $ 930
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(20-25 min.) P 4-47B Req. 1
Fresh Foods, Inc. Income Statement
Month Ended November 30, 2014 Sales Revenue $214,700 Less: Sales Returns and Allowances $3,800 Sales Discounts 4,300 8,100 Net Sales Revenue 206,600Cost of Goods Sold 102,600Gross Profit 104,000Operating Expenses: Selling Expenses 25,400 General Expenses 20,900 46,300Operating Income 57,700Other Expense: Interest expense 1,350Net income $56,350
Req 2
Gross Profit Percentage
= Gross Profit
=$104,000
= .503 or 50.3% Net Sales Revenue $206,600
Req 3 Fresh Foods Inc.’s 50.3% gross margin percentage means that each dollar of net sales generates 50.3 cents of gross profit that is used to cover operating expenses, interest expense, and generate net income.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(25-30 min.) P 4-48B Req. 1
Ramirez Industries, Inc. Income Statement
Year Ended October 31, 2014 Sales Revenue $325,800 Less: Sales Returns and Allowances $6,800 Sales Discounts 4,600 11,400 Net Sales Revenue 314,400Cost of Goods Sold 171,600Gross Profit 142,800Operating Expenses: Selling Expenses: Commission Expense 25,700 Advertising Expense 14,600 Delivery Expense 1,400 41,700 General and Administrative Expenses Office Salaries Expense 53,200 Depreciation Expense 13,500 Insurance Expense 10,200 Utilities Expense 5,300 82,200 123,900Operating Income 18,900Other Revenues (Expenses) Interest Expense (1,300)Net Income $17,600
Req 2
Ramirez Industries, Inc. Statement of Retained Earnings Year Ended October 31, 2014
Retained earnings, November 1, 2013 $ 88,250 Plus: Net Income 17,600 Subtotal 105,850 Less: Dividends 10,000 Retained earnings, October 31, 2014 $ 95,850
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Req 3
Ramirez Industries, Inc. Balance Sheet
October 31, 2014 Assets
Current Assets: Cash $ 12,200 Accounts Receivable 8,800 Inventory 16,400 Supplies 750 Prepaid Rent 3,500 Total Current Assets 41,650Long-term Assets: Equipment $97,000 Less: Accumulated Depreciation, Equipment 13,000 84,000 Building 125,000 Less: Accumulated Depreciation, Building 41,300 83,700Total assets $209,350
Liabilities Current Liabilities: Accounts Payable $ 17,700 Salaries Payable 1,700 Unearned Sales Revenue 4,100 Total Current Liabilities 23,500Long-Term Liabilities: Mortgage Payable 45,000Total Liabilities 68,500
Stockholders’ Equity Common Stock 45,000Retained Earnings 95,850Total Stockholders’ Equity 140,850 Total Liabilities and Stockholders’ Equity $209,350
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 4-49B
Req 1
Earnings per Share =Net Income
=$17,600
= $3.52 per share Ave. Shares Outstanding 5,000
Req 2
Ramirez Industries, Inc.’s earnings per share in 2014 has improved from the earnings per share of $3.27 in 2013. Ramirez Industries, Inc. earned more for each share of stock in 2014 than it did in 2013.
Req 3
Gross Profit Percentage
= Gross Profit
=$142,800*
= .454 or 45.4% Net Sales Revenue $314,400*
* Numbers are taken from the solution to P4-48B above Req 4 Ramirez Industries, Inc.’s gross profit rate of 45.4% in 2014 has improved from the gross profit rate of 42.6% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses , interest expense, and generating net income than it did in 2013. Req 5
Net Income Percentage
= Net Income
= $17,600*
= .056or 5.6% Net Sales Revenue $314,400*
* Numbers are taken from the solution to P4-48B above
Req 6
Ramirez Industries, Inc.’s net income rate of 5.6% in 2014 has improved from the net income rate of 4.9% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales as net income than it did in 2013.
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Chapter 5: Inventory
Short Exercises
(5-10 min.) S 5-2
Req 1.
The Average-cost method would meet Cunnington Furniture’s goal of averaging out price changes
Req 2.
In order to expense out the newer purchases of goods, Cunnington Furniture would utilize LIFO.
(5-10 min.) S 5-3
Perpetual Inventory Record: FIFO Perpetual Inventory Record - FIFO
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost
Quantity Unit Cost
Total Cost
Quantity Unit Cost
Total Cost
Dec 1
Dec 19
Dec 28
15
$52.00
$780.00
10 2
$54.00 $52.00
$540.00 $104.00
10
10 15
13
$54.00
$54.00 $52.00
$52.00
$540.00
$540.00 $780.00
$676.00
Dec 31 15 $780.00 12 $644.00 13 $676.00
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 5-4
Perpetual Inventory Record: FIFO Perpetual Inventory Record - LIFO
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost
Quantity Unit Cost
Total Cost
Quantity Unit Cost
Total Cost
Dec 1
Dec 19
Dec 28
15
$52.00
$780.00
12
$52.00
$624.00
10
10 15
10 3
$54.00
$54.00 $52.00
$54.00 $52.00
$540.00
$540.00 $780.00
$540.00 $156.00
Dec 31 15 $780.00 12 $624.00 13 $696.00
(5-10 min.) S 5-5
Perpetual Inventory Record: FIFO Perpetual Inventory Record – Average-cost
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost
Quantity Unit Cost
Total Cost
Quantity Unit Cost
Total Cost
Dec 1
Dec 19
Dec 28
15
$52.00
$780.00
12
$52.80
$634.00
10
25
13
$54.00
$52.80*
$52.80
$540.00
$1,320.00
$686.00 Dec 31 15 $780.00 12 $634.00 13 $686.00
* ($540.00 + $780.00) / 25 = $52.80
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(5-10 min.) S 5-6
Dec 19 Inventory 780.00
Accounts Payable 780.00
Dec 28 Accounts receivable 1,272.00
Sales 1,272.00
Cost of goods sold 624.00
Inventory 624.00
Note - the Dec 28 sale amount is based on the perpetual inventory record from S5-4 above:
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 5-7
1. When inventory costs are rising, FIFO will produce the lowest cost of goods sold because the older, lower cost items are assumed to be sold before the newer, higher priced items.
2. When inventory costs are rising, LIFO will produce the highest cost of goods sold because the newer, higher cost items are assumed to be sold before the older, lower priced items.
3. If prices had been declining, FIFO will produce the highest cost of goods sold because the older, higher cost items are assumed to be sold before the newer, lower priced items.
(5-10 min.) S 5-8
__b.__ 1. A company must perform strictly proper accounting only for items that are
significant to the business’s financial statements.
___d._ 2. Reporting the least favorable figures in the financial statements.
___a._ 3. A business’s financial statements must report enough information for users to
make knowledgeable decisions about the company.
___c._ 4. A business should use the same accounting methods and procedures from period to period.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 5-9
Req 1
Mar 31 Cost of goods sold ($10,800-10,640) 160
Inventory 160
Inventory would be reported on the March 31 balance sheet at $10,640
(5-10 min.) S 5-10
Req 1
The inventory would be valued at $13,480 which is the value based on the physical count.
(5-10 min.) S 5-11
__c.__ 1. Conservatism
__f.__ 2. Full disclosure
__g.__ 3. LIFO
__b._ 4. Average-cost
__a.__ 5. FIFO
__d._ 6. Consistency
__h._ 7. Materiality
__e._ 8. Specific- Identification
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 5-12
If ending inventory is overstated, $2,800 too much is deducted from Cost of goods available for sale to arrive at Cost of goods sold. Therefore, Cost of goods sold is understated by $2,800. The correct amount for Cost of goods sold would be $139,200($136,400+$2,800).
If Cost of goods sold is understated, too little was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is overstated by $2,800. The correct amount for Gross profit would be $114,500 ($117,300-$2,800))
(5-10 min.) S 5-13
Because the uncorrected ending inventory error in 2014 becomes a beginning inventory error in 2015, the beginning inventory in 2015 is overstated by $3,200.
If beginning inventory is overstated, $3,200 too much is added to purchases to arrive at Cost of goods available for sale. So, Cost of goods available for sale, and therefore Cost of goods sold, is overstated by $3,200 in 2015.
If Cost of goods sold is overstated, too much was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is understated by $3,200 in 2015.
(10-15 min.) S 5-14
Beginning inventory $ 51,600 + Purchases 326,800
= Cost of goods available for sale 378,400 Estimated cost of goods sold: Sales revenue 505,300 - Estimated gross profit of 38 % ($505,300 x 38%) 192,014
= Estimated cost of goods sold 313,286 Estimated ending inventory $ 65,114
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) S 5-15
Inventory
Turnover =
Cost of Goods Sold =
728,000 =
11.8 times
per year Average Inventory ($55,000 + $68,000) / 2
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(10-15 min.) E 5-28B
Req 1
Perpetual Inventory Record: FIFO Perpetual Inventory Record - FIFO
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantit
y Unit Cost Total Cost
Mar1
Mar7
Mar 11
Mar 19
Mar 28
8
13
$108.00
$112.00
$864.00
$1,456.00
6 4
4 5
$100.00 $108.00
$108.00 $112.00
$600.00 $432.00
$432.00 $560.00
6
6 8
4
4 13 8
$100.00
$100.00 $108.00
$108.00
$108.00 $112.00
$112.00
$600.00
$600.00 $864.00
$43200
$432.00 $1,456.00
$896.00
Mar 31 21 $2,320.00 19 $2,024.00 8 $896.00
Req 2
Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,032.00 Inventory 1,032.00 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00
Sales 1,665.00 Cost of goods sold 992.00 Inventory 992.00
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(10-15 min.) E 5-29B
Req 1
Perpetual Inventory Record: FIFO Perpetual Inventory Record – LIFO
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost
Quantity Unit Cost
Total Cost
Quantity Unit Cost
Total Cost
Mar 1
Mar 7
Mar 11
Mar 19
Mar 28
8
13
$108.00
$112.00
$864.00
$1,456.00
8 2
9
$108.00 $100.00
$112.00
$864.00 $200.00
$1,008.00
6
6 8
4
4 13
4 4
$100.00
$100.00 $108.00
$100.00
$100.00 $112.00
$100.00 $112.00
$600.00
$600.00 $864.00
$400.00
$400.00 $1,456.00
$400.00 $448.00
Mar 31 21 $2,320.00 19 $2,072.00 8 $848.00
Req 2
Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,064.00 Inventory 1,06400 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00
Sales 1,665.00 Cost of goods sold 1,008.00 Inventory 1,008.00
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E5-30B
Perpetual Inventory Record: FIFO Perpetual Inventory Record – Average-cost
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost
Quantity Unit Cost
Total Cost
Quantity Unit Cost Total Cost
Mar 1
Mar 7
Mar 11
Mar 19
Mar 28
8
13
$108.00
$112.00
$864.00
$1,456.00
10
9
$104.57
$110.24
$1,046.00
$992.00
6
14
4
17
8
$100.00
$104.57*
$104.57
$110.24**
$110.24
$600.00
$1,464.00
$418.00
$1,874.00
$882.00
Mar 31 21 $2,320.00 19 $2,038.00 8 $882.00
* ($600.00 + $864.00) / 14 = $104.57 (rounded)
** ($418.00 + $1,456.00)/17 = $110.24 (rounded)
Req 2
Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,046.00 Inventory 1,046.00 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00
Sales 1,665.00 Cost of goods sold 992.00 Inventory 992.00
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(10-15 min.) E 5-31B
Req 1
FIFO ending inventory = 17 @ $267 – 11@ $267 +16 @ $271 - (6@ $267 and 4 @ $271) – 7 @ $271 = 5 @ $271 = $1,355
Req 2
LIFO ending inventory = 17 @ $267 – 11 @ $267 +16 @ $271 - 10 @ $271 – (6 @ $271 and 1 @ $267) = 5 @ $267 = $1,335
Req 3
FIFO results in the higher cost of ending inventory.
(10-15 min.) E 5-32B
Req 1
FIFO cost of goods sold = 11 @ $267 +(6 @ $267 and 4 @ $271) + 7 @ $271 = $7,520
Req 2
LIFO cost of goods sold = 11 @ $267 + 10 @ $271 + (6 @ $271 and 1 @ $267) = $7,540
Req 3
LIFO results in the higher cost of goods sold.
(15-20 min.) E 5-33B
Req 1
FIFO
Sales Revenue (38 x $160) $6,080
Cost of Goods Sold [(34 x $88) + (4 x $90)] 3,352
Gross Profit $2,728
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 2
LIFO
Sales Revenue (38 x $160) $6,080
Cost of Goods Sold [(29 x $90) + (9 x $88)] 3,402
Gross Profit $2,678
Req 3
Average cost
Sales Revenue (38 x $160) $6,080
Cost of Goods Sold (38 x $88.92*) 3,379
Gross Profit $2,701
* ($2,992 + $2,610)/63 = $88.92
Req 4
FIFO results in the largest gross profit. When prices are rising, FIFO results in the lowest cost of goods sold and therefore the highest gross profit.
(10-15 min.) E 5-34B
Req 1
Using LCM, Ridgeview Resources will report the ending inventory at $29,700.
Req 2
No adjusting entry is required because the inventory cost of $29,700 is lower than the market value of $30,600.
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(5-10 min.) E 5-35B
Req 1
Apr 30 Cost of Goods Sold 27.75
Inventory ($92.50 -$64.75) 27.75
Req 2
The actual amount of inventory on hand may differ from the amount based on the perpetual inventory records due to errors in recording inventory related transactions or due to inventory shrinkage. Inventory shrinkage is most often the result of theft, damage, or spoilage of inventory items.
(10-15 min.) E 5-36B
Req 1
Sales Revenue $343,000
Cost of Goods Sold ($246,000 + $3,600) * 249,600
Gross Profit $93,400
*If ending inventory is overstated, $3,600 too much is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is understated by $3,600.
Req 2
Sales Revenue $343,000
Cost of Goods Sold ($246,000 - $1,800) * 244,200
Gross Profit $98,800
*If ending inventory is understated, $1,800 too little is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is overstated by $1,800.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 5-37B
Req 1
Gomez Auto Parts, Inc.
Comparative Income Statement
Years Ended April 30, 2014 and 2013
2014 2013
Sales Revenue $143,000 $119,000
Cost of Goods Sold:
Beginning Inventory $ 9,000* $ 12,500
Net Purchases 79,000 71,000
Cost of Goods Available 88,000 83,500
Ending Inventory 18,000 9,000*
Cost of Goods Sold 70,000 74,500
Gross profit 73,000 44,500
Operating expenses 29,000 23,000
Net income $ 44,000 $ 21,500
* $12,000 - $3,000 = $9,000
Req 2
Net income for the two years combined is the same in both cases—$65,500. The sum of the
correct amounts, $65,500 ($44,000 + $21,500), equals the sum of the incorrect amounts, $65,500
($41,000 + $24,500). The beginning inventory error in 2014 offsets the ending inventory error in
2013.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) E 5-38B
Beginning inventory 58,000
+ Net purchases 287,000
= Cost of goods available for sale 345,000
-Estimated cost of goods sold:
Net sales revenue $486,000
- Estimated gross profit of 43% ($486,000 x 43%) 208,980
= Estimated cost of goods sold 277,020
Estimated cost of inventory destroyed $ 67,980
(10-15 min.) E 5-39B
Req 1
Inventory
Turnover =
Cost of Goods Sold =
$280,100 =
8.55 times
per year Average Inventory ($44,300 + $21,200) / 2
Req 2
Pete’s Plants 2014 inventory turnover rate of 8.55 times has deteriorated from the 2013 rate of 10.24.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Problems
(15-20 min.) P 5-48B
Req 1
The inventory method that most likely mimics the physical flow of Top Line Equipment’s inventory is FIFO because FIFO assigns the cost of the oldest items to cost of goods sold first.
Req 2
Perpetual Inventory Record: FIFO
Perpetual Inventory Record - LIFO
Date
Purchases Cost of Goods Sold Inventory on Hand
Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost
Nov 1
Nov 6
Nov 13
Nov 19
Nov 25
Nov 29
105
150
$134.00
$136.00
$14,070.00
$20,400.00
100
110
40 5 60
$134.00
$136.00
$136.00 $134.00 $120.00
$13,400.00
$14,960.00
$5,440.00 $670.00
$7,200.00
95
95 105
95 5
95 5
150
95 5 40
35
$120.00
$120.00 $134.00
$120.00 $134.00
$120.00 $134.00 $136.00
$120.00 $134.00 $136.00
$120.00
11,400.00
$11,400.00 $14,070.00
$11,400.00 $670.00
$11,400.00 $670.00
$20,400.00
$11,400.00 $670.00
$5,440.00
$4,200.00
Nov 30 255 $34,470.00 315 $41,670.00 35 $4,200.00
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Req. 3
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Nov 6 Inventory 14,070 Accounts Payable 14,070
13 Accounts Receivable 28,000 Sales Revenue (100 $280) 28,000 Cost of Goods Sold 13,400 Inventory 13,400
19 Inventory 20,400 Accounts Payable 20,400
25 Accounts Receivable 30,800 Sales Revenue (110 $280) 30,800 Cost of Goods Sold 14,960 Inventory 14,960
29 Accounts Receivable 29,400 Sales Revenue (105 $280) 29,400 Cost of Goods Sold ($5,440 + $670 + $7,200) 13,310 Inventory 13,310
30 Accounts payable 16,300 Cash 16,300
30 Operating expenses 9,000 Cash ($9,000 x 2/3) 6,000 Accounts Payable ($9,000 x 1/3) 3,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) P 5-49B
Req 1
Perpetual Inventory Record: FIFO
Perpetual Inventory Record – Average-cost
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit Cost Total Cost Quantity Unit
Cost Total Cost Quantity Unit Cost Total Cost
Nov 1
Nov 6
Nov 13
Nov 19
Nov 25
Nov 29
105
150
$134.00
$136.00
$14,070.00
$20,400.00
100
110
105
$127.35
$132.54
$132.54
$12,735.00
$14,579.00
$13,917.00
95
200
100
250
140
35
$120.00
$127.35*
$127.35
$132.54**
$132.54
$132.54
$11,400.00
$25,470.00
$12,735.00
$33,135.00
$18,556.00
$4,639.00
Nov 30 255 $34,470.00 315 $41,231.00 35 $4,639.00
* ($11,400.00 + $14,070.00) /200 = $127.35
** ($12,735.00 + $20,400.00)/250 = $132.54
Req 2
Top Line Equipment
Income Statement
Month ended November 30
Sales Revenue $88,200
Cost of Goods Sold 41,231
Gross Profit $ 46,969
Operating Expenses 9,000
Net income $ 37,969
Computations:
Sales revenue: [(100 x $280) + (110 x $280) + (105 x $280)] = $88,200
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(15-20 min.) P 5-50B
Req 1
Because inventory prices are rising, the LIFO inventory method will result in Lakeside Industries paying the lowest income taxes. The LIFO method assigns the most recent cost (in this case the highest) to cost of goods sold which results in lower net income and, therefore, lower income taxes.
