African Lakes Company purchased a delivery truck.The total cash payment was $27,900, including the following items.
|
Negotiated purchase price |
$24,000 |
|
Installation of special shelving |
1,100 |
|
Painting and lettering |
900 |
|
Motor vehicle license |
100 |
|
Annual insurance policy |
500 |
|
Sales tax |
1,300 |
|
Total paid |
$27,900 |
Explain how each of these costs would be accounted for.
The following expenditures relating to plant assets were made by Spaulding Company during the first 2 months of 2011.
1. Paid $5,000 of accrued taxes at time plant site was acquired.
2. Paid $200 insurance to cover possible accident loss on new factory machinery while the machinery was in transit.
3. Paid $850 sales taxes on new delivery truck.
4. Paid $17,500 for parking lots and driveways on new plant site.
5. Paid $250 to have company name and advertising slogan painted on new delivery truck.
6. Paid $8,000 for installation of new factory machinery.
7. Paid $900 for one year accident insurance policy on new delivery truck.
8. Paid $75 motor vehicle license fee on the new truck.
Instructions
(a) Explain the application of the cost principle in determining the acquisition cost of plant assets.
(b) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited.
(c) Research and development costs
1. ______ Rights, privileges, and competitive advantages that result from the ownership of longlived assets that do not possess physical substance.
2. ______ The allocation of the cost of an intangible asset to expense in a rational and systematic manner.
3. ______ A right to sell certain products or services, or use certain trademarks or trade names within a designated geographic area.
4. ______ Costs incurred by a company that often lead to patents or new products.These costs must be expensed as incurred.
5. ______ The excess of the cost of a company over the fair market value of the net assets acquired.
Trudy Company incurred the following costs.
|
1. Sales tax on factory machinery purchased |
$ 5,000 |
|
2. Painting of and lettering on truck immediately upon purchase |
700 |
|
3. Installation and testing of factory machinery |
2,000 |
|
4. Real estate broker’s commission on land purchased |
3,500 |
|
5. Insurance premium paid for first year’s insurance on new truck |
880 |
|
6. Cost of landscaping on property purchased |
7,200 |
|
7. Cost of paving parking lot for new building constructed |
17,900 |
|
8. Cost of clearing, draining, and filling land |
13,300 |
|
9. Architect’s fees on self constructed building |
10,000 |
Instructions
Indicate to which account Trudy would debit each of the costs.
Chris Rock has prepared the following list of statements about depreciation.
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its market value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue producing ability generally remain intact over time.
6. The revenue producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged to expense.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual
Value
Instructions
Identify each statement on page 430 as true or false. If false, indicate how to correct the statement.
Jerry Grant, the new controller of Blackburn Company, has reviewed the expected usefullives and salvage values of selected depreciable assets at the beginning of 2011. His findings are as follows.
|
Accumulated Depreciation |
Useful Life in Years |
Salvage Value |
|||||
|
Type of |
Date |
||||||
|
Asset |
Acquired |
Cost |
1/1/11 |
Old |
Proposed |
Old |
Proposed |
|
Building |
1/1/05 |
$800,000 |
$114,000 |
40 |
50 |
$40,000 |
$37,000 |
|
Warehouse |
1/1/06 |
100,000 |
25,000 |
25 |
20 |
5,000 |
3,600 |
All assets are depreciated by the straight line method. Blackburn Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Jerry’s proposed changes.
Instructions
(a) Compute the revised annual depreciation on each asset in 2011. (Show computations.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2011.
Presented below are selected transactions at Ingles Company for 2011. Jan. 1 Retired a piece of machinery that was purchased on January 1, 2001.The machine cost $62,000 on that date. It had a useful life of 10 years with no salvage value. June 30 Sold a computer that was purchased on January 1, 2008.The computer cost $40,000. It had a useful life of 5 years with no salvage value.The computer was sold for $14,000. Dec. 31 Discarded a delivery truck that was purchased on January 1, 2007. The truck cost $39,000. It was depreciated based on a 6 year useful life with a $3,000 salvage value.
Instructions
Journalize all entries required on the above dates, including entries to update depreciation, where applicable, on assets disposed of. Ingles Company uses straight line depreciation. (Assume depreciation is up to date as of December 31, 2010.)
Herzogg Company, organized in 2011, has the following transactions related to intangible assets.
|
1/2/11 |
Purchased patent (7 year life) |
$560,000 |
|
4/1/11 |
Goodwill purchased (indefinite life) |
360,000 |
|
7/1/11 |
10 year franchise; expiration date 7/1/2021 |
440,000 |
|
9/1/11 |
Research and development costs |
185,000 |
Instructions
Prepare the necessary entries to record these intangibles. All costs incurred were for cash. Make the adjusting entries as of December 31, 2011, recording any necessary amortization and reflecting all balances accurately as of that date.