Req 2
Perpetual Inventory Record: FIFO
Perpetual Inventory Record – FIFO
Date
Purchases Cost of Goods Sold Inventory on Hand
Quantity Unit Cost
Total Cost Quantity Unit Cost
Total Cost Quantity Unit Cost
Total Cost
Aug 1
Aug 4
Aug12
Aug 22
Aug 31
70
56
$92.00
$95.00
$6,440.00
$5,320.00
35 46
24 20
$90.00 $92.00
$92.00 $95.00
$3,150.00 $4,232.00
$2,208.00 $1,900.00
35
35 70
24
24 56
36
$90.00
$90.00 $92.00
$92.00
$92.00 $95.00
$95.00
$3,150.00
$3,150.00 $6,440.00
$2,208.00
$2,208.00 $5,320.00
$3,420.00
Aug 31 126 $11,760.00 125 $11,490.00 36 $3,420.00
Req 3
Perpetual Inventory Record: FIFO
Perpetual Inventory Record - LIFO
Date
Purchases Cost of Goods Sold Inventory on Hand
Quantity Unit Cost Total Cost Quantity Unit Cost
Total Cost Quantity Unit Cost
Total Cost
Aug 1
Aug 4
Aug 12
Aug 22
Aug 31
70
56
$92.00
$95.00
$6,440.00
$5,320.00
70 11
44
$92.00 $90.00
$95
$6,440.00 $990.00
$4,180.00
35
35 70
24
24 56
24 12
$90.00
$90.00 $92.00
$90.00
$90.00 $95.00
$90.00 $95.00
$3,150.00
$3,150.00 $6,440.00
$2,160.00
$2,160.00 $5,320.00
$2,160.00 $1,140.00
Aug 31 126 $11,760.00 125 $11,610.00 36 $3,300.00
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 4
Perpetual Inventory Record: FIFO
Perpetual Inventory Record – Average-cost
Date
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost Quantity Unit
Cost Total Cost Quantity Unit Cost Total
Cost
Aug 1
Aug 4
Aug 12
Aug 22
Aug 31
70
56
$92.00
$95.00
$6,440.00
$5,320.00
81
44
$91.33
$93.90
$7,398.00
$4,132.00
35
105
24
80
36
$90.00
$91.33*
$91.33
$93.90**
$93.90
$3,150.00
$9,590.00
$2,192.00
$7,512.00
$3,380.00
Aug 31 126 $11,760.00 125 $11,530.00 36 $3,380.00
* ($3,150.00 + $6,440.00) /105 = $91.33 (rounded)
** ($2,192.00 + $5,320.00)/80 = $93.90
(10-15 min.) P 5-51B
Req 1
Conservatism is the reason to account for inventory at the lower-of-cost-or-market value. Conservatism directs accountants to decrease the accounting value of an asset if it appears unrealistically high.
Req 2
SoCal Sporting Goods should value its ending inventory at December 31, 2014 at the current replacement cost of $73,850 because it is less than SoCal Sporting Goods’ actual cost of $75,230.
Req 3
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,380 Inventory ($75,230 - $73,850) 1,380 Write inventory down to market value.
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(10-15 min.) P 5-52B
Req 1
Freeze It Corp. should report inventory at the current replacement cost of $149,300 ($160,500 - $11,200) on its July 31, 2014 balance sheet.
Req 2
Freeze It Corp. should report cost of goods sold of $682,200 ($671,000 + $11,200) for the period.
Req 3
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
July 31 Cost of Goods Sold
11,200
Inventory 11,200
Write inventory down to market value.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 5-53B
Req 1
Prior to correction Net income for the year was:
2014 2013 2012
Overstated by $8,000
Overstated by $5,000
Understated by $5,000
Req 2
Ling Supply Co. Income Statements
For the Years Ended December 31, 2012, 2013, & 2014
( in thousands) 2014 2013 2012 Sales Revenue $ 198 $ 177 $ 179Cost of Goods Sold: Beginning Inventory $ 16 $ 24 $ 6 Net Purchases 145 112 132 Cost of Goods Available 161 136 138 Ending Inventory 15 16 24 Cost of Goods Sold 146 120 114Gross Profit 52 57 65Operating Expenses 42 41 43Net Income $ 10 $ 16 $ 22
Req 3
There is no impact on the 2014 income statement if the 2012 inventory error is left uncorrected. The ending inventory in 2012 becomes the beginning inventory in 2013 so the net income in 2013 is misstated by the exact opposite amount that it was misstated by in 2012. However, the 2012 error will not carry forward into 2014.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(15-20 min.) P 5-54B
Req. 1
Beginning Inventory $ 43,400
+ Net Purchases 287,300
= Cost of Goods Available for Sale 330,700
Estimated Cost of Goods Sold:
Sales $488,400
Less: Sales Returns and Allowances $81,500
Sales Discounts 5,900 87,400
Net Sales 401,000
- Estimated gross profit of 39% ($401,000 x 39%) 156,390
= Estimated cost of goods sold 244,610
Estimated ending inventory $ 86,090
Req. 2
Inland Empire Supply, Inc.
Income Statement (partial)
Month Ended July 31, 2014
Sales $ 488,400
Less: Sales Returns and Allowances $ 81,500
Sales Discounts 5,900 87,400
Net Sales $ 401,000
Cost of Goods Sold 244,610
Gross Profit $ 156,390
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) P 5-55B
Req. 1
2014
Inventory Turnover
= Cost of Goods Sold
=$153,000
= 7.29 times per year Average Inventory ($24,000 + $18,000) / 2
2013 Inventory Turnover
= Cost of Goods Sold
=$151,000
= 5.81 times per year Average Inventory ($28,000+ $24,000) / 2
Req 2
2014
Days-Sales-in-inventory
= (24,000 + 18,000)/2 = 50.1 days
(153,000/365)
2013
Days-Sales-in-inventory
= (28,000 + 24,000)/2
= 62.8 days
(151,000/365)
Req 3
Keystone Electronics, Inc.’s cost of goods sold remained relatively constant from 2013 to 2014. Therefore, the most likely cause for the change in the inventory turnover was the decrease in the average inventory from 2013 ($26,000) to 2014 ($21,000)
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Chapter 6: The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics
Short Exercises
(5–10 min.) S 6-1
1 F
2 CR
3 B
4 F
5 E
(5–10 min.) S 6-2
1 P
2 P
3 R
4 O
5 P
(5–10 min.) S 6-3
Student answers will vary.
1. It can be argued that any one of the four objectives is the most important. However, many students feel that the safeguarding of assets is the most important. In fact, all of the objectives are equally important.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
2. In order for the business to survive in the long run, each of the objectives must be accomplished. The failure to accomplish any of the objectives can leave the business susceptible to such things as erroneous financial reporting, theft, or fraud. Any one of these may harm the company to the extent that its survival is in jeopardy.
(5–10 min.) S 6-4
1 ADR
2 RA
3 PA
4 RA
5 SD
(10–15 min.) S 6-5
Student answers will vary.
Separation of duties helps prevent employees from being able to steal assets and then cover up the theft. This is why it is often referred to as the cornerstone of internal controls over the safeguarding of assets. If an employee has custody of cash (they make the daily deposits) and records the daily cash sales, they could steal money from the daily deposit and then alter the amount of the daily cash sales that were recorded in order to hide the theft.
(5–10 min.) S 6-6
1 R
2 P
3 P
4 O
5 P
6 R
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(5–10 min.) S 6-7
1 A
2 L
3 A
4 O
5 A
6 L
7 O
8 A
9 L
10 0
(5–10 min.) S 6-8
1 b
2 d
3 a
4 e
5 c
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5–10 min.) S 6-9
a. Strength. When an employee is on vacation, errors or irregularities may be detected by the individual filling in for the employee who is on vacation.
b. Weakness. The accounting department should not be allowed to order merchandise and approve payment. An accountant could have goods sent to his / her home and then approve payment for the goods.
c. Strength. By not allowing the sales clerk access to both the cash and the accounting records, it is more difficult for the clerk to steal cash and hide the theft.
d. Weakness. The officer should examine the payment packet to ensure that the payment is for the correct amount.
(5–10 min.) S 6-10
a. Separation of duties (The same person is ordering merchandise and approving payment.)
b. Separation of duties (The same person is selling tickets and taking tickets.)
c. Adequate documents and records (No sales receipt is being prepared.)
d. Proper authorization (No authorization is required for sales returns.)
e. Adequate documents and records (No receiving report is being prepared.)
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(15–20 min.) S 6-11
Requirement 1 Requirement 2 Requirement 3
Missing Internal
Control Possible Problem Solution a. Separation of duties Theft Assign accounting and cash
handling duties to separate employees.
b. Authorization Financial loss. Require proper authorization by management prior to granting credit to customers.
c. Documentation Theft Order pre-numbered receipts from another vendor.
d. Separation of duties Theft Do not allow cashiers to record sales in accounting records.
(5–10 min.) S 6-12
1 i.
2 f.
3 j.
4 b.
5 e.
6 g.
7 d.
8 a.
9 h.
10 c.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) S 6-13
Student answers may vary
The main provisions of the Sarbanes-Oxley Act are:
• It applies to publicly traded companies.
• It established the Public Company Accounting Oversight Board (PCAOB).
• It requires that external auditors report to an audit committee, rather than to an
organization’s management. Prior to Sarbanes-Oxley, the external auditors often
reported to a company’s upper management.
• It requires that a company’s Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) certify all annual, or quarterly, reports filed by an organization.
(20-25 min.) S 6-14
Student answers may vary
US GAAP is primarily only utilized in the US compared to IFRS which is used by many
countries in the world. US GAAP is a rules-based system with numerous rules compared to
IFRS which is a principles-based system that utilizes overriding principles and a smaller number
of rules. US GAAP utilizes historical cost as its primary method of valuation compared to IFRS
which utilizes fair market value as its primary method of valuation.
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(10-15 min.) EB-1A
a. Future Value of $1 at 7% for 6 years
(Exhibit B-1)
Future value
$8,000 1.501 = $12,008
b. Present Value of Annuity of $1 at 12%
for 4 years (Exhibit B-4)
Present value
$3,000 3.037 = $9,111
c. Future Value of Annuity of $1 at 10%
for 3 years (Exhibit B-2)
Future Value
$4,500 3.310 = $14,895
d. Present Value of $1 at 6% for 10 years
(Exhibit B-3)
Present Value
$29,000 .558 = $16,182
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) EB-2A
Some students may predict that Plan A will provide the larger future value because the amount
invested, $30,000 ($3,000 10), is greater than the $25,000 invested with plan B.
Future Value of Annuity of $1 at 8%
for 10 years (Exhibit B-2)
Future Value
Plan A: $ 3,000 14.487 = $43,461
Future Value of $1 at 6% for 10 years
(Exhibit B-1)
Future value
Plan B: $25,000 1.791 = $44,775
Plan B provides the larger future.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) EB-3A
Req 1
Present Value of Annuity of $1 at 8%
for 4 years (Exhibit B-4)
Present value
a. Tanner: $55,000 3.312 = $182,160
Present Value of $1 at 8% for 4 years
(Exhibit B-3)
Present Value
b. Phoenix: $250,000 .735 = $183,750
Req 2
Student answers may vary. However, in addition to the present value cost of the equipment,
Hobart Parts, Inc. should consider the following when determining which company to purchase the
equipment from:
The warranties offered by the two companies.
The reputation of the two companies.
The stability/financial strength of the two companies.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Chapter 7: Cash and Receivables
Short Exercises
(10-15 min.) S 7-2
− Bank 1. Outstanding checks
+ Bank 2. Deposits in transit
− Book 3. NSF check
+ Book 4. Bank collection of our note receivable
+ Book 5. Interest earned on bank balance
− Book 6. Bank service charge
− Book 7. Book error: We credited Cash for $200. The correct amount of the check was $2,000
+ Bank 8. Bank error: The bank decreased our account for a check written by
another customer
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 7-3
Sinclair Food Service Bank Reconciliation
October 31, 2014
Bank Book Balance, October 31 $3,890 Balance, October 31 $2,605 Add: Add: Deposit in transit 240 Bank collection 630 4,130 Interest revenue 5 3,240 Less: Less: Outstanding checks (930) Service charge (40)Adjusted bank balance $3,200 Adjusted book balance $3,200
Amounts agree
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 7-4
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
May 31 Cash 5 Interest revenue 5 Record interest earned on bank balance. 31 Miscellaneous expense 25 Cash 25 Record bank service charge. 31 Accounts receivable 132 Cash 132 Record NSF checks
(5-10 min.) S 7-5
Assets Current Assets:
Cash $ 21,700 Accounts receivable 54,200 Inventory 85,800
Total Current Assets $161,700
Computations: Cash in bank accounts plus Petty cash = $21,400+ $300 = $21,700
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 7-6
f. 1. A contra-account, related to accounts receivable, which holds the estimated
amount of uncollectible receivables
i. 2. A method of accounting for uncollectible receivables in which the company
waits until a specific customer’s account receivable is uncollectible before recording Bad debt
expense
e. 3. A method of recording receivable losses on the basis of estimates instead of
waiting to see which customers the company will not collect from
a. 4. The party to a credit transaction who sells goods or a service and obtains a
receivable
h. 5. A way to estimate uncollectible accounts by analyzing individual accounts
receivable according to the length of time they have been receivable
b. 6. The party to a credit transaction who makes a purchase and has a payable
d. 7. Cost to the seller of credit sales; arises from the failure to collect from credit
customers
g. 8. A method of estimating uncollectible receivables that calculates Bad debt
expense based on net credit sales
(5-10 min.) S 7-7 Accounts receivable balance at October 31:
Accounts receivable Bal. 16,500 Collections 19,000Services on account
21,000 Write-offs 1,600
Bal. 16,900 Macintosh probably does not expect to collect all $16,900 of the accounts receivable because, realistically, she knows she will most likely not be able to collect from some clients.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 7-8
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec 31 Bad debt expense ($620,000 .03) 18,600 Allowance for uncollectible accounts 18600 Record estimate of uncollectible accounts for the year.
2. Balance sheet (partial): Accounts receivable $177,400 Less: Allowance for uncollectible accounts 18,600 Accounts receivable, net $158,800
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 7-9
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
a. Accounts receivable 545,000 Service revenue 545,000 Record service revenue.
b. Cash 575,000 Accounts receivable 575,000 Record collections on account.
c. Allowance for uncollectible accounts 19,000 Accounts receivable 19,000 Write off uncollectible accounts.
d. Bad debt expense ($545,000 .03) 16,350
Allowance for uncollectible accounts 16,350 Record estimate of uncollectible accounts for the year.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 7-10
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
a. Accounts receivable 322,000 Sales revenue 322,000 Record sales on account.
b. Cash 309,000 Accounts receivable 309,000 Record collections on account.
c. Allowance for uncollectible accounts 12,400 Accounts receivable 12,400 Write off uncollectible accounts.
d. Bad debt expense 10,700 Allowance for uncollectible accounts 10,700 Record estimate of uncollectible accounts for the year.
Allowance for uncollectible accounts Write-offs 12,400 Bal. 9,000 Bad debt expense
X
= 10,700 Bal. 7,300
Alternative solution: Ending balance = Beginning balance – write offs + Bad debt expense Where X = Bad debt expense, $87,300 = $9,000 - $12,400 + X $7,300 + $12,400 - $9,000 = X $10,700 = X
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 7-11
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Dec. 31
Bad debt expense ($3,768 – $2,000)
1,768 Allowance for uncollectible accounts 1,768 Record estimate of uncollectible accounts for the year.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 7-11 continued Computations: Required balance for Allowance for Uncollectible Accounts based on the aging schedule:
Age of Accounts
1-30 Days 31-60 Days 61-90 Days Over
90 Days Total
Receivables Amount receivable
$66,000 $24,000 $12,000 $3,600 $105,600
Estimate percentage uncollectible
X 1% X 2% X 6% X 53%
Required balance for Allowance for Uncollectible Accounts
$660 + $480 + $720
+ $1,908 = $ 3,768
Allowance for uncollectible accounts Bal. 2,000 Bad debt expense = 1,768 Bal. 3,768
(10-15 min.) S 7-12
Procedure b is the only procedure that includes an internal control weakness. The internal control weakness is the lack of separation of duties that allows the Credit Department to receive incoming cash receipts from customers and the authority to write-off an account receivable. With access to cash, a credit-department employee can pocket cash received from a customer and destroy the related remittance slip. The employee can then authorize the write-off of the customer’s account as uncollectible, and the company will stop pursuing collection from the customer. To strengthen the controls, the company can have customer checks go to a lock box controlled by a bank or to the company mailroom, not to the credit department.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) S 7-13
i 1. A written promise to pay a specified amount of money at a particular future date
e 2. The date when final payment of the note is due; also called the due date.
c 3. The percentage rate of interest specified by the note for one year
g 4. The entity to whom the maker promises future payment
b 5. The period of time during which interest is earned
h 6. The amount loaned out by the payee and borrowed by the maker of the note
f 7. The sum of the principal plus interest due at maturity
d 8. The entity that signs the note and promises to pay the required amount
a 9. The revenue to the payee for loaning money; the expense to the debtor
(10-15 min.) S 7-14 Note 1: $25,000 .09 11/12 = $2,063 Note 2: $42,000 .08 75/360 = $700 Note 3: $10,000 .06 45/360 = $75 Note 4: $125,000 .04 9/12 = $3,750
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 7-15
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
1. June 12 Note receivable—R. Simmons 125,000 Cash 125,000 2. July. 12 Cash ($125,000 + $625) 125,625 Note receivable—R. Simmons 125,000 Interest revenue ($125,000 .06 30/360) 625
(5-10 min.) S 7-16
Rhodes Peters Cash $15,000 $23,000Short-term investments 6,000 13,000Net receivables 41,000 51,000= Total quick assets $62,000 $87,000÷ Current liabilities ÷ $40,000 ÷$108,750= Quick ratio 1.55 .80
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 7-17
Simpson Martinez Net Credit Sales $90,000 $48,000
Divide by average Net Accounts Receivable* $16,500 $22,000 Equals accounts receivable turnover 5.45 2.18
* (Net accounts receivable, beginning + Net accounts receivable, ending)/2
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(20-25 min.) E 7-31B Req. 1
Cliff’s Construction
Bank Reconciliation
April 30, 2014
Bank Book
Balance, April 30 $1,363 Balance, April 30 $3,606
Add:
Deposit in transit 2,890
4,253 Less:
Correction of book error—
Less: Recorded $76 check
Outstanding checks as $67 9
No. 926 186 Cost of checks 32
No. 927 527 Service charge 25
Adjusted bank balance $3,540 Adjusted book balance $3,540
Cliff’s Construction’s account actually has cash of $3,540 on April 30.
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Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Apr 30 Accounts payable 9 Cash 9 To correct error on check written to vendor. 30 Miscellaneous expense 57 Cash 57 Record bank service charge and cost of checks.
(20-25 min.) E 7-32B Req. 1
Addison Picture Frames
Bank Reconciliation
November 30
Bank Book
Balance, November 30 $1,030 Balance, November 30 $3,304
Add: Add:
Deposit in transit 2,700 EFT collection—rent 410
3,730 3,714
Less:
Correction of book error—
Less: Recorded $330 check as $33 297
Outstanding checks Service charge 23
No. 213 300 Charge for printed checks 14
No. 214 150 NSF checks 100
Adjusted bank balance $3,280 Adjusted book balance $3,280
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Nov 30 Cash 410 Rental income 410 To record rental income 30 Salaries expense 297 Cash 297 To correct error on check written to pay salaries. 30 Miscellaneous expense 37 Cash 37 Record bank service charge and cost of checks. 30 Accounts receivable 100 Cash 100 Record NSF checks (5-10 min.) E 7-33B
Journal
DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.
May 3 Accounts receivable – B. Wilson 1,300 Service revenue 1,300 Record service revenue. Nov. 8 Bad debt expense 1,300 Accounts receivable – B. Wilson 1,300 Write off uncollectible accounts. Dec. 10 Accounts receivable – B. Wilson 1,150 Bad debt expense 1,150 Reinstate part of B. Wilson account Dec 10 Cash 1,150 Accounts receivable – B. Wilson 1,150 Record receipt of cash on account
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(10-15 min.) E 7-34B Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.
a. Cash 60,000 Accounts receivable 98,000 Sales revenue 158,000 Record sales. b. Cash 77,000 Accounts receivable 77,000 Record collections on account. c. Allowance for uncollectible accounts 900 Accounts receivable 900 Write off uncollectible accounts. d. Bad debt expense ($98,000 .01) 980 Allowance for uncollectible accounts 980 Record estimate of uncollectible accounts for the
month.
Req. 2
Accounts receivable Allowance for uncollectible accounts Bal. 30,000 Collections 77,000 Write-offs 900 Bal. 4,000Credit Sales 98,000 Write-offs 900 Bad debt expense 980Bal. 50,100 Bal. 4,080 Net accounts receivable: $50,100 – $4,080 = $46,020. Teck Automotive expects to collect the net accounts receivable of $46,020.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 7-35B
Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Oct. 31 Bad debt expense ($11,085 - $4,200) 6,885 Allowance for uncollectible accounts 6,885 Record estimate of uncollectible accounts for the year.
Computations:
Balance needed in allowance account: ($125,000 .003) + ($80,000 .04) + ($61,000 .06) + ($7,000 .55) = $375 + $3,200 + $3,660 + $3,850 = $11,085. Adjusting entry amount: $11,085 balance needed – $4,200 current balance = $6,885.
Allowance for uncollectible accounts Bal. 4,200 Bad debt expense 6,885 Bal. 11,085
Req. 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Oct. 31 Bad debt expense ($11,085 + $1,300) 12,385 Allowance for Uncollectible Accounts 12,385 Record estimate of uncollectible accounts for the year.
Computations:
Balance needed in allowance account: ($125,000 .003) + ($80,000 .04) + ($61,000 .06) + ($7,000 .55) = $375 + $3,200 + $3,660 + $3,850 = $11,085. Adjusting entry amount: $11,085 balance needed + $1,300 current balance = $12,385.
Allowance for Uncollectible Accounts Bal. 1,300 Bad debt expense 12,385 Bal. 11,085
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(15-20 min.) E7 -36B Req 1
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Dec 31 Bad debt expense 6,000 Allowance for uncollectible accounts 6,000 Record estimate of uncollectible accounts for the year. Computations: ($800,000 .0075) = $6,000 Req 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Dec. 31 Bad debt expense 1,350 Allowance for uncollectible accounts 1,350 Record estimate of uncollectible accounts for the year. Computations: Balance needed in allowance account: $2,650 Adjusting entry amount: $2,650 balance needed - $1,300 current balance = $1,350 (15-20 min.) E 7-37B
Req. 1
Interest for: 2014: $475,000 .06 5/12 = $11,875 2015: $475,000 .06 7/12 = $16,625
Req. 2
a. Texas State Bank has a note receivable. b. Gina Baldwin has a note payable. c. Texas State has interest revenue. d. Gina Baldwin has interest expense.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 3 Payoff at January 31, 2015: Principal $475,000 Interest $475,000 .06 6/12 = 14,250 Total $489,250
(15-20 min.) E 7-38B
Journal
DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.
May 1 Note receivable—S. Franklin 16,000 Cash 16,000 Record loan supported by note. Sep 17 Note receivable—Findlay Corp. 12,000 Sales revenue 12,000 Record sales revenue provided for note receivable. 30 Interest receivable ($405 + $43) 448 Interest revenue 448 Accrue interest revenue. Computations: Interest Receivable: S. Franklin: $16,000 0.06 152/360 = $405 Findlay Corp: $12,000 0.10 13/360 = 43 Total interest receivable at September 30 $ 448
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(15-20 min.) E 7-39B Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Jan 31 Accounts receivable—Jitterz Coffee 12,000 Sales revenue 12,000 Record sale on account. Jun 1 Note receivable—Jitterz Coffee 12,000 Accounts receivable—Jitterz Coffee 12,000 Record note received for account. Jul 31 Cash ($12,000 + $140) 12,140 Note receivable— Jitterz Coffee 12,000 Interest revenue ($12,000 .07 x 60/360) 140 Record collection of note receivable. (15-20 min.) E 7-40B Req 1 A B C D Cash $ 95,000 $ 67,000 $20,000 $103,000 Short-term investments 85,000 30,000 14,000 53,000 Net receivables 120,000 113,000 50,000 145,000 =Total quick assets $300,000 $210,000 $84,000 $301,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 Quick ratio 1.50 0.82 1.40 1.16
Req 2 Total current assets $325,000 $224,000 $96,000 $368,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 = Current ratio 1.63 0 .88 1.60 1.42 Req 3 Company B should be concerned because they only have $0.82 of quick assets and $0.88 of current assets to pay for every $1 owed in current liabilities.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 7-41B Requirement 1 Dollar amounts in thousands Accounts Short-term a. Quick
= Cash + receivable + investments
ratio Total Current Liabilities
= $130+ $280 + $95
$360 + $25
= $505
$385 = 1.31
b. Current =
Cash + Acct. Rec. + Investments + Inventory + Other current assets ratio Total current liabilities
= $130+ $280 + $95 + 145 + 65
$360 + $25
= $715
$385 = 1.86
c. Accounts Receivable
= Net credit sales
= $3,270
Turnover Average net accounts receivable [($280 + $260) / 2] = 12.1 times per year Requirement 2
a. A quick ratio of 1.31 is strong because there is $1.31 of quick assets for every $1 of current liabilities owed.
b. A current ratio of 1.86 is strong because there is $1.86 of current assets for every $1 of current liabilities.
c. An accounts receivable turnover ratio of 12.1 is good relative to credit terms of net 30.
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Problems
(20-25 min.) P7-50B Req. 1
Julio’s Hamburgers
Bank Reconciliation
October 31
Bank Book
Balance, October31 $12,555 Balance, October 31 $12,071
Add: Add:
Deposit in transit 400 EFT— collection of rent revenue 850
Correction of bank error— EFT - Bank collection oon account 225
Charged our account
for the check of
another company 745 Interest revenue on bank balance 8
13,700 13,154
Less:
Outstanding checks
No. 800 323
No. 802 81
No. 806 27 Less:
No. 809 147 NSF check #698 72
No. 810 215 NSF check #701 186
No. 811 46 Service charge 35
Adjusted bank balance $12,861 Adjusted book balance $12,861
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Oct 31 Cash 850 Rent revenue 850 Record EFT rent collected by bank 31 Cash 225 Accounts receivable 225 Record EFT collection from customer. 31 Cash 8 Interest revenue 8 Record interest earned 31 Accounts receivable ($72 + $186) 258 Cash 258 Record NSF checks returned by the bank. 31 Miscellaneous expense 35 Cash 35 Record bank service charge.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(20-25 min.) P 7-51B Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS
POST
REF. Dr. Cr. Apr 30 Accounts receivable 510,000 Sales revenue 510,000 Record sales on account. 30 Cash 525,000 Accounts receivable 525,000 Record collections on account. 30 Allowance for uncollectible accounts 5,000 Accounts receivable 5,000 Write off uncollectible accounts. 30 Bad debt expense (510,000 .04) 20,400 Allowance for uncollectible accounts 20,400 Record estimate of uncollectible expense for the
month.
Accounts receivable Allowance for uncollectible accounts Bal. 210,000 Collections 525,000 Bal. 6,300Credit sales
510,000 Write-offs 5,000 Write-offs
5,000 Bad debt expense 20,400
Bal. 190,000 Bal. 21,700
Bad debt expense Bad debt expense
20,400
Bal. 20,400
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 2.
Journal
DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.
April. 30 Accounts receivable 510,000 Sales revenue 510,000 Record sales on account. 30 Cash 525,000 Accounts receivable 525,000 Record collections on account. 30 Bad debt expense 5,000 Accounts receivable 5,000 Write off uncollectible accounts.
Accounts receivable Bad debt expense
Bal. 210,000 Collections 525,000 Write-offs 5,000 Credit sales 510,000
Write-offs 5,000
Bal. 5,000
Bal. 190,000
Req. 3
Income statement:
Allowance Method
Direct Write- Off Method
Bad debt expense $20,400 $5,000 Bad debt expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way.
Req. 4
Balance sheet:
Allowance Method
Direct Write- Off Method
Accounts receivable $190,000 $190,000 Less: Allowance for uncollectible accounts 21,700 — Accounts receivable, net $168,300 $190,000 Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(15-20 min.) P 7-52B
Req. 1 Allowance for uncollectible accounts Bad debts expense
Bal. 1,400 Bal. 0 Write-off 800 Reinstate 800 adjustment 2,332 Write-off 552 adjustment 2,332 Bal. 2014 3,180 2,332 Req. 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Jan. 17 Accounts receivable—Jon Nelson 800 Sales revenue 800 Record sale on account. June 29 Allowance for uncollectible accounts 800 Accounts receivable— Jon Nelson 800 Write off uncollectible account. Aug. 6 Accounts receivable— Jon Nelson 800 Allowance for uncollectible accounts 800 Reinstate account receivable. 6 Cash 650 Accounts receivable— Jon Nelson 650 Record partial collection on account. Sept. 4 Cash ($800 – $650) 150 Accounts receivable—Jon Nelson 150 Record balance collected on account. Dec. 31 Allowance for uncollectible accounts 552 Accounts receivable—Bill Renz 175 Accounts receivable—Nancy Carlson 240 Accounts receivable—Daria Putin 137 Write off uncollectible accounts. 31 Bad debt expense 2,332 Allowance for uncollectible accounts 2,332 Record estimate of uncollectible accounts for the year. Req. 3
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Balance sheet at December 31, 2014: Current assets: Accounts receivable $87,550 Less: Allowance for uncollectible accounts 3,180 Accounts receivable, net $84,370 (20-25 min.) P 7-53B Req. 1 Note Due Date Principal + Interest = Maturity Value (1) Nov 5, 2015 $20,000 + $1,800 ($20,000 .09 1) = $21,800 (2) Aug 30, 2015 6,000 + $585 ($6,000 .13 9/12) = 6,585 (3) Feb 5, 2015 12,000 + $220 ($12,000 .11 60/360) = 12,220
Req. 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Dec 31 Interest receivable 435 Interest revenue 435 Computations: Note (1): $20,000 .09 56/360 = $280 Note (2): $6,000 .13 31/360 = 67 Note (3): $12,000 .11 24/360 = 88 Total interest revenue = $435
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Req. 3
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2015 Nov 5 Cash ($20,000 + $280 + $1,520) 21,800 Note receivable 20,000 Interest receivable ($20,000 .09 56/360) 280 Interest revenue ($20,000 .09 304/360) 1,520 (20-25 min.) P 7-54B Req. 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2013 Dec. 6 Note receivable—LM Publishing 6,000 Accounts receivable—LM Publishing 6,000 31 Interest receivable ($6,000 .08 25/360) 33 Interest revenue 33 31 Interest revenue 33 Retained earnings 33
2014 Mar 5 Cash ($6,000 + $33 + $87) 6,120 Note receivable—LM Publishing 6,000 Interest receivable($6,000 .08 25/360) 33 Interest revenue ($6,000 .08 65/360) 87 June 1 Note receivable—London Sounds 12,500 Cash 12,500 Oct. 31 Note receivable—Union Music 4,000 Accounts receivable—Union Music 4,000 Dec. 1 Cash ($12,500+ $438) 12,938 Note receivable— London Sounds 12,500 Interest revenue ($12,500 .07 6/12) 438
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 7-55B Dollar amounts in thousands 2014 2013 Cash + Net current receivables a. Quick
= + ST investments
=$190 + $250 + $118 $106 + $290 + $120
Ratio Total current liabilities $650 $675 = 0.86 = 0.76
b. Current
= Total current assets
=$1,023 $1,006
Ratio Total current liabilities $650 $675 = 1.57 = 1.49
c. A/R
= Net sales
=$5,184
= 19.20 $5,050
= 16.83Turnover Average A/R* $270 $300 *(beginning A/R + ending A/R)/2
d. Receivable collection
period =
Average accounts receivable=
$270 $300 (Sales/365 Days) $5,184/365 $5,050/365
= 19.01 = 21.68
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Req. 2
MEMORANDUM DATE: TO: The Lakeland Restaurants FROM: Student Name RE: Changes in ratio values from 2013 to 2014 The quick ratio increased from 0.76 to 0.86 and the current ratio increased from 1.49 to 1.57. These increases were largely due to the significant increase in Cash. This conveys a favorable impression about the company as it indicates the company has more of an ability to pay its current liabilities as they come due. The accounts receivable turnover increased from 16.83 to 19.20 and the receivable collection period decreased from 21.68 to 19.01. Both changes were favorable and can be attributed to the decrease in Accounts receivable. This conveys a favorable impression about the company as it indicates that the business appears to have a better ability collecting cash from credit customers. Student responses may vary.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Appendix:
Short Exercises
(5-10 min.) S 7A-2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Sept. 1 Petty cash 250 Cash 250 30 Office supplies expense 112 Entertainment expense 75 Cash short and over 7 Cash 194 30 Petty cash 50 Cash 50
Exercises
(10-15 min.) E 7A-6B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec 31 Office supplies expense 121 Delivery expense 55 Cash short and over 12 Cash 188 Replenish the petty cash fund. 31 Petty cash 80 Cash 80 Increase Petty Cash fund by $80 to $280
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Problems
(10-15 min.) P 7A-8B Req. 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Aug 1 Petty cash 450 Cash 450 Open the petty cash fund. Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Aug 31 Office supplies expense 92 Travel expense 29 Delivery expense 15 Entertainment expense 70 Cash short and over 35 Cash 241 Replenish the petty cash fund. A difference of $35 charged to the cash short and over account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use. Req. 3
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Sep 1 Cash ($450 − $400) 50 Petty cash 50 Decrease the petty cash fund from $450 to $400. The custodian takes $50 currency and coin from the fund and deposits it in the bank.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Chapter 8: Analyzing and Recording Business Transactions
Short Exercises
(5-10 min.) S 8-2
A 1. Franchises
NA 2. Land
DR 3. Buildings
DR 4. Furniture
A 5. Patents
A 6. Copyrights
A 7. Trademarks
DR 8. Land improvements
DL 9. Gold ore deposits
(5-10 min.) S 8-3
L 1. Survey fees
LI 2. Fencing
LI 3. Lighting
L 4. Clearing land
LI 5. Parking lot
(5-10 min.) S 8-4
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Land 75,000 Building 60,000 Equipment 15,000 Notes Payable 175,000 Record purchase of land, a building, and
equipment.
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Computations:
Asset
Market
Value Percentage of Total Market Value
Total Purchase
Price
Cost of Each Asset
Land $ 110,000 $110,000 / $220,000 = 50% X $210,000 = $ 105,000
Building 88,000 $88,000 / $220,000 = 40% X $210,000 = 84,000
Equipment 22,000 $22,000 / $220,000 = 10% X $210,000 = 21,000
Total $220,000 100% $210,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 8-5
Req 1.
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Incorrect entry: Equipment 3,000 Cash 3,000 Correct entry: Repairs and Maintenance Expense 3,000 Cash 3,000
Req 2.
Net income would be overstated by $3,000, because the 3,000 was not included as an expense.
(10-15 min.) S 8-6
Depreciation is the process of allocating a plant asset’s cost to expense over its useful life.
The primary purpose of depreciation is to match the period’s expenses against its revenues in
order to measure net income.
Lake is correct that depreciation can relate to the wear and tear of an asset. However, the
depreciation of some assets is more affected by obsolescence than by physical wear and tear.
Coe is wrong. Depreciation has nothing to do with a cash fund to replace an asset.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) S 8-7
Requirement 1
First-year depreciation:
a. Straight-line: ($48,000 – $8,000) / 4 years = $10,000 b. Units-of-production: [($48,000– $8,000) / 800,000 miles] 160,000 miles = $8,000 c. Double-declining-balance: (1/4 years) 2 = 50%; 50% x $48,000
= $24,000 Requirement 2 Book value, under straight-line method: Cost $48,000 Less: Accumulated depreciation (10,000) Book value $38,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 8-8
Second-year depreciation: a. Straight-line: ($48,000 – $8,000) / 4 years = $ 10,000 b. Units-of-production: [($48,000 – $8,000) /800,000 miles] 280,000 miles = $14,000 c. Double-declining-balance:
Year 1: 50% x $48,000= $24,000 Year 2: 50% x ($48,000 – $24,000) = $12,000
(5-10 min.) S 8-9
First-year depreciation (for a partial year):
Straight-line: ($52,000 – $10,000) / 5 years 9/12 = $6,300
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 8-10
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Depreciation Expense, Hot Dog Stand 18,000 Accumulated Depreciation, Hot Dog Stand 18,000 Record depreciation on hot dog stand.