Diaz Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order.
|
Debits |
||
|
1. Cost of filling and grading the land |
$ 4,000 |
|
|
2. Full payment to building contractor |
700,000 |
|
|
3. Real estate taxes on land paid for the current year |
5,000 |
|
|
4. Cost of real estate purchased as a plant site (land $100,000 and building $45,000) |
145,000 |
|
|
5. Excavation costs for new building |
35,000 |
|
|
6. Architect’s fees on building plans |
10,000 |
|
|
7. Accrued real estate taxes paid at time of purchase of real estate |
2,000 |
|
|
8. Cost of parking lots and driveways |
14,000 |
|
|
9. Cost of demolishing building to make land suitable for construction |
||
|
of new building |
15,000 |
|
|
$930,000 |
||
|
Credits |
||
|
10. Proceeds from salvage of demolished building |
$ 3,500 |
|
Instructions
Analyze the foregoing transactions using the following column headings. Insert the number of each transaction in the Item space, and insert the amounts in the appropriate columns. For amounts entered in the Other Accounts column, also indicate the account titles.
|
Item |
Land |
Building |
Other Accounts |
In recent years, Juresic Transportation purchased three used buses. Because of frequent turnover in the accounting department, a different accountant selected the depreciation method for each bus, and various methods were selected. Information concerning the buses is summarized below.
|
Salvage |
Useful Life |
||||
|
Bus |
Acquired |
Cost |
Value |
in Years |
Depreciation Method |
|
1 |
1/1/09 |
$ 96,000 |
$ 6,000 |
5 |
Straight line |
|
2 |
1/1/09 |
120,000 |
10,000 |
4 |
Declining balance |
|
3 |
1/1/10 |
80,000 |
8,000 |
5 |
Units of activity |
For the declining balance method, the company uses the double declining rate. For the units ofactivity method, total miles are expected to be 120,000. Actual miles of use in the first 3 years were: 2010, 24,000; 2011, 34,000; and 2012, 30,000.
Instructions
(a) Compute the amount of accumulated depreciation on each bus at December 31, 2011.
(b) If bus no. 2 was purchased on April 1 instead of January 1, what is the depreciation expense for this bus in (1) 2009 and (2) 2010?
On January 1, 2011, Pele Company purchased the following two machines for use in its production process. Machine A: The cash price of this machine was $38,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end of that time period. Assume that the straight line method of depreciation is used. Machine B: The recorded cost of this machine was $160,000. Pele estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
Instructions
(a) Prepare the following for machine A.
(1) The journal entry to record its purchase on January 1, 2011.
(2) The journal entry to record annual depreciation at December 31, 2011.
(b) Calculate the amount of depreciation expense that Pele should record for machine B each year of its useful life under the following assumptions.
(1) Pele uses the straight line method of depreciation.
(2) Pele uses the declining balance method.The rate used is twice the straight line rate.
(3) Pele uses the units of activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2011, 45,000 units; 2012, 35,000 units; 2013, 25,000 units; 2014, 20,000 units.
(c) Which method used to calculate depreciation on machine B reports the highest amount of depreciation expense in year 1 (2011)? The highest amount in year 4 (2014)? The highest total amount over the 4 year period?
At the beginning of 2009, Lehman Company acquired equipment costing $90,000. It was estimated that this equipment would have a useful life of 6 years and a residual value of $9,000 at that time.The straight line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year. During 2011 (the third year of the equipment’s life), the company’s engineers reconsidered their expectations, and estimated that the equipment’s useful life would probably be 7 years (in total) instead of 6 years. The estimated residual value was not changed at that time. However, during 2014 the estimated residual value was reduced to $5,000.
Instructions
Indicate how much depreciation expense should be recorded each year for this equipment, by completing the following table.
|
Year |
Depreciation Expense |
Accumulated Depreciation |
|
2009 |
||
|
2010 |
||
|
2011 |
||
|
2012 |
||
|
2013 |
||
|
2014 |
||
|
2015 |
At December 31, 2011, Jimenez Company reported the following as plant assets.
|
Land |
$ 4,000,000 |
|
|
Buildings |
$28,500,000 |
|
|
Less: Accumulated depreciation—buildings |
12,100,000 |
16,400,000 |
|
Equipment |
48,000,000 |
|
|
Less: Accumulated depreciation—equipment |
5,000,000 |
43,000,000 |
|
Total plant assets |
$63,400,000 |
During 2012, the following selected cash transactions occurred.
April 1 Purchased land for $2,130,000.
May 1 Sold equipment that cost $780,000 when purchased on January 1, 2008.The equipment was sold for $450,000.
June 1 Sold land purchased on June 1, 2002 for $1,500,000.The land cost $400,000.
July 1 Purchased equipment for $2,000,000.
Dec. 31 Retired equipment that cost $500,000 when purchased on December 31, 2002. No salvage value was received.
Instructions
(a) Journalize the above transactions.The company uses straight line depreciation for buildings and equipment.The buildings are estimated to have a 50 year life and no salvage value.The equipment is estimated to have a 10 year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement.
(b) Record adjusting entries for depreciation for 2012.
(c) Prepare the plant assets section of Jimenez’s balance sheet at December 31, 2012.
The intangible assets section of Redeker Company at December 31, 2011, is presented below.
|
Patent ($70,000 cost less $7,000 amortization) |
$63,000 |
|
Franchise ($48,000 cost less $19,200 amortization) |
28,800 |
|
Total |
$91,800 |
The patent was acquired in January 2011 and has a useful life of 10 years. The franchise was acquired in January 2008 and also has a useful life of 10 years .The following cash transactions may have affected intangible assets during 2012.
Jan. 2 Paid $45,000 legal costs to successfully defend the patent against infringement by another company.
Jan.–June Developed a new product, incurring $140,000 in research and development costs. A patent was granted for the product on July 1. Its useful life is equal to its legal life.