Computations:
Straight-line for years 1-4: $120,000 / 10 years = $12,000 per year
$12,000 4 years = $48,000 for years 1-4
Revised Straight-line: ($120,000 - $48,000)/4 years = $18,000 per year
(10-15 min.) S 8-11
CAP a. Purchase price REV b. Ordinary recurring repairs CAP c. Lubrication before machine is placed in service REV d. Periodic lubrication CAP e. Major overhaul CAP f. Sales tax CAP g. Transportation and insurance CAP h. Installation CAP i. Training of personnel
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 8-12
Journal
DATE ACCOUNTS
POST REF. Dr. Cr.
2014 Dec. 31 Cash 42,000 Accumulated Depreciation, Truck 27,000 Truck 64,000 Gain on Sale of Truck 5,000 Record the sale of the truck.
Computations:
Sale price of asset $42,000 Book value: Truck $64,000 Less: Accumulated depreciation (27,000) 37,000 Gain on sale $5,000
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(15-20 min.) S 8-13
Purchase price paid for the Thrifty Nickel $925,000Market value of the Thrifty Nickel’s assets $1,225,000 Less: Market value of the Thrifty Nickel’s liabilities (375,000)
Market value of the Thrifty Nickel’s net assets 850,000
Goodwill $75,000
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Assets 1,225,000 Goodwill 75,000 Liabilities 375,000 Cash 925,000 Record purchase of The Thrifty Nickel.
(5-10 min.) S 8-14
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Apr 1 Patent 750,000 Cash 750,000 Record purchase of patent. Dec 31 Amortization Expense 112,500 Patent 112,500 Record amortization expense
Computations:
$750,000/5 = $150,000 x 9/12 = $112,500
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 8-15
Depletion expense per barrel of oil = $14,400,000/1,200,000 = $12.00
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2015 Dec. 31 Depletion Expense, Oil Reserves (220,000 x
$12.00)
2,640,000 Accumulated Depletion, Oil Reserves 2,640,000 Record depletion.
(5-10 min.) S 8-16
__H_ 1. A bond that management plans on owning until it is repaid. Management does not
believe it will need to sell the bond to generate cash before the bond’s scheduled
maturity date.
__N_ 2. Land that management is holding as an investment.
__T_ 3. Intel stock that company management plans on selling quickly, as soon as its price
is 10% more than what the company paid at the time it purchased the stock.
__A_ 4. Ford Motor Company stock. Management does not actively manage this stock and
intends to sell it only if they need to generate cash.
__A_ 5. A bond that management plans on owning until it is repaid. However,
management believes it may have to sell the bond within the year in order to
provide enough cash for operations.
__N_ 6. Inventory that management intends to sell within the year.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 8-17
1 IS $1432 BS $5,0003 IS $604 BS $9404 SE $655 BS $6555 IS $156 IS $280
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(10-15 min.) E 8-32B
Req 1
Cost of land: $65,000 + 235,000 + $6,300 + $2,800 + $5,500 = $314,600
Cost of building: $840,000
Cost of land improvements: $36,000 + $16,700 + $7,100 = $59,800
Req 2
Specialty Systems will depreciate the building and the land improvements.
(10-15 min.) E 8-33B
Req. 1
Cost of building in 2015: Construction cost $940,000 Architect fees and building permits 78,000 Total $1,018,000
Solutions Manual Copyright © 2015 Pearson Education, Inc.
Req. 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Building 940,000 Cash 940,000 Incurred construction cost. Building 78,000 Cash 78,000 Paid architect fees and building permit fees.
(10-15 min.) E 8-34B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Tanning Bed 1 8,211
Tanning Bed 2 5,481
Tanning Bed 3 7,308
Cash 11,000
Notes Payable 10,000
Record purchase of 3 tanning beds.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Computations:
Tanning Bed Appraised
Value
Percentage of Total Appraised ValueTotal Purchase
Price Cost of Each
Bed
1
$ 9,000
$9,000 / $23,000 = .391 $21,000
=
$ 8,211
2
6,000
$6,000 / $23,000 = .261 x $21,000
=
5,481
3
8,000
$8,000 / $23,000 = .348 x $21,000
=
7,308
Totals
$23,000 1.000
$21,000
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(15-20 min.) E 8-35B
Reds. 1 and 2
Year
Cost - Accumulated depreciation = Equipment, net* Net income
1 $470,000 $94,000 $376,000 U $ 376,000U**
2 $470,000 $188,000 $282,000 U $ 94,000 O
3 $470,000 $282,000 $188,000 U $ 94,000 O
4 $470,000 $376,000 $94,000 U $ 94,000 O
5 $470,000 $470,000 Correct $ 94,000 O
U = Understated O = Overstated
Computations:
Straight-line: ($470,000)/ 5 years = $94,000 per year.
*Equipment, net represents the net amount that should have appeared on the balance sheet for each year. Since no asset amount was recorded for this purchase, this represents the amount of the understatement.
**$470,000 expense recorded - $94,000 depreciation expense that should have been recorded = $376,000 understatement of net income.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 8-36B
Req. 1
DEPRECIATION EXPENSE PER YEAR
Year
Straight-Line
Units-of-Production Double-Declining-Balance
2014 $ 9,000 $ 4,050 $ 19,000
2015 9,000 11,250 9,500
2016 9,000 10,800 3,750
2017 9,000 9,900 3,750
$36,000 $36,000 $36,000
Computations: Straight-line: ($38,000 – $2,000)/ 4 years = $9,000 per year.
Units-of-production: ($38,000 – $2,000)/ 800 operations = $45 per operation
Year 1: 90 operations $45 = $4,050
Year 2: 250 operations $45 = $11,250
Year 3: 240 operations $45 = $10,800
Year 4: 220 operations $45 = $9,900
Double-declining-balance: (1/4 years) 2 = 50%
Year 1: 50% x $38,000 = $19,000
Year 2: 50% x ($38,000 – $19,000) = $9,500
Years 3 and 4: ($38,000 – $19,000 – $9,500) = $9,500 – $2,000 residual value = $7,500/ 2 years = $3,750.
Req. 2
The units-of-production method tracks the wear and tear on the equipment most closely.
Req. 3
For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation expense and thus the largest tax deductions in the early life of the asset. This conserves cash in the early years.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 8-37B
Journal
DATE
ACCOUNT
Dr.
Cr.
Year 15 Depreciation Expense, Building 29,000
Accumulated Depreciation, Building 29,000
Record depreciation on building.
Year 16 Depreciation Expense, Building 72,000
Accumulated Depreciation, Building 72,000
Record depreciation on building.
Computations:
Straight-line: ($1,000,000 – $130,000)/ 30 years = $29,000
Straight-line for years 1-15: $ 29,000 15 years = $435,000
Revised SL =
$1,000,000 - $435,000 - $205,000= $72,000 per year
depreciation 5 years
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 8-38B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2015
August 31 Depreciation Expense, Fixtures
1,250
Accumulated Depreciation, Fixtures 1,250
Record 8 months’ depreciation.
31 Cash
13,200 Accumulated Depreciation, Fixtures 3,750
Loss on Sale of Fixtures
1,050
Fixtures
18,000
Record the sale of fixtures.
Computations:
Straight-line, 2015: ($18,000/ 8 years) = $2,250 x 8/12 months = $1,500
Sale price of old fixtures $13,200 Fixtures: Cost $18,000
Less: Accumulated depreciation ($2,250 + $1,500) (3,750) Book value (14,250)
Loss on sale ($1,050)
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 8-39B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
Jan. 2 Cash
252,000
Accumulated Depreciation, Plant, and Equipment
87,500
Plant, and Equipment
322,500
Gain on Sale of Assets
17,000
Sale price of assets $252,000 Book value: Plant, and Equipment: $645,000/2= $322,500 Less: Accumulated Depreciation: $175,000/2 = (87,500) 235,000 Gain on sale $17,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 8-40B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2016
Truck - new
422,000
Accumulated Depreciation, Truck – old *
152,200
Truck - old
385,000
Cash (422,000 - $243,000)
179,000
Gain on Exchange **
10,200
* Units-of-production: ($385,000 – $85,000)/ 1,500,000 miles = $.20 per mile
Year 1: 182,000 miles $.20 = $36,400
Year 2: 263,000 miles $.20 = $52,600
Year 3: 254,000 miles $.20 = $50,800
Year 4: 62,000 miles $.20 = $12,400
Total $152,200
** Trade-in value $243,000 Book value of old truck: Cost $385,000 Less: Accumulated Depreciation: (152,200) 232,800 Gain on sale $10,200
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 8-41B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Part 1(a) Patents
700,000
Cash
700,000
Record purchase of patent.
(b) Amortization Expense, Patents ($700,000/ 8 years)
87,500
Patents
87,500
Record amortization of patent.
Part 2 Amortization Expense, Patents
131,250
Patents
131,250
Record amortization of patent.
Computations:
Straight-line for years 1-4: $ 87,500 5 years = $437,500
Revised SL =
$700,000 - $437,500 =
$131,250 per year amortization 2 years
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 8-42B
Req. 1 Goodwill:
Purchase price paid for Simmons, Inc
$16,000,000
Market value of Simmons, Inc.’s assets $22,000,000
Less: Market value of Simmons, Inc.’s liabilities
(8,000,000)
Market value of Simmons, Inc.’s net assets
14,000,000
Goodwill
$ 2,000,000
Req. 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Assets ( Cash, Receivables, Plant assets, etc.) 22,000,000 Goodwill 2,000,000 Liabilities 8,000,000 Cash 16,000,000 Purchased Simmons, Inc.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 8-43B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
(a) Mineral Assets 615,000 Cash 615,000 Purchased mineral assets. (b) Mineral Assets ($1,400 + $3600 + $45,000) 50,000 Cash 50,000 Paid fees and other costs related to mineral assets. (c) Depletion Expense [($665,000/500,000) 80,000] 106,400 Accumulated Depletion, Mineral Assets 106,400 Record depletion.
(10-15 min.) E 8-44B
Requirement 1
Balance Sheet (partial):
Property, Plant, and Equipment $12,000,000
Less: Accumulated Depreciation, Plant and Equipment 3,000,000
Net Property, Plant, and Equipment $9,000,000
Patents 210,000
Goodwill 1,400,000
Other Long-term Assets 318,000
Total Long-term Assets $10,928,000
Requirement 2
The book value of property, plant, and equipment on December 31, 2014 was $9,000,000.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) E 8-45B
Return on Assets
= Net income
= $63,000
= 14.93%Average total assets ($408,000 + $436,000)/2
Fixed asset turnover ratio
= Sales
= $821,000
= 2.65 Average fixed assets ($305,000 + $314,000)/2
Solutions Manual Copyright © 2015 Pearson Education, Inc.
Problems
(20-25 min.) P 8-54B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jan. 1 Motor-Carrier Equipment (new) 174,000
Accumulated Depreciation, Motor-Carrier Equipment
85,000 Motor-Carrier Equipment (old) 132,000 Cash ($174,000 – $64,000) 110,000 Gain on Exchange of Equipment 17,000 Record trade of motor-carrier equipment. July 1 Depreciation Expense, Building 6,125 Accumulated Depreciation, Building 6,125 Record 6 months’ depreciation.
1 Cash 100,000 Note Receivable 590,000
Accumulated Depreciation, Building ($240,000 + $6,125)
246,125 Building 570,000 Gain on Sale of Building 366,125 Record sale of building. Oct. 31 Land 288,000 Building 612,000 Cash 900,000 Record purchase of land and a building. Dec. 31 Depreciation Expense, Motor-Carrier Equipment 19,000
Accumulated Depreciation, Motor-Carrier Equipment 19,000 Record depreciation on motor-carrier equipment. 31 Depreciation Expense, Buildings 2,300 Accumulated Depreciation, Buildings 2,300 Record depreciation on building.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Computations:
Trade-in Value of Motor carrier equipment: = $64,000 Book value: Motor carrier equipment $132,000 Less: Accumulated depreciation (85,000) 47,000 Gain on exchange $17,000
Straight-line, building: ($570,000 – $80,000)/ 40 years x 6/12 months = $6,125
Sale price of building: $100,000 + $590,000 = $690,000 Book value: Building $570,000 Less: Accumulated depreciation (246,125) 323,875 Gain on sale $366,125
Asset
Market Value
Percentage of Total Market Value
Total Purchase
Price
Cost of Each Asset
Land. $ 331,200 $331,200 / $1,035,000 = 32% X $900,000 = $288,000 Building 703,800 $703,800 / $1,035,000 = 68% X $900,000 = $612,000 Total $1,035,000 100% = $900,000
Units-of-production, motor-carrier equipment: [($174,000 – $22,000) /800,000 miles] 100,000 miles = $19,000
Straight-line, building: ($612,000 - $60,000)/40 years x 2/12 months = $2,300.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
(20-25 min.) P 8-55B
Req. 1
Straight-Line Depreciation Schedule Depreciation for the Year
DATE
ASSET COST
DEPRECIATION RATE
DEPRECIABLE COST =
DEPRECIATION
EXPENSE
ACCUMULATED DEPRECIATION
BOOK
VALUE Year 0
$320,000
$320,000
Year 1
1/5
$280,000 $ 56,000
$ 56,000
264,000
Year 2
1/5
280,000
56,000
112,000
208,000
Year 3
1/5
280,000
56,000
168,000
152,000
Year 4
1/5
280,000
56,000
224,000
96,000
Year 5
1/5
280,000
56,000
280,000
40,000
Computations: Asset cost: $287,700 + $2,800 + $800 + $25,800 + $2,900 = $320,000 Straight-line: ($320,000 – $40,000) / 5 years = $56,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Units-of-Production Depreciation Schedule
Depreciation for the Year
DATE
ASSET COST
DEPRECIATION PER UNIT
NUMBER
OF UNITS =
DEPRECIATION
EXPENSE
ACCUMULATED DEPRECIATION
BOOK
VALUE Year 0
$320,000
$320,000
Year 1
$1.12
60,000
$ 67,200
$ 67,200
252,800
Year 2
1.12
55,000
61,600
128,800
191,200
Year 3
1.12
50,000
56,000
184,800
135,200
Year 4
1.12
45,000
50,400
235,200
84,800
Year 5
1.12
40,000
44,800
280,000
40,000
Computations: Units-of-production: ($320,000 – $40,000) / 250,000 units = $1.12/unit
Solutions Manual Copyright © 2015 Pearson Education, Inc.
Double-Declining-Balance Depreciation Schedule Depreciation for the Year
DATE
ASSET COST
DDB DEPRECIATION RATE
BOOK
VALUE =
DEPRECIATION
EXPENSE
ACCUMULATED DEPRECIATION
BOOK
VALUE
Year 0
$320,000
$320,000
Year 1
.40
$320,000
$ 128,000
$ 128,000
192,000
Year 2
.40
192,000
76,800
204,800
115,200
Year 3
.40
115,200
46,080
250,880
69,120
Year 4
.40
69,120
27,648
278,528
41,472
Year 5
41,472
1,472
280,000
40,000
Computations: DDB rate: (1/5 years 2) =.40 Depreciation for Year 5: $41,472 – residual value of $40,000 = $1,472
536 Solutions Manual Copyright © 2015 Pearson Education, Inc
Req. 2
The depreciation method that reports the highest net income in the first year of the equipment’s
life is the straight-line method, which produces the lowest depreciation expense for that year,
$56,000. The method that minimizes income taxes in the first year is the double-declining-
balance method, which produces the highest depreciation expense amount for that year,
$128,000.
Req. 3
Method of depreciation
Straight-line Units of Production Declining Balance
Cost $320,000 $320,000 $320,000
Less: Accumulated
Depreciation
(56,000) (67,200) (128,000)
Book value at Dec. 31 $264,000 $252,800 $192,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 537
(15-20 min.) P 8-56B
Requirement 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
a. Accumulated Depreciation, Equipment 30,000 Loss on Disposal 1,000 Equipment 31,000 Record the disposition of equipment. b. Cash 6,000 Accumulated Depreciation, Equipment 30,000 Equipment 31,000 Gain on sale of Equipment 5,000 Record sale of equipment. c. Equipment - new 35,000 Accumulated Depreciation, Equipment 30,000 Equipment - old 31,000 Cash ($35,000 - $5,500) 29,500 Gain on Exchange of Equipment * 4,500 Record exchange of equipment. d. Equipment - new 23,000 Accumulated Depreciation, Equipment 30,000 Loss on Exchange of Equipment ** 500 Equipment - old 31,000 Note payable ($23,000 - $500) 22,500 Record exchange of equipment.
* Gain on exchange = Trade in value less book value of old equipment = $5,500 - ($31,000 - $30,000) = $4,500
** Loss on exchange = Book value of old equipment - trade in value = ($31,000 - $30,000) - $500 = $500
538 Solutions Manual Copyright © 2015 Pearson Education, Inc
(15-20 min.) P 8-57B
Req. 1
Journal
DATE ACCOUNTS
POSTREF. Dr. Cr.
Assets 2,700,000 Goodwill 400,000 Liabilities 1,300,000 Cash 1,800,000 Record purchase of Corner Diners
Computations: Goodwill: Purchase price paid for Don’s Diners $1,800,000Market value of Don’s Diners’ assets $2,700,000 Less: Market value of Don’s Diners’ liabilities (1,300,000) Market value of Don’s Diners’ net assets 1,400,000Goodwill $400,000
Req. 2
Cottage Cafe should measure the fair value of its goodwill each year. If the goodwill has
increased in fair value, there is nothing to record. But if the goodwill’s fair value has decreased,
then Cottage Cafe should record an impairment loss and write down the goodwill.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 539
(20-25 min.) P 8-58B
Req. 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Coal Reserves 1,800,000 Cash 1,800,000 Purchased coal mine rights. Coal Reserves ($66,000 + $46,000) 112,000 Cash 112,000 Paid costs related to acquisition of mine. Coal Reserves 32,000 Note Payable 32,000 Record note for costs related to coal mine. Depletion Expense, Coal Reserves 492,480 Accumulated Depletion, Coal Reserves * 492,480 Record depletion. Accounts Receivable (38,000 $28) 1,064,000 Sales Revenue 1,064,000 Record coal sales. Operating Expenses 250,000 Cash 250,000 Paid operating expenses.