Sept. 1 Paid $50,000 to an extremely large defensive lineman to appear in commercials advertising the company’s products. The commercials will air in September and October.
Oct. 1 Acquired a franchise for $100,000.The franchise has a useful life of 50 years.
Instructions
(a) Prepare journal entries to record the transactions above.
(b) Prepare journal entries to record the 2012 amortization expense.
(c) Prepare the intangible assets section of the balance sheet at December 31, 2012.
Due to rapid turnover in the accounting department, a number of transactions involving intangible assets were improperly recorded by the Thorne Company in 2011.
1. Thorne developed a new manufacturing process, incurring research and development costs of $136,000.The company also purchased a patent for $60,000. In early January,Thorne capitalized $196,000 as the cost of the patents. Patent amortization expense of $9,800 was recorded based on a 20 year useful life.
2. On July 1, 2011, Thorne purchased a small company and as a result acquired goodwill of $92,000. Thorne recorded a half year’s amortization in 2011, based on a 50 year life ($920 amortization).The goodwill has an indefinite life.
Instructions
Prepare all journal entries necessary to correct any errors made during 2011. Assume the books have not yet been closed for 2011.
Lebo Company and Ritter Corporation, two corporations of roughly the same size, are both involved in the manufacture of in line skates. Each company depreciates its plant assets using the straight line approach. An investigation of their financial statements reveals the following information.
|
Lebo Co. |
Ritter Corp. |
|
|
Net income |
$ 800,000 |
$1,000,000 |
|
Sales |
1,200,000 |
1,080,000 |
|
Average total assets |
2,500,000 |
2,000,000 |
|
Average plant assets |
1,800,000 |
1,000,000 |
Instructions
(a) For each company on page 435, calculate the asset turnover ratio.
(b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales and produce net income.
Dewey Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order.
|
1. Accrued real estate taxes paid at time of purchase of real estate |
$ 5,000 |
|
2. Real estate taxes on land paid for the current year |
7,500 |
|
3. Full payment to building contractor |
500,000 |
|
4. Excavation costs for new building |
19,000 |
|
5. Cost of real estate purchased as a plant site (land $75,000 and building $25,000) |
100,000 |
|
6. Cost of parking lots and driveways |
18,000 |
|
7. Architect’s fees on building plans |
9,000 |
|
8. Installation cost of fences around property |
6,000 |
|
9. Cost of demolishing building to make land suitable for construction of new building |
17,000 |
|
$681,500 |
|
|
Credits |
|
|
10. Proceeds from salvage of demolished building |
$ 3,500 |
Instructions
Analyze the foregoing tranactions using the following column headings. Insert the number of each transaction in the Item space, and insert the amounts in the appropriate columns. For amounts entered in the Other Accounts column, also indicate the account title.
|
Item |
Land |
Building |
Other Accounts |
Sanders Company recorded sales revenues of $10 million for the year just ended. It recorded expenses totaling $9 million. Of these expenses, $4 million were expenses that would not have been different if sales revenue had been different. They were fixed expenses.
a. Prepare a table showing how much net income Sanders would have earned on sales of $8 million, $10 million, and $12 million.
b. Suppose the company’s total expenses had been $9 million, and of that amount, the fixed expenses had been $6 million. The remaining expenses would have varied proportionately with sales revenue. Prepare a table showing how much net income Sanders would have earned on sales of $8 million, $10 million, and $12 million.
c. What conclusions about the effect of operating leverage on net income can you draw from this analysis?
Given below is selected information about two companies.
|
Company A |
Company B |
|
|
Sales |
$10,000 |
$10,000 |
|
Fixed costs |
4,000 |
7,000 |
|
Variable costs |
5,000 |
2,000 |
a. Calculate net income for each company.
b. What is operating leverage? Is it present in the operations of these two companies? If so, which company uses the greater amount of operating leverage?
c. If sales decrease by 10%, which company will report the higher net income?
d. If sales increase by 10%, which company will report the higher net income?
Selected accounting information is provided below for two companies.
|
(In millions) |
2001 |
2000 |
1999 |
1998 |
|
Total assets: |
||||
|
Sara Lee |
$10,167 |
$11,611 |
$10,292 |
$10,989 |
|
Merck & Co. |
44,007 |
40,155 |
35,934 |
31,853 |
|
Depreciation and amortization: |
||||
|
Sara Lee |
599 |
602 |
533 |
618 |
|
Merck & Co. |
1,464 |
1,277 |
1,145 |
1,015 |
|
Capital expenditures: |
||||
|
Sara Lee |
532 |
647 |
535 |
474 |
|
Merck & Co. |
2,725 |
2,728 |
2,561 |
1,973 |
What trends in asset investments are apparent from the data presented? (Hint: Compare total assets, capital expenditures to total assets, and capital expenditures to depreciation and amortization for each year.)
Presented below are data on three promissory notes. Determine the missing amounts.
|
Date of |
Maturity |
Annual |
Total |
||
|
Note |
Terms |
Date |
Principal |
Interest Rate |
Interest |
|
(a) April 1 |
60 days |
? |
$600,000 |
9% |
? |
|
(b) July 2 |
30 days |
? |
90,000 |
? |
$600 |
|
(c) March 7 |
6 months |
? |
120,000 |
10% |
? |
The ledger of Hixson Company at the end of the current year shows Accounts Receivable $120,000, Sales $840,000, and Sales Returns and Allowances $30,000.
Instructions
(a) If Hixson uses the direct write off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Hixson determines that Fell’s $1,400 balance is uncollectible.
(b) If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.
(c) If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.
Ingles Company has accounts receivable of $93,100 at March 31. An analysis of the accounts shows the information on the next page.
|
Month of Sale |
Balance, March 31 |
|
March |
$60,000 |
|
February |
17,600 |
|
January |
8,500 |
|
Prior to January |
7,000 |
|
$93,100 |
Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $1,200 prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company’s estimate of bad debts is as follows.
|
Estimated Percentage |
|
|
Age of Accounts |
Uncollectible |
|
1–30 days |
2.0% |
|
31–60 days |
5.0% |
|
61–90 days |
30.0% |
|
Over 90 days |
50.0% |
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31 to record bad debts expense.
At December 31, 2010, Leis Co. reported the following information on its balance sheet.
|
Accounts receivable |
$960,000 |
|
Less: Allowance for doubtful accounts |
80,000 |
During 2011, the company had the following transactions related to receivables.
|
1. Sales on account |
$3,200,000 |
|
2. Sales returns and allowances |
50,000 |
|
3. Collections of accounts receivable |
2,810,000 |
|
4. Write offs of accounts receivable deemed uncollectible |
90,000 |
|
5. Recovery of bad debts previously written off as uncollectible |
24,000 |
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2011, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances.
(c) Prepare the journal entry to record bad debts expense for 2011, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
(d) Compute the accounts receivable turnover ratio for 2011.
Information related to Hermesch Company for 2011 is summarized below.
|
Total credit sales |
$2,200,000 |
|
Accounts receivable at December 31 |
825,000 |
|
Bad debts written off |
33,000 |
Instructions
(a) What amount of bad debts expense will Hermesch Company report if it uses the direct writeoff method of accounting for bad debts?
(b) Assume that Hermesch Company estimates its bad debts expense to be 2% of credit sales. What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $4,000?
(c) Assume that Hermesch Company estimates its bad debts expense based on 6% of accounts receivable.What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $3,000?
(d) Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance forDoubtful Accounts.What amount of bad debts expense will Hermesch record?
(e) What is the weakness of the direct write off method of reporting bad debts expense?
Presented below is an aging schedule for Zillmann Company.
|
Not |
Number of Days Past Due |
|||||
|
Customer |
Total |
Yet Due |
1–30 |
31–60 |
61–90 |
Over 90 |
|
Arndt |
$ 22,000 |
$10,000 |
$12,000 |
|||
|
Blair |
57,000 |
$ 40,000 |
||||
|
Chase |
40,000 |
16,000 |
6,000 |
$35,000 |
||
|
Drea |
34,000 |
$34,000 |
||||
|
Others |
132,000 |
96,000 |
16,000 |
14,000 |
6,000 |
|
|
$285,000 |
$152,000 |
$32,000 |
$26,000 |
$35,000 |
$40,000 |
|
|
Estimated Percentage Uncollectible |
3% |
6% |
13% |
25% |
60% |
|
|
Total Estimated Bad Debts |
$ 42,610 |
$ 4,560 |
$ 1,920 |
$ 3,380 |
$ 8,750 |
$24,000 |
At December 31, 2011, the unadjusted balance in Allowance for Doubtful Accounts is a credit of$12,000.
Instructions
(a) Journalize and post the adjusting entry for bad debts at December 31, 2011.
(b) Journalize and post to the allowance account the following events and transactions in the year 2012.
(1) On March 31, a $1,000 customer balance originating in 2011 is judged uncollectible.
(2) On May 31, a check for $1,000 is received from the customer whose account was written off as uncollectible on March 31.
(c) Journalize the adjusting entry for bad debts on December 31, 2012, assuming that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $800 and the aging scheduleindicates that total estimated bad debts will be $28,600.
Wall Inc. uses the allowance method to estimate uncollectible accounts receivable.Thecompany produced the following aging of the accounts receivable at year end.
|
Number of Days Outstanding |
||||||
|
Accounts receivable |
Total |
0–30 |
31–60 |
61–90 |
91–120 |
Over 120 |
|
% uncollectible |
375,000 |
220,000 |
90,000 |
40,000 |
10,000 |
$15,000 |
|
Estimated bad debts |
1% |
4% |
6% |
8% |
10% |
|
Instructions
(a) Calculate the total estimated bad debts based on the above information.
(b) Prepare the year end adjusting journal entry to record the bad debts using the aged uncollectible accounts receivable determined in (a). Assume the current balance in Allowance for Doubtful Accounts is a $8,000 debit.
(c) Of the above accounts, $5,000 is determined to be specifically uncollectible. Prepare the journal entry to write off the uncollectible account.
(d) The company collects $5,000 subsequently on a specific account that had previously been determinedto be uncollectible in (c). Prepare the journal entry(ies) necessary to restore the accountand record the cash collection.
(e) Comment on how your answers to (a)–(d) would change if Wall Inc. used 3% of totalaccounts
receivable, rather than aging the accounts receivable.What are the advantages to the companyof aging the accounts receivable rather than applying a percentage to total accounts receivable?