* [($1,800,000 + $66,000 + $46,000 + $32,000) / 150,000] 38,000
Req. 2 O’Brien Oil Company
Income Statement – Coal Operations For the year ended Year 1
Sales Revenue $1,064,000Depletion Expense $492,480 Operating Expenses 250,000 742,480Net Income $ 321,520
540 Solutions Manual Copyright © 2015 Pearson Education, Inc
(10-15 min.) P 8-59B
Req. 1
2013
Return on Assets
= Net income
= $151,000
= 16.61%Average total assets ($901,000 + $917,000)/2
Fixed asset turnover ratio
= Sales
=$1,582,000
= 2.11 Average fixed assets ($736,000 + $764,000)/2
2014
Return on Assets
= Net income
=$142,000
= 15.40%Average total assets ($917,000 + $926,000)/2
Fixed asset turnover ratio
= Sales
=$1,468,000
= 1.92 Average fixed assets ($764,000 + $768,000)/2
Req 2
The return on assets has decreased from 16.61% to 15.40% indicating that Ibanez Industries is less profitable in 2014 relative to its total assets.
The fixed asset turnover ratio has decreased from 2.11 to 1.92 indicating that Ibanez Industries is generating sales less efficiently with its fixed assets in 2014.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
Chapter 9: Current Liabilities and Long-Term Debt
Short Exercises
(5-10 min.) S 9-2
Dawson Co. would report the following amounts on its balance sheet at July 31, 2014:
Note payable, short-term $6,000.00
Interest payable ($6,000 x .09% x 3/12) $135.00
Dawson Co. would report the following amounts on its income statement for the year ended July 31, 2014:
Interest expense $135.00
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 9-3
1.
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Cash ($607,000 .35) 212,450 Notes Receivable ($607,000 – $212,450) 394,550 Sales Revenue 607000 Record sales. Warranty Expense ($607,000 .04) 24,280 Estimated Warranty Payable 24,280 Record estimated warranty expense. Estimated Warranty Payable 18,500 Cash 18,500 Record payment of warranty claims.
Solutions Manual Copyright © 2015 Pearson Education, Inc.
2.
Estimated Warranty Payable Warranty payments 18,500 Warranty expense 24,280 Bal. 5,780
At the end of the first year, Sundaze owes its customers $5,780 in estimated warranty payable
3. Sundaze will report warranty expense of $24,280 during its first year of operations.
No, the warranty expense for the year does not necessarily equal the year’s cash payments for warranties. The matching principle addresses this situation. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for the warranty claims.
(5-10 min.) S 9-4
1. These are contingent liabilities because at the time the financial statements were issued;
Phatboy Motorcycles was not liable for any of these product losses. These represent
potential rather than actual obligations.
2. The contingency can become a real liability if the user of a Phatboy product suffers a loss for
which the company is responsible.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 9-5
(5-10 min.) S 9-6
(A) (B) (C) (D)
Date Payment Interest Expense (D) x 4% x 6/12
Principal (A) - (B)
LoanBalance (D) - (C)
January 1, 2014 $280,000
June 30, 2014 $ 8,055 $ 5,600 $ 2,455 277,545
December 31, 2014 8,055 5,551 2,504 275,041
June 30, 2015 8,055 5,501 2,554 272,487
December 31, 2015 8,055 5,450 2,605 269,882
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
a. Jan. 1 Building 360,000
Mortgage Notes Payable 360,000
Record purchase of building and issuance of mortgage note.
b. June 30 Interest Expense ($360,000 x .06 x 6/12) 10,800
Mortgage Notes Payable 2,208
Cash 13,008
Made semiannual mortgage payment.
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(5-10 min.) S 9-7
1. e.
2. i.
3 d.
4. b.
5. a.
6. g.
7. h.
8. f.
9. c
(5-10 min.) S 9-8
a. Premium
b. Discount
c. Par
d. Discount
(10-15 min.) S 9-9 a. Discount
b. Premium
c. Par value
d. Premium
e. Discount
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) S 9-10
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
a. Jan. 1 Cash 30,000
Bonds Payable 30,000
Issued bonds payable at par value.
b. July 1 Interest Expense ($30,000 .065 1/2) 975
Cash 975
Paid semiannual interest.
2024
c. Jan. 1 Bonds Payable 30,000
Cash 30,000
Paid bonds payable at maturity.
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(15-20 min.) S 9-11
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
a. Jan. 1 Cash 48,200
Discount on Bonds Payable ($50,000 ‐ $48,200) 1,800
Bonds Payable 50,000
Issued bonds payable at a discount.
b. July 1 Interest Expense ($2,000+ $180) 2,180
Cash ($50,000 .08 6/12) 2,000
Discount on Bonds Payable ($1,800/10) 180
Paid semiannual interest and
amortized bond discount.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) S 9-12
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
a. Jan. 1 Cash 52,420
Bonds Payable 50,000
Premium on Bonds Payable ($52,420 -
$50,000)
2,420
Issued bonds payable at a premium.
b. July 1 Interest Expense ($2,000- $242) 1,758
Premium on Bonds Payable ($2,420/10) 242
Cash ($50,000 .08 6/12) 2,000
Paid semiannual interest and
amortized bond premium.
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(15-20 min.) S 9-13
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
a. May 1 Cash 50,000
Bonds Payable 50,000
Issued bonds payable at par value.
b. Nov. 1 Interest Expense ($50,000 x .08 x 6/12) 2,000
Cash 2,000
Paid semiannual interest on bonds.
c. Dec. 31 Interest Expense ($50,000 .08 2/12) 667 Interest Payable 667 Accrued two months’ interest on bonds.
(5-10 min.) S 9-14
1. LTL
2. CL
3. LTA
4. LTL
5. LTA
6. LTL
7. LTL
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) S 9-15
Liabilities
Current Liabilities:
Accounts payable $42,500
Interest payable 1,350
Total current liabilities 43,850
Long-term Liabilities:
Lease payable, long-term 32,000
Mortgage notes payable 180,000
Bonds payable $420,000
Less: Discount on bonds payable 14,000 406,000
Total long-term liabilities 618,000
Total liabilities $661,850
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Exercises
(5-10 min.) E 9-27B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
May 31 Cash ($630,000 + $44,100) 674,100
Sales Revenue 630,000
Sales Tax Payable ($630,000 .07) 44,100
Jun 6 Sales Tax Payable 44,100
Cash 44,100 (5-10 min.) E 9-28B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014 Feb 1 Equipment 55,000 Note Payable, Short-term 55,000
Dec 31 Interest Expense ($55,000 .06 11/12) 3,025
Interest Payable 3,025
2015 Feb 1 Note Payable, Short-term 55,000 Interest Payable 3,025 Interest Expense ($55,000 .06 1/12) 275 Cash ($55,000 + $3,025 + $275) 58,300
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5-10 min.) E 9-29B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
Nov 1 Cash ($2,400 + $96) 2,496
Unearned Subscription Revenue 2,400
Sales Tax Payable ($2,400 .04) 96
Dec 15 Sales Tax Payable 96
Cash 96
Dec 31 Unearned Subscription Revenue 800
Subscription Revenue ($2,400 2/6) 800 Req 2 Current liabilities: Unearned subscription revenue ($2,400 – $800) $1,600
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(5-10 min.) E 9-30B Req. 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
Accounts Receivable 386,000
Sales Revenue 386,000
Warranty Expense ($386,000 .03) 11,580
Estimated Warranty Payable 11,580
Estimated Warranty Payable 9,420
Cash 9,420 Req. 2
Estimated Warranty Payable Beg. bal. 1,600Warranty payments 9,420 Warranty expense 11,580 End. bal. 3,760
Clayton’s Auto Repair will report $3,760 of estimated warranty payable on its balance sheet at December 31, 2014 and $11,580 of warranty expense on its income statement for the year ended December 31, 2014.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 9-31B Req. 1
(A) (B) (C) (D)
Date Payment Interest
(D) x 8% x 6/12 Principal (A) - (B)
Loan Balance (D) - (C )
January 1, 2014
$460,000
June 30, 2014 $26,602 $18,400 $8,202 451,798
December 31, 2014 26,602 18,072 8,530 443,268
June 30, 2015 26,602 17,731 8,871 434,397
December 31, 2015 26,602 17,376 9,226 425,171
June 30, 2016 26,602 17,007 9,595 415,576
Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014 a. Jan. 1 Warehouses 460,000
Mortgage Notes Payable 460,000
Record purchase of warehouses and issuance of mortgage note.
b. June 30 Interest Expense 18,400 Mortgage Notes Payable 8,202 Cash 26,602
Made semiannual payment on mortgage note payable.
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(15-20 min.) E 9-32B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. May 31 Cash 850,000
Bonds Payable 850,000
Issued bonds payable at par value.
b. Nov 30 Interest Expense ($850,000 .06 6/12) 25,500
Cash 25,500
Paid semiannual interest.
c. Dec 31 Interest Expense ($850,000 .06 1/12) 4,250
Interest Payable 4,250
Accrued one months’ interest.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 9-33B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. Jan. 1 Cash ($90,000 .95) 85,500
Discount on Bonds Payable ($90,000 - $85,500)
4,500
Bonds Payable 90,000
Issued bonds payable at a discount.
b. July 1 Interest Expense ($2,250 + 225) 2,475
Cash ($90,000 .05 6/12) 2,250
Discount on Bonds Payable ($4,500/20) 225
Paid semiannual interest and amortized bond discount.
(15-20 min.) E 9-34B Req. 1 a.
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Jan. 1 Cash 475,000
Bonds Payable 475,000
July 1 Interest Expense ($475,000 .07 6/12) 16,625
Cash 16,625
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b.
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jan. 1 Cash 460,000
Discount on Bonds Payable ($460,000 - $475,000) 15,000
Bonds Payable 475,000
July 1 Interest Expense ($16,625 + $750) 17,375
Cash ($475,000 .07 6/12) 16,625
Discount on Bonds Payable
($15,000/20) 750 c.
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Jan. 1 Cash 493,000
Bonds Payable 475,000
Premium on Bonds Payable ($493,000 -
$475,000)
18,000
July 1 Interest Expense ($16,625 - $900) 15,725
Premium on Bonds Payable ($18,000/20) 900
Cash ($475,000 .07 6/12) 16,625
Req 2 The discount price of $460,000 results in the most interest expense because Peterson Machine
Tool, Inc. receives only $460,000 for the bonds and must pay back $475,000 at maturity. The
$15,000 difference represents additional interest expense to Peterson Machine Tool, Inc.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 9-35B December 31 2014 2015 2016 Current Liabilities: Current Portion of Long-term Note Payable $700,000 $700,000 $700,000 Interest Payable 94,500 63,000 31,500Long-term Liabilities: Long-term Note Payable 1,400,000 700,000
— Computations: Interest: 2014 $2,100,000 .09 x 6/12 = $94,500 2015 $1,400,000 .09 x 6/12 = $63,000 2016 $700,000 .09 x 6/12 = $31,500
(15-20 min.) E 9-36B
Liabilities Current Liabilities: Accounts Payable $ 37,000 Salaries Payable 8,500 Interest Payable 9,000 Income Tax Payable 11,700 Notes Payable, Current Portion 22,000 Total Current Liabilities 88,200Long-term Liabilities: Notes Payable 158,000Total liabilities $246,200 Computations: Notes payable: $180,000 – $22,000 = $158,000
(15-20 min.) E 9-37B
Debt ratio
= Total liabilities
= $220,000
= .55 or 55% Total Assets $400,000
Interest
coverage ratio =
EBIT =
$73,800 = 3.95 times
Interest expense $18,700
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Problems
(20-25 min.) P 9-46B Req 1 a. Sales Tax Payable ($371,000 .07) $25,970 b. Current Portion of Long-term Notes Payable $25,000 Interest Payable ($90,000 .06 x 1) 5,400 c. Note Payable, Short-term $126,000 Interest Payable ($126,000 .07 4/12) 2,940 d. Estimated Warranty Payable ($9,200+ $31,400 – $33,800) $ 6,800 e. Unearned Rent Revenue ($13,500 4/6) $ 9,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 9-47B
Req 1
(A) (B) (C) (D)
Date Payment Interest
(D) x 11% x 6/12 Principal (A) - (B)
Loan Balance (D) - (C)
Jan 1, 2014 $180,000
Jun 30, 2014 $ 13,077 $ 9,900 $3,177 176,823
Dec 31, 2014 13,077 9,725 3,352 173,471
Jun 30, 2015 13,077 9,541 3,536 169,935
Dec 31, 2015 13,077 9,346 3,731 166,204Req 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014 Jan. 1 Building 180,000 Mortgage Notes Payable 180,000
Record purchase of building and issuance of mortgage note.
June 30 Interest Expense 9,900 Mortgage Notes Payable 3,177 Cash 13,077 Made semiannual mortgage payment. Dec 1 No entry required Dec. 31 Rent Expense 12,000 Cash 12,000 Paid one month’s rent on warehouse. 31 Leased Equipment 33,000 Lease Payable 33,000 Leased 10 copiers under a capital lease. 31 Interest Expense 9,725 Mortgage Notes Payable 3,352 Cash 13,077 Made semiannual mortgage payment.
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Req 3
Liabilities Long-term: Lease payable $ 33,000 Mortgage notes payable * 166,204 Total long-term liabilities $199,204
* The December 31, 2014 long-term portion of the Mortgage Payable is represented by the balance at December 31, 2015. The principal portion of the 2015 payments ($3,536 + $3,731) would be reflected as current portion of long-term debt in current liabilities at December 31, 2014.
(20-25 min.) P 9-48B
Req 1 The 8% bonds, issued when the market interest rate is 7.25%, will be priced at a premium.
Because they pay interest at a rate higher than the market rate, investors will pay a price above
maturity value to acquire them.
Req 2
The 8% bonds, issued when the market interest rate is 9.5%, will be priced at a discount.
Because they pay interest at a rate lower than the market rate, investors will pay less than
maturity value to acquire them.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Req 3
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014 a. Mar 1 Cash 924,000 Bonds Payable 900,000
Premium on Bonds Payable ($924,000
- $900,000)
24,000 Issued bonds payable at a premium. b. Aug 31 Interest Expense ($36,000 - $1,200) 34,800 Premium on Bonds Payable ($24,000/20) 1,200 Cash ($900,000 .08 6/12) 36,000
Paid semiannual interest and amortized bond premium.
c. Sep 30 Interest Expense ($6,000- $200) 5,800 Premium on Bonds Payable ($24,000/20 x 1/6) 200
Interest Payable ($900,000 .08 1/12)
6,000
Accrued one months’ interest and amortized bond premium.
2015 d. Feb 28 Interest Payable($900,000 .08 1/12) 6,000 Interest Expense ($36,000-6,000 - $1,000) 29,000 Premium on Bonds Payable ($24,000/20 x 5/6) 1,000 Cash ($900,000 .08 6/12) 36,000
Record five months’ interest, amortized bond premium, and paid semiannual interest.
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(20-25 min.) P 9-49B Req 1 a. The Meadows Golf Course’s bonds are priced at 106% ($477,000/$450,000).
b. When The Meadows Golf Course issued its bonds, the market interest rate was lower than 6%.
c. The amount of bond discount or premium is $27,000 premium.
Req 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
Jan. 1 Cash 477,000
Bonds Payable 450,000
Premium on Bonds Payable 27,000
Jun 30 Interest Expense ($13,500 - $900) 12,600
Premium on Bonds Payable ($27,000/30) 900
Cash ($450,000 .06 6/12) 13,500
Dec 31 Interest Expense ($13,500 - $900) 12,600
Premium on Bonds Payable ($27,000/30) 900
Cash ($450,000 .06 6/12) 13,500
Req 3
Bonds Payable $450,000 Premium on Bonds Payable ($27,000 - $900 - $900) 25,200 Amount reported on the balance sheet at December 31, 2014 $475,200
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) P 9-50B
Romero, Corp.
Balance Sheet (Partial)
December 31, 2014
Current Liabilities:
Accounts Payable $23,450
Salaries Payable 7,350
Interest Payable 9,800
Income Tax Payable 18,840
Mortgage Note Payable, Current Portion 16,500
Total Current Liabilities $75,940
Long‐term Liabilities:
Mortgage Note Payable, Long‐term 126,000
Bonds Payable $235,000
Less: Discount on Bonds Payable 12,000 223,000
Total Long‐term Liabilities 349,000
Total Liabilities $424,940
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(15-20 min.) P 9-51B
Req 1
Debt ratio
= Total Liabilities
= $234,000
= .72 or 72% Total Assets $325,000
Interest
coverage ratio =
EBIT =
$27,800 = 1.49
Interest Expense $18,700
Req 2
28% (100% - 72%) of Quinn’s assets belong to the stockholders.
Req 3
Based on the debt ratio and the interest coverage ratio, most people would not be willing to lend Quinn money because the total debt is 72% of total assets and the EBIT is only 1.49 times the interest expense.
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Chapter 10: Corporations: Paid-In Capital and Retained Earnings
Short Exercises
(5-10 min.) S 10-2
1. No, the excess amount of $1,500,000 was not a profit to Sullivan. No, the excess did not
affect net income. The $1,500,000 was additional paid-in capital, called Paid-in capital in
excess of par.
2. No, a change in the par value of the company’s stock doesn’t affect total paid-in capital. The
issue price of the stock affects total paid-in capital. The higher the issue price of the stock,
the higher the paid-in capital, and vice versa.
(10-15 min.) S 10-3 Case A – Issue stock and buy the assets in separate transactions:
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Cash 600,000
Common Stock (10,000 shares $10) 100,000
Paid-in Capital in Excess of par--Common
($600,000 - $100,000)
500,000
Issued common stock
Building 475,000
Equipment 125,000
Cash 600,000
Purchased plant assets.
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Case B – Issue stock to acquire the assets:
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Building 475,000
Equipment 125,000
Common stock (10,000 Shares $10) 100,000
Paid-in capital in excess of par--Common
($600,000 - $100,000)
500,000
Issued stock to purchase plant assets.
The balances in all accounts are the same:
Building $475,000Equipment 125,000Common stock 100,000Paid-in capital in excess of par--Common 500,000
(5-10 min.) S 10-4
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
1. Cash ($1,200,000+ $425,000) 1,625,000
Common stock 1,200,000
Paid-in capital in excess of par--Common 425,000
Issued common stock.
2. Buckeye, Inc.’s main source of stockholders’ equity was profitable operations, as shown by the far greater amount of Retained earnings compared to paid-in capital.
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(5-10 min.) S 10-5
1. Common stock, December 31, 2014 $ 900,000
Common stock, December 31, 2013 897,750
Increase during 2014 $ 2,250
Paid-in capital in excess of par--Common, December 31, 2014 $395,500
Paid-in capital in excess of par--Common, December 31, 2013 362,000
Increase during 2014 33,500
Total increase in paid-in capital during 2014 $35,750
Sugarland must have issued common stock during 2014, as shown by the increase in the Common
stock account and Paid-in capital in excess of par--Common account. Also, the number of shares
issued and outstanding increased from 2013 to 2014.
2. Retained earnings, December 31, 2014 $2,400,000
Retained earnings, December 31, 2013 2,175,000
Increase during 2014 $225,000
Sugarland had a profit less dividends of $225,000 during 2014, as indicated by the increase in
Retained earnings.
(5-10 min.) S 10-6
Journal
ACCOUNTS POST REF. Dr. Cr.
a. Cash (1,000 shares $35) 35,000
Common stock (1,000 shares $15) 15,000
Paid-in capital in excess of par--Common ($35,000 -
$15,000)
20,000
b. Cash 83,000
Preferred stock (2,000 shares $25) 50,000
Paid-in capital in excess of par--Preferred ($83,000 -
$50,000)
33,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 10-7
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
Dec. 15 Retained earnings (or Dividends) [(.02 x $140,000 total par) + (80,000 shares $.70)]
58,800
Dividends payable 58,800
Declared a cash dividend.
2015
Jan. 4 Dividends payable 58,800
Cash 58,800
Paid the cash dividend.
(10-15 min.) S 10-8
1. Zepher, Inc. must declare $4,000 (1,000 shares x.05 x $80) each year before the common stockholders get any cash dividends.
2. Assume that the total dividend declared in 2014 is $22,000:
Total dividend $22,000 Less: 2014 preferred dividend (4,000) Common dividend $18,000
3. Zepher, Inc.’s Preferred stock is assumed to be cumulative because it is not specifically labeled as noncumulative.
4. Assume that the total dividend declared in 2017 is $19,000:
Total dividend $19,000 Less: 2015 preferred dividend (4,000) 2016 preferred dividend (4,000) 2017 preferred dividend (4,000) Total preferred dividend (12,000) Common dividend $7,000
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(10-15 min.) S 10-9
1. Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
May 31 Retained earnings (or Dividends) (110,000 shares .10 $8 market value)
88,000
Common stock
(110,000 shares .10 $2 par) 22,000
Paid-in capital in excess of par— Common
($88,000 - $22,000) 66,000 2. There is no effect on Oceanview Realty’s total assets. There is no effect on Oceanview Realty’s total stockholders’ equity. (10-15 min.) S 10-10 1. Stock dividends
2. Cash dividends
3. Both cash dividends and stock dividends
4. Stock dividends
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(5–10 min.) S 10-11 1. Stockholders’ equity Paid-in capital: Common stock, $4.00 par, 1,000,000 shares authorized, 240,000 shares issued and outstanding $960,000 Paid-in capital in excess of par, common 225,000 Total paid-in capital 1,185,000Retained earnings 298,000Total stockholders’ equity 1,483,000 Computations: Par value: $8 x ½ = $4.00 Shares authorized: 500,000 x 2 = 1,000,000 Shares issued and outstanding: 120,000 x 2 = 240,000 2. No account balances changed after the stock split. All account balances were unchanged. (10-15 min.) S 10-12 Req 1
Journal
ACCOUNTS POST REF. Dr. Cr.
a. Treasury stock, common (2,500 shares $5) 12,500
Cash 12,500
b. Cash (1,000 shares $11) 11,000
Treasury stock, common (1,000 shares $5) 5,000
Paid-in capital from treasury stock ($11,000 -$5,000)
6,000
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Req 2. Treasury stock is a contra-stockholders’ equity account. Liquidation World, Inc. should subtract the $7,500 balance in Treasury stock from the rest of the stockholders’ equity accounts to arrive at total stockholders’ equity on the balance sheet. (5-10 min.) S 10-13
Stockholders’ equity
Paid-In capital:
Common stock, $7 par, 250 shares issued and
outstanding $1,750,000
Paid-in capital in excess of par--Common 172,000
Total paid-in capital $1,922,000
Retained earnings 140,000
Total stockholders’ equity $2,062,000
(10-15 min.) S 10-14 1.
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Retained earnings (or Dividends)
40,000
Dividends payable
40,000
Declared a cash dividend.
Dividends payable
40,000
Cash
40,000
Paid the cash dividend.
2. The issuance of Common stock brought in $110,000 ($20,000 + $90,000) of cash during
2014. 3. The cost of the treasury stock purchased during 2014 was $18,000. The cost of the
treasury stock sold during 2014 was $9,000. The treasury stock was sold in 2014 for $19,000 ($10,000 + $9,000).
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Exercises
(10-15 min.) E 10-32B
Req 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
Oct 6 Cash 9,000
Common stock (300 shares $6) 1,800
Paid-in capital in excess of par--Common
($9,000 - $1,800) 7,200
Issued common stock.
12 Cash 26,000
Preferred stock 26,000
Issued preferred stock.
14 Land 18,000
Common stock (1,600 shares $6) 9,600
Paid-in capital in excess of par--
Common($18,000 - $9,600) 8,400
Issued common stock for land.
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Req 2
Stockholders’ Equity
Paid-in capital: Preferred stock, $3, no-par, 900,000 shares authorized, 500 shares issued and
outstanding $26,000 Common stock, $6 par, 1,400,000 shares authorized, 1,900 shares issued and
outstanding 11,400
Paid-in capital in excess of par--Common 15,600
Total paid-in capital $53,000
Retained earnings 32,000Total stockholders’ equity $85,000
Computations:
Common stock: $1,800 + $9,600 = $11,400
Paid-in capital in excess of par: $7,200 + $8,400 = $15,600
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(10-15 min.) E 10-33B
Req 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. Cash (12,000 shares $18) 216,000
Common stock 216,000
Issued no-par common stock.
b. Cash (12,000 shares $18) 216,000
Common stock (12,000 shares $10) 120,000
Paid-in capital in excess of stated value--
Common ($216,000 - $120,000)
96,000
Issued no-par common stock with $10 stated value.
Req 2
Both types of stock issuance result in the same amount of paid-in capital, $216,000.
(10-15 min.) E 10-34B
Total paid-in capital:
Preferred stock
Issued for cash (3,500 shares $50) $175,000
Common stock
Issued for cash (9,000 shares $6) 54,000
Issued for patent 55,000
Total paid-in capital $284,000
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(10-15 min.) E 10-35B
Assume that the total dividend declared in 2014 is $18,600:
Total dividend $18,600
Less: 2014 preferred dividend (25,000 shares x .08 x $12 = $24,000, but dividends total $18,600 only)
(18,600)
Common dividend $0
Assume that the total dividend declared in 2015 is $42,800: Total dividend $42,800 Less: 2014 preferred dividend ($24,000 - $18,600) (5,400) 2015 preferred dividend (25,000 shares x .08 x $12) (24,000) Total preferred dividend (29,400)Common dividend $13,400
(10-15 min.) E 10-36B
Assume that the total dividend declared in 2015 is $175,000:
Total dividend $175,000
Less: 2014 preferred dividend (65,000 shares x $.75) (48,750)
2015 preferred dividend (65,000 shares x $.75) (48,750)
Total preferred dividend (97,500)
Common dividend $77,500
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) E 10-37B
Req 1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Aug 31 Retained earnings (or Dividends) (25,000 shares
.15 $21 market value)
78,750
Common stock (25,000 shares .15 $10 par)
37,500
Paid-in capital in excess of par—
Common ($78,750 - $37,500) 41,250
Declared and distributed a stock dividend.
Req 2
Stockholders’ equity
Paid-in capital:
Common stock, $10 par, 900,000 shares authorized, 28,750 shares issued and outstanding $ 287,500
Paid-in capital in excess of par--Common 201,250
Total paid-in capital $488,750
Retained earnings 96,250
Total stockholders’ equity $585,000 Computations: Common stock: $250,000 +$37,500= $287,500 Paid-in capital in excess of par: $160,000 +41,250 = $201,250 Retained earnings: $175,000 - $78,750 = $96,250
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(10-15 min.) E 10-38B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Retained earnings (or Dividends) (71,000 shares .15 $9 market value) 95,850
Common stock (71,000 shares .15 $5 par) 53,250
Paid-in capital in excess of par--Common ($95,850 - $53,250) 42,600
Declared and distributed a stock dividend. Req 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Retained earnings (or Dividends) [(71,000 shares + 10,650 shares) $.40]
32,660
Dividends payable 32,660 Declared a cash dividend.
Dividends payable 32,660 Cash 32,660 Paid the cash dividend.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) E 10-39B Req 1
No entry is needed to record the stock split because the split affects no account balances.
Req 2 Stockholders’ equity Paid-in capital:
Common stock, $0.50 par, 3,200,000 shares authorized, 240,000 shares issued and outstanding $120,000
Paid-in capital in excess of par--Common 48,000 Total paid-in capital $168,000Retained earnings 214,000Total stockholders’ equity $382,000 Computations: Par value: $2 x 1/4= $0.50 Shares authorized: 800,000 x 4 =3,200,000 Shares issued and outstanding: 60,000 x 4 = 240,000 (20-25 min.) E 10-40B
a. Increase stockholders’ equity by $1,276,000 (58,000 shares $22).
b. Decrease stockholders’ equity by $6,600 (1,100 shares $6).
c. No effect.
d. Increase stockholders’ equity by $2,100 (300 shares $7).
Some students may argue that the increase is $900 [300 shares ($7.00 – $4.00)], but that is incorrect. To see this, examine the entry to record sale of the treasury stock:
Journal DATE
ACCOUNTS POST REF. Dr. Cr.
Cash (300 shares $7) 2,100 Treasury stock (300 shares $4) 1,200 Paid-in capital from treasury stock ($2,100 - $1,200) 900 See that the two credits to the stockholders’ equity accounts (Treasury stock $1,200 and Paid-in capital from treasury stock $900) total $2,100. e. No effect.
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(20-25 min.) E 10-41B
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Mar 4 Cash (20,000 shares $10) 200,000
Common stock 200,000
Issued no-par Common stock.
May 22 Treasury stock (1,500 shares $6) 9,000
Cash 9,000
Purchased treasury stock.
Sep 22 Cash (600 shares $9) 5,400
Treasury Stock (600 shares $6) 3,600
Paid-in capital from treasury stock
($5,400- $3,600)
1,800
Sold treasury stock.
(20-25 min.) E 10-42B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec. 10 Treasury stock, Common (2,000 shares $13)
26,000
Cash 26,000
Purchased treasury stock.
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Req 2
Stockholders’ equity
Paid-in capital:
Common stock, $4 par, 500,000 shares authorized, 90,000 shares issued, 88,000 shares outstanding $360,000
Paid-in capital in excess of par--Common 450,000
Total paid-in capital 810,000
Retained earnings 550,000
1,360,000
Less: Treasury stock, 2,000 shares at cost (26,000)
Total stockholders’ equity $1,334,000
(10-15 min.) E 10-43B
Stockholders’ Equity
Paid-in capital: Preferred stock, 7%, $12 par, 20,000 shares authorized, 10,000 shares
issued and outstanding $120,000 Common stock, no-par, $8 stated value, 50,000 shares authorized,
issued, and outstanding 400,000
Paid-in capital in excess of stated value--Common 65,000
Total paid-in capital $585,000
Retained earnings 123,000
Total stockholders’ equity $708,000
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(20-25 min.) E 10-44B
Fernandes Corp. Statement of Stockholders’ Equity
Year Ended December 31, 2014
Common
Stock
AdditionalPaid-in Capital
Retained Earnings
Treasury Stock Total
Balance, December 31, 2013 $840,000 $145,000 $670,000 $(63,800) $1,591,200Sale of treasury stock 3,000 14,500 17,500Issuance of Common stock 6,600 15,400 22,000Net income 203,000 203,000Cash dividends (40,000) (40,000)Balance, December 31, 2014 $846,600 $163,400 $833,000 $(49,300) $1,793,700 Computations: Sale of treasury stock:
Increase in additional paid-in capital: 500 shares x ($35 sale price - $29 cost) = $3,000 Decrease in treasury stock: 500 shares x $29 cost = $14,500
Issuance of Common stock: Increase in Common stock: 1,100 shares x $6 par = $6,600 Increase in additional paid-in capital: 1,100 shares x ($20 issue price - $6 par) = $15,400
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) E 10-45B Req1
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
June Cash (120,000 shares $12) 1,440,000
Common stock (120,000 shares $2) 240,000
Paid-in capital in excess of par--Common
($1,440,000 - $240,000) 1,200,000
Issued stock.
Oct Retained earnings (or Dividends) (3,120,000 shares .05 $14 market value)
2,184,000
Common stock (3,120,000 shares .05 $2
par) 312,000
Paid-in capital in excess of par—Common
($2,184,000 - $312,000) 1,872,000
Declared and distributed a stock dividend.
Computations: Shares issued and outstanding: 3,000,000 + 120,000 = 3,120,000
Req 2
Global Communications, Inc. Statement of Stockholders’ Equity
Year Ended December 31, 2014
Common
stock
Paid-in capital in
excess of par
Retained earnings Total
Balance, December 31, 2013 $6,000,000 9,700,000 $8,000,000 $23,700,000Issuance of stock 240,000 1,200,000 1,440,000Stock dividend 312,000 1,872,000 (2,184,000) —Balance, December 31, 2014 $6,552,000 $12,772,000 $5,816,000 $25,140,000
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(20-25 min.) E 10-46B Req 1 Rate of return on stockholders’ equity = Net income
Average stockholders’ equity
=
$251,875 ($1,750,000 + $1,500,000)/2
= $251,875
$1,625,000
= 15.50% (rounded)
Req 2
Hansen Industrial Supply, Inc.’s return of equity of 15.50% indicates that Hansen Industrial Supply, Inc. performed well in 2014.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Problems
(10-15 min.) P 10-55B
Req. 1
6% is the annual dividend rate on the Preferred stock. It means that the annual dividend on the Preferred stock is $0.48 (6% x $8 par) per share.
Mackay, Inc. would expect to pay annual dividends on 1,500 shares of $720 ($8 par .06 1,500 shares)
Req. 2
Mackay, Inc. issued the Common stock during 2013 at a price of $3.75 per share. [($12,000 Common stock + $33,000 Paid-in capital in excess of par) /12,000 shares]
Req. 3
No, the first-year operations were not profitable, as shown by the ($4,000) deficit in Retained earnings.
Req. 4
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
a. Cash 40,000
Preferred stock (5,000 shares $8) 40,000
b. Cash (2,000 shares $7) 14,000
Common stock (2,000 shares $1) 2,000
Paid-in capital in excess of par--Common
($14,000 - $2,000) 12,000
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Req 5
Paid-in capital:
Preferred stock, 6%, $8 par, 70,000 shares authorized, 5,000 shares issued and outstanding $ 40,000
Common stock, $1 par, 140,000 shares authorized, 14,000 shares issued and outstanding 14,000
Paid-in capital in excess of par--Common 45,000
Total paid-in capital $99,000
Retained earnings 71,000
Total stockholders’ equity $170,000
Computations:
Common stock: $12,000 +$2,000 = $14,000
Paid-in capital in excess of par: $33,000 +12,000 = $45,000
Retained earnings: ($4,000) + $75,000 = $71,000
(20-25 min.) P 10-56B
Req 1
Davenport, Inc. has cumulative Preferred stock and Common stock outstanding.
Req 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Millions
Cash 50
Preferred stock 50
Cash ($320 + $82) 402
Common stock 320
Paid-in capital in excess of par--Common 82
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Req 3
($ Millions)
Assume that the total dividend declared in 2015 is $31:
Total dividend $31Less: 2013 preferred dividend (.08 x $50) (4) 2014 preferred dividend (.08 x $50) (4)
2015 preferred dividend (.08 x $50) (4)
Total preferred dividend (12)
Common dividend $ 19
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Millions
Retained earnings (or Dividends) 31 Dividends Payable, Preferred 12 Dividends Payable, Common 19
(15-20 min.) P 10-57B
Req 1a
Year
Total
Dividend
Preferred
Dividend
Common
Dividend
2012 $22,000 $22,000 $0
2013 $95,000 $40,000 $55,000
2014 $225,000 $40,000 $185,000
Computations:
Preferred dividends per year: 8,000 shares x $5.00 = $40,000
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Req 1b
Year Total Dividend
Preferred Dividend
Common Dividend
2012 $22,000 $22,000 $0
2013 $95,000 2012: $18,000 ($40,000 - $22,000) + 2013: $40,000 = Total: $58,000 $37,000
2014 $225,000 $40,000 $185,000 Computations: Preferred dividends per year: 8,000 shares x $5.00 = $40,000
Req 2
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
2014
Dec. 28 Retained earnings (or Dividends) 225,000 Dividend Payable, Preferred 40,000 Dividends Payable, Common 185,000 Declared a cash dividend.
2015 Jan. 17 Dividends Payable, Preferred 40,000 Dividends Payable, Common 185,000 Cash 225,000 Paid the cash dividend.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 10-58B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
Jan. 6 Retained earnings (Dividends) 46,650
Dividends Payable, Preferred (9,000
shares $4.25)
38,250
Dividends Payable, Common (14,000
shares $.60)
8,400 Declared a cash dividend.
Jan. 20 Dividends Payable, Preferred 38,250 Dividends Payable, Common 8,400 Cash 46,650 Paid the cash dividend. Mar. 21 No entry required.
Apr. 18 Retained earnings (or Dividends) (28,000 shares .15 $32 market value)
134,400
Common stock (28,000 shares .15 $5 par)
21,000
Paid-in capital in excess of par--
Common ($134,400 - $21,000)
113,400 Declared and distributed a stock dividend. June 18 Treasury Stock, Common (1,400 shares $33) 46,200 Cash 46,200 Purchased treasury stock. Dec. 22 Cash (600 shares $38) 22,800
Treasury Stock, Common (600 shares $33)
19,800
Paid-in Capital from Treasury Stock
($22,800 - $19,800)
3,000 Sold treasury stock.