At December 31, 2011, the trial balance of Worcester Company contained the following amounts before adjustment.
|
Debits |
Credits |
|
|
Accounts Receivable |
$385,000 |
|
|
Allowance for Doubtful Accounts |
$ 2,000 |
|
|
Sales |
950,000 |
Instructions
(a) Based on the information given, which method of accounting for bad debts is Worcester Company using—the direct write off method or the allowance method? How can you tell?
(b) Prepare the adjusting entry at December 31, 2011, for bad debts expense under each of the following independent assumptions.
(1) An aging schedule indicates that $11,750 of accounts receivable will be uncollectible.
(2) The company estimates that 1% of sales will be uncollectible.
(c) Repeat part (b) assuming that instead of a credit balance there is an $2,000 debit balance in Allowance for Doubtful Accounts.
(d) During the next month, January 2012, a $3,000 account receivable is written off as uncollectible.Prepare the journal entry to record the write off.
(e) Repeat part (d) assuming that Worcester uses the direct write off method instead of the allowance method in accounting for uncollectible accounts receivable.
(f) What type of account is Allowance for Doubtful Accounts? How does it affect how accounts receivable is reported on the balance sheet at the end of the accounting period?
Mendosa Company closes its books monthly. On September 30, selected ledger account balances are:
|
Notes Receivable |
$33,000 |
|
Interest Receivable |
170 |
Notes Receivable include the following.
|
Date |
Maker |
Face |
Term |
Interest |
|
Aug. 16 |
Chang Inc. |
$ 8,000 |
60 days |
8% |
|
Aug. 25 |
Hughey Co. |
9,000 |
60 days |
10% |
|
Sept. 30 |
Skinner Corp. |
16,000 |
6 months |
9% |
Interest is computed using a 360 day year. During October, the following transactions were completed.
Oct. 7 Made sales of $6,900 on Mendosa credit cards.
12 Made sales of $900 on MasterCard credit cards.The credit card service charge is 3%.
15 Added $460 to Mendosa customer balance for finance charges on unpaid balances.
15 Received payment in full from Chang Inc. on the amount due.
24 Received notice that the Hughey note has been dishonored. (Assume that Hughey is expected to pay in the future.)
Instructions
(a) Journalize the October transactions and the October 31 adjusting entry for accrued interest receivable.
(b) Enter the balances at October 1 in the receivable accounts. Post the entries to all of the receivable accounts.
(c) Show the balance sheet presentation of the receivable accounts at October 31.
On January 1, 2011, Kloppenberg Company had Accounts Receivable $139,000, Notes Receivable $25,000, and Allowance for Doubtful Accounts $13,200.The note receivable is from Sara Rogers Company. It is a 4 month, 12% note dated December 31, 2010. Kloppenberg Company prepares financial statements annually. During the year the following selected transactions occurred.
Jan. 5 Sold $20,000 of merchandise to Dedonder Company, terms n/15. 20 Accepted Dedonder Company’s $20,000, 3 month, 9% note for balance due.
Feb. 18 Sold $8,000 of merchandise to Ludwig Company and accepted Ludwig’s $8,000, 6 month, 9% note for the amount due.
Apr. 20 Collected Dedonder Company note in full. 30 Received payment in full from Sara Rogers Company on the amount due.
May 25 Accepted Jenks Inc.’s $4,000, 3 month, 7% note in settlement of a past due balance on account.
Aug. 18 Received payment in full from Ludwig Company on note due. 25 The Jenks Inc. note was dishonored. Jenks Inc. is not bankrupt; future payment is anticipated. Sept. 1 Sold $12,000 of merchandise to Lena Torme Company and accepted a $12,000, 6 month, 10% note for the amount due.
Instructions
Journalize the transactions.
At December 31, 2010, Dill Imports reported the following information on its balance sheet.
|
Accounts receivable |
$250,000 |
|
Less: Allowance for doubtful accounts |
15,000 |
During 2011, the company had the following transactions related to receivables.
|
1. Sales on account |
$2,400,000 |
|
2. Sales returns and allowances |
45,000 |
|
3. Collections of accounts receivable |
2,250,000 |
|
4. Write offs of accounts receivable deemed uncollectible |
12,000 |
|
5. Recovery of bad debts previously written off as uncollectible |
3,000 |
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2011, balances in Accounts Receivable and Allowance for Doubtful Accounts. Post the entries to the two accounts (use T accounts), and determine the balances.
(c) Prepare the journal entry to record bad debts expense for 2011, assuming that an aging of accounts receivable indicates that estimated bad debts are $22,000.
(d) Compute the accounts receivable turnover ratio for the year 2011.
Information related to Bee Company for 2011 is summarized below.
|
Total credit sales |
$1,100,000 |
|
Accounts receivable at December 31 |
369,000 |
|
Bad debts written off |
22,150 |
Instructions
(a) What amount of bad debts expense will Bee Company report if it uses the direct write off method of accounting for bad debts?
(b) Assume that Bee Company decides to estimate its bad debts expense to be 2% of credit sales. What amount of bad debts expense will Bee record if Allowance for Doubtful Accounts has a credit balance of $3,000?
(c) Assume that Bee Company decides to estimate its bad debts expense based on 6% of accounts receivable .What amount of bad debts expense will Bee Company record if Allowance for Doubtful Accounts has a credit balance of $4,000?
(d) Assume the same facts as in (c), except that there is a $2,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Bee record?
(e) What is the weakness of the direct write off method of reporting bad debt
Presented below is an aging schedule for Jafar Company.
|
Number of Days Past Due |
||||||
|
Customer |
Total |
Not Yet Due |
1–30 |
31–60 $16,500 |
61–90 |
Over 90 |
|
Akers |
$ 30,000 |
$13,500 |
||||
|
Baietto |
75,000 |
$ 45,000 |
||||
|
Comer |
45,000 |
22,500 |
7,500 |
$45,000 |
||
|
DeJong |
57,000 |
$57,000 |
||||
|
Others |
189,000 |
138,000 |
22,500 |
19,500 |
9,000 |
|
|
$396,000 |
$205,500 |
$43,500 |
$36,000 |
$45,000 |
$66,000 |
|
|
Estimated Percentage Uncollectible |
2% |
6% |
10% |
25% |
50% |
|
|
Total Estimated Bad Debts |
$ 54,570 |
$ 4,110 |
$ 2,610 |
$ 3,600 |
$11,250 |
$33,000 |
At December 31, 2011, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $16,000.
Instructions
(a) Journalize and post the adjusting entry for bad debts at December 31, 2011.
(b) Journalize and post to the allowance account the following events and transactions in the year 2012.
(1) March 1, a $1,900 customer balance originating in 2011 is judged uncollectible.
(2) May 1, a check for $1,900 is received from the customer whose account was written off as uncollectible on March 1.
(c) Journalize the adjusting entry for bad debts on December 31, 2012. Assume that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $2,000, and the aging schedule indicates that total estimated bad debts will be $42,300.
The following represents selected information taken from a company’s aging schedule to estimate uncollectible accounts receivable at year end.
|
Number of Days Outstanding |
||||||
|
Total |
0–30 |
31–60 |
61–90 |
91–120 |
Over 120 |
|
|
Accounts receivable |
$375,000 |
220,000 |
$90,000 |
$40,000 |
$10,000 |
$15,000 |
|
% uncollectible |
1% |
4% |
5% |
8% |
10% |
|
|
Estimated bad debts |
||||||
Instructions
(a) Calculate the total estimated bad debts based on the above information.
(b) Prepare the year end adjusting journal entry to record the bad debts using the allowance method and the aged uncollectible accounts receivable determined in (a). Assume the current balance in the Allowance for Doubtful Accounts account is a $3,000 credit.
(c) Of the above accounts, $1,600 is determined to be specifically uncollectible. Prepare the journal entry to write off the uncollectible accounts.
(d) The company subsequently collects $700 on a specific account that had previously been determined to be uncollectible in (c). Prepare the journal entry(ies) necessary to restore the account and record the cash collection.
(e) Explain how establishing an allowance account satisfies the expense recognition principle.
At December 31, 2011, the trial balance of Liquid Snake Company contained the following amounts before adjustment.
|
Accounts Receivable |
Debits |
Credits |
|
Allowance for Doubtful Accounts |
$250,000 |
$ 1,100 |
|
Sales |
600,000 |
Instructions
(a) Prepare the adjusting entry at December 31, 2011, to record bad debts expense under each of the following independent assumptions.
(1) An aging schedule indicates that $12,500 of accounts receivable will be uncollectible.
(2) The company estimates that 2% of sales will be uncollectible.
(b) Repeat part (a) assuming that instead of a credit balance, there is a $1,100 debit balance in Allowance for Doubtful Accounts.
(c) During the next month, January 2012, a $3,200 account receivable is written off as uncollectible. Prepare the journal entry to record the write off.
(d) Repeat part (c) assuming that Liquid Snake Company uses the direct write off method instead of the allowance method in accounting for uncollectible accounts receivable.
(e) What are the advantages of using the allowance method in accounting for uncollectible accounts as compared to the direct write off method?
Marty Co. closes its books monthly. On June 30, selected ledger account balances are:
|
Notes Receivable |
$57,000 |
|
Interest Receivable |
420 |
Notes Receivable include the following.
|
Date |
Maker |
Face |
Term |
Interest |
|
May 16 |
Rice Inc. |
$12,000 |
60 days |
10% |
|
May 25 |
Smelter Co. |
30,000 |
60 days |
9% |
|
June 30 |
Kupp Corp. |
15,000 |
6 months |
12% |
During July, the following transactions were completed.
July 5 Made sales of $7,200 on Marty Co. credit cards.
14 Made sales of $1,000 on Visa credit cards.The credit card service charge is 3%.
14 Added $510 to Marty Co. credit card customer balances for finance charges on unpaid balances.
15 Received payment in full from Rice Inc. on the amount due.
25 Received notice that the Smelter Co. note has been dishonored. (Assume that Smelter Co. is expected to pay in the future.)
Instructions
(a) Journalize the July transactions and the July 31 adjusting entry for accrued interest receivable. (Interest is computed using 360 days.)
(b) Enter the balances at July 1 in the receivable accounts. Post the entries to all of the receivable accounts.
(c) Show the balance sheet presentation of the receivable accounts at July 31.
On January 1, 2011, Furball Company had Accounts Receivable $98,000 and Allowance for Doubtful Accounts $8,100. Furball Company prepares financial statements annually. During the year the following selected transactions occurred.
Jan. 5 Sold $10,800 of merchandise to Kandle Company, terms n/30.