Computations: Common stock outstanding after split: 14,000 shares x 2 = 28,000 shares
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(20-25 min.) P 10-59B Req 1
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
2014
Feb. 15 Treasury Stock (5,000 shares $6) 30,000
Cash 30,000
Mar. 8 Cash (1,000 shares $13) 13,000
Treasury Stock (1,000 shares $6) 6,000
Paid-in Capital from Treasury Stock ($13,000
- $6,000) 7,000
Sep. 28 Retained earnings (or Dividends) (116,000 shares .05 $7 market value)
40,600
Common stock (116,000 shares .05 $2 par) 11,600
Paid-in capital in excess of par--Common ($40,600 - $11,600)
29,000
Req 2
Stockholders’ Equity at December 31, 2014 Paid-in capital: Common stock, $2 par, 650,000 shares authorized, 125,800 shares
issued, 121,800 shares outstanding $251,600 Paid-in capital in excess of par--Common 339,000 Paid-in capital from treasury stock 7,000 Total paid-in capital 597,600Retained earnings 173,400 771,000Less: Treasury stock, 4,000 shares at cost (24,000)Total stockholders’ equity $747,000
Computations:
Common stock: 120,000 + 5,800 = 125,800 issued – 4,000 treasury shares = 121,800 outstanding
Paid-in capital in excess of par: $310,000 + $29,000 = $339,000
Retained earnings: $140,000 – $40,600 + $74,000 = $173,400
Treasury stock: $30,000 - $6,000 = $24,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) P 10-60B Req 1
Par value of Common stock: $16,000
= $3.20 per share 5,000 shares
newly issued Req 2 Price per share of stock issuance:
($16,000 + $56,000) = $14.40 per share
5,000 shares newly issued Req 3 Cost of treasury stock sold: $12,000 Selling price of treasury stock sold: $118,000 ($6,000 + $12,000) Increase in total stockholders’ equity: $18,000 Req 4 The stock dividend had no effect on total stockholders’ equity.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 665
Chapter 11: The Statement of Cash Flows
Short Exercises
(5-10 min.) S 11-2
1. The “check figure” is change in cash, which can be found on a comparative balance sheet showing beginning and ending cash balances for the period.
2. Operating activities, investing activities, and financing activities are the categories of cash flows in order of importance.
3. Net income is the first dollar amount reported using the indirect method.
666 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 11-3
TO: Managers of Icemountain, Inc. FROM: Student Name SUBJECT: Purposes of Statement of Cash Flows
Although net income growth has been strong over the past 10 years, the company is now facing
bankruptcy because too little attention has been paid to cash flows over the years. The following
is a brief explanation of the purposes of the statement of cash flows:
1. By looking at cash receipts and cash payments from the past, it should be easier to forecast
what the cash flows will be in the future.
2. The statement of cash flows reveals whether the company is experiencing a positive or
negative cash flow from operations. This can expose problems with present management
operating decisions, i.e. collection policies. The statement of cash flows also reveals whether
the company is experiencing a positive or negative cash flow from investing activities. This
can expose other problems with management decisions, such as excessive acquisition of
long-term assets. Likewise, the statement of cash flows shows results from financing
decisions.
3. The statement of cash flows can help managers anticipate available funds for making
payments to lenders and for paying dividends to stockholders. If there is a positive cash flow
between operating activities and investing activities, there will be money available for paying
debts and dividends.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 667
(10-15 min.) S 11-4
a. I+ i. O-
b. F+ j. O+
c. O+ k. NIF
d. F- l. F-
e. F+ m. NIF
f. O+ n. O+
g. O+ o. O+
h. F- p. O-
(10-15 min.) S 11-5
a. investing b. investing c. financing d. no effect
e. operating f. financing g. financing h. financing
i. operating j. investing k. operating
668 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) S 11-6
Net income $42,000
+ Depreciation expense 8,000
− Increase in Accounts Receivable (14,000)
− Decrease in Accounts Payable (6,000)
Net cash provided by operating activities $30,000
(10-15 min.) S 11-7
Trident Equipment Statement of Cash Flows
Year Ended April 30, 2014 Cash flows from operating activities: Net income $72,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $23,000 Increase in current assets (35,000) Decrease in current liabilities ( 4,000) (16,000) Net cash provided by operating activities 56,000 Cash flows from investing activities: Purchase of equipment (58,000) Proceeds from sale of land 63,000 Net cash provided by investing activities 5,000 Cash flows from financing activities: Proceeds from issuance of common stock 6,000 Purchase of treasury stock (7,000) Payment of notes payable (38,000) Payment of dividends (5,000) Net cash used for financing activities (44,000)Net increase in cash 17,000Cash balance April 30, 2013 11,000Cash balance April 30, 2014 28,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 669
(5-10 min.) S 11-8
Nemo’s Spas
Statement of Cash Flows
Year Ended December 31, 2014
Cash flows from operating activities:
Collections from customers $572,000
Payments to suppliers and employees (417,000)
Net cash provided by operating activities $155,000
Cash flows from investing activities:
Acquisition of equipment (84,000)
Net cash used for investing activities (84,000)
Cash flows from financing activities:
Payment of dividends (57,000)
Net cash used for financing activities (57,000)
Net increase in cash 14,000
Cash balance, December 31, 2012 32,000
Cash balance, December 31, 2013 $ 46,000
670 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(5-10 min.) S 11-9
Juarez Equipment, Inc. Statement of Cash Flows Year ended June 30, 2014
Cash flows from operating activities: Collections from customers $213,000 Payments to suppliers $ (92,000) Payments to employees (67,000) Net cash provided by operating activities 54,000 Cash flows from investing activities: Proceeds from sale of land 61,000 Purchase of equipment (38,000) Net cash provided by investing activities 23,000 Cash flows from financing activities: Proceeds from issuance of stock 21,000 Payment of dividends (16,000) Payment of notes payable (41,000) Net cash used for financing activities (36,000)Net increase in cash 41,000Cash balance, June 30, 2013 23,000Cash balance, June 30, 2014 $ 64,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 671
(5-10 min.) S 11-10
1.
Accounts Receivable
Bal. beg.
Sales revenue
$43
684
? Cash received from
customers
Bal. end $63
Cash received from customers = Beg. Bal. $43 + Sales revenue $684 – Bal. end. $63 = $664 2. Step a.
Inventory
Bal. beg. $84 334 Cost of goods sold
Purchases ?
Bal. end $77
Purchases of inventory + Beg. Bal. $84 – cost of goods sold $334 = Bal. end $77
Purchases of inventory = $327 (This is total purchases—some for cash and some on account).
Step b.
Accounts Payable
Payments to vendors ? $32 Bal. beg.
327 Purchases
$55 Bal. end
Bal. beg. $32 + purchases $327 – payments to vendors ? = Bal. end $55
Payments to vendors = $304
672 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) S 11-11
Plant Assets, Net
Beginning balance 180 Depreciation
expense
61
Acquisitions ?
Ending balance 226
Acquisitions of plant assets: $180– $61 + ? = $226
?= $107
(10-15 min.) S 11-12
1. Long-Term Notes Payable
Payment of notes payable ? Beginning balance 75
Ending balance 62
Payment of long term notes payable: $75 - ? = $62
?= $13
2.
Common Stock
Beginning balance 30
Sale of common stock ?
Ending balance 41
Sale of common stock: $30 + ? = $41
?= $11
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3.
Retained Earnings
Dividends declared ? Beginning balance 255
Net Income 97
Ending balance 290
Dividends declared: $255 + $97 - ? = $290
? = $62
Since there is no Dividend Payable, dividends paid equals dividends declared.
674 Solutions Manual Copyright © 2015 Pearson Education, Inc.
Exercises
(10-15 min.) E 11-23B
Req 1
Cash flows from operating activities:
Net income $132,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense $ 9,000
Decrease in accounts receivable 6,000
Increase in inventory (14,000)
Increase in accounts payable 11,000 12,000
Net cash provided by operating activities $144,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 675
(20-25 min.) E 11-24B
Req 1
Snyder Services, Inc. Statement of Cash Flows
Year Ended November 30, 2014 Cash flows from operating activities: Net income $ 93,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $19,000 Decrease in accounts receivable 15,000 Increase in inventory (14,000) Increase in accounts payable 9,000 Decrease in accrued liabilities (13,000) 16,000 Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payment of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000
Noncash investing and financing transaction: Acquisition of fixed asset with note payable $15,000
Req 2
Free cash flow = Net cash flow from operations - Cash payment for investment in L/T assets = $109,000 - $87,000 = $22,000
676 Solutions Manual Copyright © 2015 Pearson Education, Inc.
Req 3
Snyder Services’ operations provided net cash flows of $109,000. The majority of the cash flow comes from operations, as it should in a successful company. Snyder Services used net negative cash flows of $68,000 for investing activities. However, this indicates that the company is investing its cash into the long term assets of the business. Snyder Services’ financing activities provided net cash flows of $19,000. The company raised additional capital by issuing common stock, which more than covered the payment of long-term debt and the return of some of the proceeds from operations to the stockholders in the form of dividends. Snyder Services also has Free cash flow of $22,000 which indicates it has cash available to pay dividends, pay off debt, or pursue other investment oportunities.
(10-15 min.) E 11-25B
Req 1
Cash Conversion Cycle = (Days-Sales-In-Inventory) + (Receivable Collection Period) –
(Accounts Payable Payment Period)
Days-Sales-In-Inventory =Average Inventory/ (Cost of Goods Sold/365 Days)
Receivable Collection Period = Average Accounts Receivables/(Credit Sales/365 Days)
Accounts Payable Payment Period = Average Accounts Payable/(Cost of Goods Sold/365 Days)
Days’ sales in inventory
= ($24,000+$38,000)/2
=$31,000
= 109.86 days $103,000/365 $282.19
A/R collection period
= ($55,000+$40,000)/2
=$47,500
= 63.05 days $275,000/365 $753.42
Accts. Payable payment period
= ($27,000+$36,000)/2
=$31,500
= 111.63 days $103,000/365 $282.19
Cash Conversion Cycle = 109.86 + 63.05 – 111.63 = 61.28 days
Req 2
Snyder Serices’ Cash conversion cycle has improved from 66.82 days to 61.28 days. This is a positive sign as it means that Snyder Services’ cash has been “tied up” for a shorter period of time in the current year.
(10-15 min.) E 11-26B
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 677
(10-15 min.) E 11-26B
1.
Retained Earnings
Dividends declared ? Beginning balance 29,000
Net income 62,000
Ending balance 80,000
Declarationt of cash dividends: $29,000 + $62,000 - ? = $80,000
?= $11,000
2.
Plant Assets, Net
Beginning balance 101,000 Depreciation 16,000
Acquisitions 42,000 Book value of assets sold ?
Ending balance 110,000
Book value of assets sold: $101,000 – 16,000 + $42,000 -? = $110,000
? = $17,000
Sale proceeds: Book value of assets sold + gain or – loss = $17,000 +$3,000 = $20,000
678 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 11-27B
Req 1
Cash flows from operating activities:
Receipts:
Collections from customers $90,000
Dividends received 8,000
Total cash receipts $ 98,000
Payments:
To suppliers (41,000)
To employees (46,000)
For income tax (9,000)
For interest (15,000)
Total cash payments (111,000)
Net cash used for operating activities $ (13,000)
Req 2
The negative cash flow from operating activities is a sign of a company that is in distress because a successful business needs to generate most of its cash flows from day to day operating activities.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 679
(20-25 min.) E 11-28B
Snyder Services, Inc. Statement of Cash Flows
Year Ended November 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 290,000 Dividends received 11,000 Total cash receipts $ 301,000 Payments: To suppliers (110,000) To employees (63,000) For income tax (12,000) For interest (7,000) Total cash payments (192,000) Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payments of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000
680 Solutions Manual Copyright © 2015 Pearson Education, Inc.
(10-15 min.) E 11-29B
1. Accounts Receivable
Bal. beg. Credit Sales
$26,000 147,000
? Cash received from customers
Bal. end $31,000 Cash received from customers = Beg. Bal. $26,000 + Credit Sales $147,000 – Bal. end. $31,000 = $142,000 2. Step a.
Inventory Bal. beg. $31,000 94,000 Cost of goods sold Purchases ? Bal. end $34,000 Purchases of inventory + Beg. Bal. $31,000 – cost of goods sold $94,000 = Bal. end $34,000 Purchases of inventory = $97,000 (this is total purchases, some for cash and some on account). Step b.
Accounts Payable Payments to vendors ? $ 4,000 Bal. beg. 97,000 Purchases
$9,000 Bal. end Bal. beg. $4,000 + purchases $97,000 – payments to vendors ? = Bal. end $9,000 Payments to vendors = $92,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 681
(20-25 min.) E 11-30B
(In millions) a. Collections from customers: Sales revenues $24,859 + Decrease in accounts receivable 179 = Collections from customers $25,038 b. Payments for inventory: Cost of goods sold $18,162 − Decrease in inventory (592) − Increase in accounts payable (183) = Payments for inventory $17,387
c. Payments for other operating expenses: Other operating expenses $ 4,883 + Decrease in accrued liabilities 91 = Payments for operating expenses $ 4,974
d. Acquisitions of property and equipment: Ending balance, Property and equipment, net $ 4,345 + Depreciation expense 288 − Beginning balance, Property and equipment, net (3,879) = Acquisitions of property and equipment $ 754
e. Long-Term borrowing: Ending balance, Long-term liabilities $ 500 − Beginning balance, Long-term liabilities (470) = Long-Term borrowing $ 30
f. Proceeds from issuance of common stock: Ending balance, Common stock $ 675 − Beginning balance, Common stock (615) = Proceeds from issuance of common stock $ 60
g. Payment of cash dividends: Retained earnings, beginning balance $ 4,683 + Net income 994 − Retained earnings, ending balance (4,198) = Payment of cash dividends $ 1,479
682 Solutions Manual Copyright © 2015 Pearson Education, Inc.
Problems
(20-25 min.) P 11-37B
Req 1
Carlson Corporation Statement of Cash Flows
Year Ended December 31, 2014 Cash flows from operating activities: Net income $ 57,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 21,900 Loss on sale of equipment 10,500 Increase in accounts receivable (4,900) Decrease in inventory 3,200 Increase in accounts payable 1,600 Decrease in income tax payable (2,000) 30,300 Net cash provided by operating activities 87,600 Cash flows from investing activities: Acquisition of building (124,000) Proceeds from sale of equipment 53,000 Net cash used for investing activities (71,000) Cash flows from financing activities: Proceeds from issuance of common stock 36,900 Proceeds from issuance of long-term notes payable 34,600 Payment of dividends (18,300) Purchase of treasury stock (14,200) Net cash provided by financing activities 39,000 Net increase in cash 55,600 Cash balance, December 31, 2013 27,000Cash balance, December 31, 2014 $ 82,600
Noncash Investing and Financing Activities:
Retirement of bonds payable by issuing common stock $66,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 683
(20-25 min.) P 11-38B
Req 1 Marsing Company
Statement of Cash Flows Year Ended March 31, 2014
Cash flows from operating activities: Net income $ 76,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 18,300 Decrease in accounts receivable 7,200 Increase in inventories (1,700) Increase in accounts payable 3,400 Decrease in accrued liabilities (2,100) Increase in income tax payable 3,800 28,900 Net cash provided by operating activities 105,300 Cash flows from investing activities: Acquisition of equipment (29,400) Acquisition of building (99,200) Net cash used for investing activities (128,600) Cash flows from financing activities: Proceeds from issuance of common stock 15,000 Proceeds from issuance of long-term notes payable 60,000 Payment of dividends (42,000) Net cash provided by financing activities 33,000 Net increase in cash 9,700 Cash balance, March 31, 2013 5,600Cash balance, March 31, 2014 $ 15,300
Req. 2 Marsing Company’s operations provided net cash flow of $105,300. This amount exceeds net income, as it should due to the add-back of depreciation. In addition, the majority of the cash flow comes from operations, as it should in a successful company. Marsingr Co. used net negative cash flows of $128,600 for investing activities. However, this indicates that the company is investing its cash into the long-term assets of the business. CMarsing Company’s financing activities provided net cash flows of $33,000. The company raised additional capital by issuing common stock and long-term notes payable, which more than covered the return of some of the company’s earnings to the stockholders.
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(20-25 min.) P 11-39B
Req 1
Kahl Medical Supplies Statement of Cash Flows
Year Ended December 31, 2014 Cash flows from operating activities: Net income $67,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 4,600 Decrease in accounts receivable 1,800 Increase in inventory (2,300) Decrease in accounts payable (5,500) Increase in accrued liabilities 2,600 1,200 Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700 Req 2 Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.
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(20-25 min.) P 11-40B
Req 1
Inez, Inc. Statement of Cash Flows
Year Ended September 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 637,000 Interest received 7,600 Dividends received 4,800 Total cash receipts $ 649,400 Payments: To suppliers (381,900) To employees (87,400) For taxes (38,600) For interest (13,200) Total cash payments (521,100) Net cash provided by operating activities 128,300 Cash flows from investing activities: Acquisition of fixed assets (82,300) Proceeds from sale of fixed assets 17,800 Net cash used for investing activities (64,500) Cash flows from financing activities: Proceeds from issuance of common stock 55,000 Proceeds from issuance of notes payable 23,500 Payments of long-term notes payable (46,800) Payment of dividends (41,300) Net cash used for financing activities (9,600)Net increase in cash 54,200 Cash balance, September 30, 2013 26,700 Cash balance, September 30, 2014 $ 80,900
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(20-25 min.) P 11-41B
Req 1
Kahl Medical Supplies Statement of Cash Flows
Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $214,800 Interest received 8,300 Total cash receipts $ 223,100 Payments: To suppliers: (86,000) To employees (27,700) For interest (11,400) For income taxes (29,000) Total cash payments (154,100) Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Collections from customers = Sales Revenue + decrease in Accounts Receivable = $213,000 + $1,800 = $214,800 Payment to suppliers = Payment for inventory plus payment for other operating expenses = (Cost of goods sold plus increase in inventory plus decrease in Accounts Payable) + (Other Operating Expenses – increase in Accrued Liabilities) = ($70,500 + $2,300 + $5,500) + ($10,300 - $2,600) = ($78,300) + ($7,700) = $86,000 Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 687
Req 2
Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.