Feb. 2 Accepted a $10,800, 4 month, 10% promissory note from Kandle Company for the balance due. 12 Sold $13,500 of merchandise to Lowe Company and accepted Lowe’s $13,500, 2 month, 10% note for the balance due. 26 Sold $7,000 of merchandise to Barrel Co., terms n/10.
Apr. 5 Accepted a $7,000, 3 month, 8% note from Barrel Co. for the balance due. 12 Collected Lowe Company note in full.
June 2 Collected Kandle Company note in full.
July 5 Barrel Co. dishonors its note of April 5. It is expected that Barrel will eventually pay the amount owed. 15 Sold $12,000 of merchandise to Bushel Co. and accepted Bushel’s $12,000, 3 month, 12% note for the amount due. Oct. 15 Bushel Co.’s note was dishonored. Bushel Co. is bankrupt, and there is no hope of future settlement. Instructions Journalize the transactions.
SEK Company sells office equipment and supplies to many organizations in the city and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. The number of customers taking the full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now taking the discount. Bad debts as a percentage of gross credit sales have risen from the 2.5% provided in past years to about 4.5% in the current year. The company’s Finance Committee has requested more information on the collections of accounts receivable. The controller responded to this request with the report reproduced below. Accounts Receivable Collections May 31, 2011 The fact that some credit accounts will prove uncollectible is normal. Annual bad debts writeoffs have been 2.5% of gross credit sales over the past 5 years. During the last fiscal year, this percentage increased to slightly less than 4.5%. The current Accounts Receivable balance is $1,400,000. The condition of this balance in terms of age and probability of collection is as follows.
|
Proportion of Total |
Age Categories |
Probability of Collection |
|
62% |
not yet due |
98% |
|
20% |
less than 30 days past due |
96% |
|
9% |
30 to 60 days past due |
94% |
|
5% |
61 to 120 days past due |
91% |
|
21/2% |
121 to 180 days past due |
75% |
|
11/2% |
over 180 days past due |
30% |
The Allowance for Doubtful Accounts had a credit balance of $29,500 on June 1, 2010. SEK has provided for a monthly bad debts expense accrual during the current fiscal year based on the assumption that 4.5% of gross credit sales will be uncollectible.Total gross credit sales for the 2010–11 fiscal year amounted to $2,900,000. Write offs of bad accounts during the year totaled $102,000.
Instructions
(a) Prepare an accounts receivable aging schedule for SEK Company using the age categories identified in the controller’s report to the Finance Committee showing the following.
(1) The amount of accounts receivable outstanding for each age category and in total.
(2) The estimated amount that is uncollectible for each category and in total.
(b) Compute the amount of the year end adjustment necessary to bring Allowance for Doubtful Accounts to the balance indicated by the age analysis.Then prepare the necessary journal entry to adjust the accounting records.
(c) In a recessionary environment with tight credit and high interest rates:
(1) Identify steps SEK Company might consider to improve the accounts receivable situation.
(2) Then evaluate each step identified in terms of the risks and costs involved.
Molly and Joe Mayne own Campus Fashions. From its inception Campus Fashions has sold merchandise on either a cash or credit basis, but no credit cards have been accepted. During the past several months, the Maynes have begun to question their sales policies. First, they have lost some sales because of refusing to accept credit cards. Second, representatives of two metropolitan banks have been persuasive in almost convincing them to accept their national credit cards. One bank, City National Bank, has stated that its credit card fee is 4%. The Maynes decide that they should determine the cost of carrying their own credit sales. From the accounting records of the past 3 years they accumulate the following data.
|
2011 |
2010 |
2009 |
|
|
Net credit sales |
$500,000 |
$600,000 |
$400,000 |
|
Collection agency fees for slow paying |
2,450 |
2,500 |
2,400 |
|
Salary of part time accounts receivable clerk |
4,100 |
4,100 |
4,100 |
Credit and collection expenses as a percentage of net credit sales are: uncollectible accounts 1.6%, billing and mailing costs 0.5%, and credit investigation fee on new customers 0.15%. Molly and Joe also determine that the average accounts receivable balance outstanding during the year is 5% of net credit sales. The Maynes estimate that they could earn an average of 8% annually on cash invested in other business opportunities.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a table showing, for each year, total credit and collection expenses in dollars and as a percentage of net credit sales.
(b) Determine the net credit and collection expense in dollars and as a percentage of sales after considering the revenue not earned from other investment opportunities.
(c) Discuss both the financial and nonfinancial factors that are relevant to the decision.
As the All About You feature in this chapter (page 376) indicates, credit card usage in the United States is substantial. Many startup companies use credit cards as a way to help meet short term financial needs. The most common forms of debt for startups are use of credit cards and loans from relatives. Suppose that you start up Brothers Sandwich Shop. You invested your savings of $20,000 and borrowed $70,000 from your relatives. Although sales in the first few months are good, you see that you may not have sufficient cash to pay expenses and maintain your inventory at acceptable levels, at least in the short term. You decide you may need to use one or more credit cards to fund the possible cash shortfall.
Instructions
(a) Go to the Web and find two sources that provide insight into how to compare credit card terms.
(b) Develop a list, in descending order of importance, as to what features are most important to you in selecting a credit card for your business.
(c) Examine the features of your present credit card. (If you do not have a credit card, select a likely one online for this exercise.) Given your analysis above, what are the three major disadvantages of your present credit card?