(20-25 min.) P 11-42B
Nelson Industrial, Inc. Statement of Cash Flows
Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 461,300 Interest received 8,200 Total cash receipts $ 469,500 Payments: To suppliers (304,800) To employees (62,300) For interest (21,400) For income taxes (7,600) Total cash payments (396,100) Net cash provided by operating activities 73,400 Cash flows from investing activities: Acquisition of equipment (21,800) Net cash used for investing activities (21,800) Cash flows from financing activities: Proceeds from issuance of common stock 58,500 Payment of dividends (10,700) Payment of notes payable (72,000) Net cash used for financing activities (24,200)Net increase in cash 27,400 Cash balance, December 31, 2013 63,800Cash balance, December 31, 2014 $ 91,200
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
Chapter 12: Financial Statement Analysis
Short Exercises
(5-10 min.) S 12-1
__E__ a. $12,000 insurance proceeds on a fully depreciated piece of equipment that was lost in a hurricane.
__C__ b. $800 gain on the sale of office furniture.
__C__ c. Income tax expense
__D__ d. $106,000 loss incurred as a result of closing the Coeur d’Alene, Idaho store location.
__C__ e. $2,300 loss incurred as a result of a company vehicle being involved in an accident. (Note – auto accidents are not
unusual or infrequent)
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(10-15 min.) S 12-2
Increase (Decrease)
(Amounts in thousands) 2014 2013
2014 2013 2012 Amount Percentage Amount Percentage
1. Net sales $325 $263 $212 $62 23.6% $51 24.1%
Cost of sales 200 161 128
2. Gross profit $125 $102 $84 $23 22.5% 18 21.4%
(10-15 min.) S 12-3
2014 Amount Percentage
Assets Current assets: Cash $14,400 18.0% Accounts Receivable, net 5,600 7.0% Inventory 23,200 29.0% Prepaid expenses 2,400 3.0% Total current assets 45,600 57.0% Plant and Equipment, net 34,400 43.0% Total assets $80,000 100%
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 12-4
1. c
2. e
3. g
4. a
5. h
6. d
7. b
8. f
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(10-15 min.) S 12-5
a. 4.
b. 3.
c. 5.
d. 4.
e. 1.
f. 4.
g. 2.
h. 4.
i. 1.
j. 5.
k. 3.
l. 2.
m. 1.
n. 5.
o. 4.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(10-15 min.) S 12-6
1. Accounts receivable turnover = $189,000
= 12.60 times ($13,000 + $17,000) / 2
2. Inventory turnover = $72,270
= 9.42 times ($12,000 + $14,000) / 2
(10-15 min.) S 12-7
1. Current ratio = $14,000 + $17,000 + 9,000
= 1.60 $25,000
2. Quick ratio
= $14,000 + $17,000
= 1.24 $25,000 3. Cash conversion
cycle = 39 + 29- 26 = 42 days
Days-sales-in-
inventory = ($12,000 + $9,000) / 2 = 39days
$98,910/365
Receivable
collection period = ($13,000 + $17,000) / 2 = 29 days
$189,000/365
Accounts payable
payment period = ($6,000 + $8,000)/2 = 26 days
$98,910/365
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(10-15 min.) S 12-8
1. Debt ratio = $322,500
= .56 or 56% $572,000
2. Interest coverage ratio = $227,600
= 12.17 times $18,700
3. Return on assets = $191,400
= .35 or 35% ($572,000 + $513,000) / 2
4. Dividend payout
= $24,600
= .13 or 13% $191,400
5. Return on equity = $191,400
= .85 or 85% ($249,500 + $198,500) / 2
(10-15 min.) S 12-9
1. Earnings per share = $191,400
= $3.48 (50,000+ 60,000)/2
2. Price/earnings ratio = $34
= 9.77 $3.48
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(10-15 min.) S 12-10
Dividend yield = $6
= .25 $24
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Exercises
(15-20 min.) E 12-21B
2014 2013 2012 Total current assets
$336,250 $328,500 $315,000
Total current liabilities
232,705 213,450 185,000
Net working capital
$103,545 $115,050 $130,000
Amount Percentage Amount Percentage ($11,505) (10.0%) ($14,950) (11.5%)
Although the percentage decrease in working capital is less from 2013 to 2014 than it was from 2012 to 2013, the trend is unfavorable given the decreases in both years.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-22B
Horton, Inc. Income Statement
Years Ended December 31, 2014 and 2013 Increase / (Decrease)
2014 2013 Amount Percentage
Revenue $595,000 $505,000 $90,000 17.8%
Expenses:
Cost of goods sold 270,000 227,000 43,000 18.9%
Selling and general expenses 120,000 110,000 10,000 9.1%
Interest expense 48,000 41,000 7,000 17.1%
Income tax expense 30,000 35,000 (5,000) (14.3%)
Total expenses 468,000 413,000 55,000 13.3%
Net income $ 127,000 $ 92,000 35,000 38.0%
Req 1
Net income increased by a higher percentage than total revenues because revenues increased at a higher rate (17.8%) than did total
expenses (13.3%).
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(15-20 min.) E 12-23B
Year 5 Year 4 Year 3 Year 2 Year 1 Net sales 118% 110% 104% 102% 100% Net income 110% 105% 102% 101% 100%
Net sales grew faster than net income during the period.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-24B
Natalie’s Nursing Home
Balance Sheet December 31, 2014
Amount Percentage Assets
Total current assets $126,000 21.3% Long-term investments 90,000 15.2% Property, plant and equipment, net 376,000 63.5% Total assets $592,000 100.0%
Liabilities Total current liabilities $ 120,000 20.3% Long-term debt 202,000 34.1% Total liabilities $322,000 54.4%
Stockholders’ Equity Total stockholders’ equity 270,000 45.6% Total liabilities and stockholders’ equity $592,000 100.0%
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(15-20 min.) E 12-25B
Horton, Inc. Common-Size Income Statement
Years Ended December 31, 2014 and 2013 2014 2013 Total revenues 100.0% 100.0% Expenses: Cost of goods sold 45.4% 45.0% Selling and general expenses 20.2% 21.8% Interest expense 8.1% 8.1% Income tax expense 5.0% 6.9% Total expenses 78.7% 81.8% Net income 21.3% 18.2%
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-26B
a. Current ratio = $195,000
= 1.65 $118,000
b. Quick ratio
= $28,000 + $20,000 + $64,000
= .95 $118,000 c. Cash conversion
cycle = 82 + 50 - 64 = 68 days
Days-sales-in-
inventory = ($77,000 + $55,000) / 2 = 82 days
$293,000/365
Receivable
collection period = ($64,000 + $70,000) / 2 = 50 days
$488,000/365
Accounts payable
payment period = ($54,000 + $48,000)/2 = 64 days
$293,000/365
d. Accounts receivable
= $488,000
= 7.28 times turnover ($64,000 + $70,000) / 2
e. Inventory turnover = $293,000
= 4.44 times ($77,000 + $55,000) / 2
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f. Gross profit %
= ($488,000 - 296,000)
= 39.3% $488,000 g. Net income %
= $61,000
= 12.5% $488,000
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-27B
a. Current ratio:
2014: $40,000 + $36,000 + $150,000 + $180,000 + $5,000
= 2.69 $153,000
2013: $25,000 + $22,000 + $136,000 + $192,000 + $4,000
= 2.35 $161,000
b. Quick ratio:
2014: $40,000 + $36,000 + $150,000
= 1.48 $153,000
2013: $25,000 + $22,000 + $136,000
= 1.14 $161,000
c. Debt ratio:
2014: $283,000
= 0.49
2013: $326,000
= 0.58 $572,000 $560,000
Computations: Total liabilities, 2014: $153,000 + $130,000 = $283,000 Total liabilities, 2013: $161,000 + $165,000 = $326,000 d. Interest coverage ratio:
2014: $175,000
= 10.94 times 2013: $158,000
= 8.10 times $16,000 $19,500
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Summary: The company’s ability to pay its current liabilities, long-term debt, and interest expense improved during 2014, as shown
by the increase in the current ratio, quick ratio and interest coverage ratio ratio, as well as the decrease in the debt ratio.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-28B
a. Accounts receivable turnover:
2014: $215,000
= 10.24
2013:$200,000
= 9.76 ($20,000 + $22,000)/2 ($22,000 + $19,000)/2
b. Inventory turnover:
2014: $118,000
= 18.15
2013:$110,000
= 15.71 ($7,000 + $6,000)/2 ($6,000 + $8,000)/2
c. Fixed asset turnover
2014: $215,000
= 1.43
2013:$200,000
= 1.36 ($152,000 + $148,000)/2 ($148,000 + $146,000)/2
d. Total asset turnover
2014: $215,000
= 1.18
2013:$200,000
= 1.13 ($183,000 + $180,000)/2 ($180,000 + $175,000)/2
e. Return on total assets:
2014: $33,500
= 18.46%
2013:$32,000
= 18.03% ($183,000 + $180,000)/2 ($180,000 + $175,000)/2
Req 2.
The company’s performance improved during 2014 as shown by increases in all of the ratios.
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(15-20 min.) E 12-29B
2014 2013 a. Earnings per share: $110,000
= $1.07 $120,000
= $1.22 (105,000 + 100,000)/2 (100,000 + 97,000)/2 b. Dividends per share: $45,000
= $.44 $51,000
= $.52 (105,000 + 100,000)/2 (100,000 + 97,000)/2 c. Dividend payout: $45,000
= 40.91%$51,000
= 42.50% $110,000 $120,000 d. Return on equity: $110,000
= 17.70%$120,000
= 20.29% ($640,000 + $603,000)/2 ($603,000 + $580,000)/2 Sharp Systems Incorporated stock’s attractiveness has decreased during the year as shown by the decrease in all of the ratios.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(15-20 min.) E 12-30B
Order of computation: MillionsGiven Current assets $30,000
4 Property, plant, and equipment. $50,000 Given Less: Accumulated depreciation 5,000 45,000
3 Total assets $75,000 1 Current liabilities $ 20,000 2 Long-term liabilities 25,000 6 Stockholders’ equity 30,000 5 Total liabilities and stockholders’ equity $75,000
Computations: 1. Current liabilities: $30,000 ÷ 1.5 = $20,000 2. Long-term liabilities: $45,000 - $20,000= $25,000 3. Total assets: $45,000 ÷ .60 = $75,000 4. Property, plant, and equipment, net: $75,000 - $30,000 = $45,000 Property, plant, and equipment: $45,000 + $5,000 = $50,000 5. Total liabilities and stockholders’ equity = total assets of $75,000 6. Stockholders’ equity: $75,000 - $20,000 - $25,000 = $30,000
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Problems (20-25 min.) P 12-37B
Req. 1
Regal Clothing Emporium Trend Percentages
2014 2013 2012 2009 Net sales 132% 117% 112% 100% Net income 167% 157% 108% 100% Ending total assets 130% 124% 110% 100%
Req 2 (Dollar amounts in thousands)
2014 2013 2012 Return on assets =
$82 = 12.9%
$77 = 13.2%
$53 = 10.1% ($650 + $620)/2 ($620 + $550)/2 ($550 + $500)/2
Req. 3 Based on the return on assets, in 2012, Regal underperformed its main competitor. However, in 2013 and in 2014 Regal outperformed
its main competitor.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 12-38B
Req 1
Johnson Auto Sales Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2014
Johnson Industry Average
Net sales 100.0% 100.0% Cost of goods sold 60.1% 63.2% Gross profit 39.9% 36.8% Operating expenses 31.5% 27.5% Operating income 8.4% 9.3% Other expenses 0 .6% 0.5% Net income 7.8% 8.8%
Johnson Auto Sales
Common-Size Balance Sheet Compared to Industry Average December 31, 2014
Johnson
Industry Average
Current assets 70.7% 71.2% Fixed assets, net 23.6% 24.3% Intangible assets, net 0.6% 0.7% Other assets 5.1% 3.8% Total assets 100.0% 100.0% Current liabilities 49.3% 48.4% Long-term liabilities 18.7% 16.1% Stockholders’ equity 32.0% 35.5% Total liabilities and stockholders’ equity 100.0% 100.0%
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Req. 2 Johnson Auto Sale’s common-size income statement shows that its ratio of gross profit to net sales is better than the industry average. However, the company’s ratio of operating income to net sales and ratio of net income to net sales are worse than the industry averages. Overall, Johnson’s profit performance is worse than average for the industry. Req. 3 Johnson’s common-size balance sheet shows that its ratio of current assets to total assets is comparable to the industry average. Johnson’s ratio of stockholders’ equity to total assets is lower than the industry average. This indicates that Johnson’s Auto Sales finances more of its assets with debt than others in the industry which might make it harder to obtain additional financing if necessary.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
(20-25 min.) P 12-39B
Req 1
Current ratio $17,000 + $22,000 + $103,000 + $119,000 +$10,000
= 1.43 $45,000 + $105,000 + $40,000
Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000
= 57.73% $660,000
Earnings per share $75,400
= $2.15 35,000
Req 2 a.
Current ratio $17,000 + $22,000 + $103,000 + $145,000 +$10,000
= 1.38 $45,000 + $131,000 + $40,000
Debt ratio $45,000 + $131,000 + $40,000 + $157,000 + $34,000
= 59.33% $686,000
Earnings per share $75,400
= $2.15 35,000
b.
Current ratio $61,000 + $22,000 + $103,000 + $119,000 +$10,000
= 1.66 $45,000 + $105,000 + $40,000
Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000
= 54.12% $704,000
Earnings per share $75,400
= $1.93 39,000
c.
Current ratio $92,000 + $22,000 + $103,000 + $119,000 +$10,000
= 1.82 $45,000 + $105,000 + $40,000
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Debt ratio $45,000 + $105,000 + $40,000 + $232,000 + $34,000
= 62.04% $735,000
Earnings per share $75,400
= $2.15 35,000
d.
Current ratio $35,000 + $22,000 + $85,000 + $119,000 +$10,000
= 1.43 $45,000 + $105,000 + $40,000
Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000
= 57.73% $660,000
Earnings per share $75,400
= $2.15 35,000
(20-25 min.) P 12-40B
2014 2013 a. Current ratio: $374
= 1.780 $363
= 1.570 $210 $231 b. Inventory $241
= 1.51 $231
= 1.34 turnover: ($165 + $154) / 2 ($154 + $191) / 2 c. Accounts $492
= 5.62 $449
= 4.70 Receivable ($86+ $89) / 2 ($89 + $102) / 2 turnover: d. Interest coverage $108
= 10.80 $80 5.0
0
ratio: $10 $16
e. Return on equity: $65 = 30.88%
$42 = 21.48%
($228 + $193) / 2 ($193 + $198) / 2
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
f. Earnings per share $65
= $5.91* $42
= $4.20* of common stock: 11 10 g. Price/earnings $48.72*
= 8.26 $33.28*
= 7.92 ratio: $5.90* $4.20* *Not in thousands
Req 2
Decisions: a. The company’s performance improved during 2014 as shown by increases in the current ratio, inventory turnover, accounts
receivables turnover and in the interest coverage ratio. b. The common stock’s attractiveness increased during 2014, as shown by the increase in the return on equity, the earnings per share
of common stock, and the price/earnings ratio. Req 3 This problem gives you practice in computing and evaluating several of the ratios used in financial statement analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s ability to pay its debts, manage its assets, and earn a return for its investors has improved or deteriorated during this period. Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment.
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(20-25 min.) P 12-41B
Req 1 (Dollar Amounts and Stock Quantities in Thousands) Here to Stay, Inc. Dream Home, Corp. a. Quick ratio: $12 + $11 + $28
= .86 $13 + $12 + $25
= .77 $59 $65 b. Debt ratio: $75
= 38.07% $74
= 39.15% $197 $189 c. Interest coverage $83
= 6.38 $63
= 5.73 ratio: $13 $11 d. A/R turnover: 395
= 13.86 333
= 13.59 ($28 + $29) / 2 ($25 + $24) / 2 e. Inventory $155
= 2.74 $125
= 2.31 turnover: ($60 + $53) / 2 ($52 + $56) / 2 f. Total asset turnover: 395
= 2.20 333
= 1.94 ($197 + $162) / 2 ($189 + $155) / 2 g. Return on assets: 43
= 23.96% 49
= 28.49% ($197+ $162) / 2 ($189 + $155) / 2 h. Return on equity: 43
= 42.79% 49
= 42.06% ($122+ $79) / 2 ($115 + $118) / 2 i. Earnings per share: $43
= $14.33* $49
= $8.17* 3 6
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
j. Price/earnings $45* = 3.14
$35.00* = 4.28
ratio: $14.33* $8.17* *Not in thousands
Decision:
Here to Stay, Inc.’s common stock seems to fit the investment strategy better. Its price/earnings ratio is lower than that of Dream
Home Corp. and it appears to be in better shape financially. On most of the ratios, Here to Stay, Inc. outperformed Dream Home Corp.
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(20-25 min.) P 12-42B Student answers will vary TO: Client FROM: Student Name SUBJECT: Investment Recommendation I recommend that you invest in Mutual Material, Inc. for the following reasons: 1. Mutual Materials, Inc.’ return on equity (ROE) is 4.5% higher than Anderson Supply, Co.’s. An investment in Mutual Materials,
Inc. stock should, therefore, produce a higher return than an investment in Anderson Supply, Co. stock.
2. Mutual Materials, Inc.’ ROE exceeds its return on assets by a wider margin than does Anderson Supply, Co.’s. This means that
Mutual Materials, Inc. is earning more with its borrowed funds than Anderson Supply, Co. is earning.
3. Mutual Materials, Inc. can cover its interest expense with operating income 9.3 times compared to 7.4 times for Anderson Supply,
Co..
4. Mutual Materials, Inc. collects receivables faster than Anderson Supply, Co. does. This suggests that cash flow is stronger at
Mutual Materials, Inc..
5. Mutual Materials, Inc.’s gross profit percentage is higher than Anderson Supply, Co.’s. This means they have more left over from
each dollar of sales after paying for cost of goods sold to put towards paying operating expenses and providing a profit to
investors.
Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e
6. Anderson Supply, Co. is better than Mutual Materials, Inc. on inventory turnover and net income as a percentage of sales. These
ratios provide insight about companies’ operations, but ROE and interest coverage are more “bottom-line” oriented. Further,
accounts receivable turnover gives an indication about cash flow. For these reasons, I place more importance on ROE, interest
coverage, and accounts receivable turnover, and Mutual Materials, Inc. outstrips Anderson Supply, Co. on these measures.