Gazca Company specializes in manufacturing motorcycle helmets. The company hasenough orders to keep the factory production at 1,000 motorcycle helmets per month. Gazca’s monthly manufacturing cost and other expense data are as follows.
|
Maintenance costs on factory building |
$ 1,500 |
|
Factory manager’s salary |
4,000 |
|
Advertising for helmets |
8,000 |
|
Sales commissions |
5,000 |
|
Depreciation on factory building |
700 |
|
Rent on factory equipment |
6,000 |
|
Insurance on factory building |
3,000 |
|
Raw materials (plastic, polystyrene, etc.) |
20,000 |
|
Utility costs for factory |
800 |
|
Supplies for general office |
200 |
|
Wages for assembly line workers |
54,000 |
|
Depreciation on office equipment |
500 |
|
Miscellaneous materials (glue, thread, etc.) |
2,000 |
Instructions
(a) Prepare an answer sheet with the following column headings.
|
Product Costs |
||||
|
Cost |
Direct |
Direct |
Manufacturing |
Period |
|
Item |
Materials |
Labor |
Overhead |
Costs |
Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. Total the dollar amounts in each of the columns.
(b) Compute the cost to produce one motorcycle helmet.
Vanessa Williams Company, a manufacturer of tennis rackets, started production in November 2012. For the preceding 5 years, Williams had been a retailer of sports equipment. After a thorough survey of tennis racket markets, Williams decided to turn its retail store into a tennis racket factory.
Raw materials cost for a tennis racket will total $23 per racket. Workers on the production lines are paid on average $13 per hour. A racket usually takes 2 hours to complete. In addition, the rent on the equipment used to produce rackets amounts to $1,300 per month. Indirect materials cost $3 per racket. A supervisor was hired to oversee production; her monthly salary is $3,500.
Janitorial costs are $1,400 monthly. Advertising costs for the rackets will be $6,000 per month. The factory building depreciation expense is $8,400 per year. Property taxes on the factory building will be $7,200 per year.
Instructions
(a) Prepare an answer sheet with the following column headings.
|
Product Costs |
||||
|
Cost |
Direct |
Direct |
Manufacturing |
Period |
|
Item |
Materials |
Labor |
Overhead |
Costs |
Assuming that Williams manufactures, on average, 2,500 tennis rackets per month, enter each cost item on your answer sheet, placing the dollar amount per month under the appropriate headings. Total the dollar amounts in each of the columns.
(b) Compute the cost to produce one racket.
Incomplete manufacturing costs, expenses, and selling data for two different cases are as follows.
|
Case |
||
|
A |
B |
|
|
Direct Materials Used |
$ 6,300 |
$ (g) |
|
Direct Labor |
3,000 |
4,000 |
|
Manufacturing Overhead |
6,000 |
5,000 |
|
Total Manufacturing Costs |
(a) |
16,000 |
|
Beginning Work in Process Inventory |
1,000 |
(h) |
|
Ending Work in Process Inventory |
(b) |
2,000 |
|
Sales |
22,500 |
(i) |
|
Sales Discounts |
1,500 |
1,200 |
|
Cost of Goods Manufactured |
15,800 |
20,000 |
|
Beginning Finished Goods Inventory |
(c) |
5,000 |
|
Goods Available for Sale |
18,300 |
(j) |
|
Cost of Goods Sold |
(d) |
(k) |
|
Ending Finished Goods Inventory |
1,200 |
2,500 |
|
Gross Profit |
(e) |
6,000 |
|
Operating Expenses |
2,700 |
(l) |
|
Net Income |
(f) |
2,200 |
Instructions
(a) Indicate the missing amount for each letter.
(b) Prepare a condensed cost of goods manufactured schedule for Case A.
(c) Prepare an income statement and the current assets section of the balance sheet for Case A.
Assume that in Case A the other items in the current assets section are as follows: Cash $3,000, Receivables (net) $10,000, Raw Materials $700, and Prepaid Expenses $200.
The following data were taken from the records of Goodman Manufacturing Company for the year ended December 31, 2012.
|
Raw Materials |
Factory Insurance |
$ 7,400 |
|
|
Inventory 1/1/12 |
$ 47,000 |
Factory Machinery |
|
|
Raw Materials |
Depreciation |
7,700 |
|
|
Inventory 12/31/12 |
44,200 |
Factory Utilities |
12,900 |
|
Finished Goods |
Office Utilities Expense |
8,600 |
|
|
Inventory 1/1/12 |
85,000 |
Sales |
465,000 |
|
Finished Goods |
Sales Discounts |
2,500 |
|
|
Inventory 12/31/12 |
67,800 |
Plant Manager’s Salary |
40,000 |
|
Work in Process |
Factory Property Taxes |
6,100 |
|
|
Inventory 1/1/12 |
9,500 |
Factory Repairs |
800 |
|
Work in Process |
Raw Materials Purchases |
62,500 |
|
|
Inventory 12/31/12 |
8,000 |
Cash |
28,000 |
|
Direct Labor |
145,100 |
||
|
Indirect Labor |
18,100 |
||
|
Accounts Receivable |
27,000 |
Instructions
(a) Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.)
(b) Prepare an income statement through gross profit.
(c) Prepare the current assets section of the balance sheet at December 31.
Waterways Corporation is a private corporation formed for the purpose of providing the products and the services needed to irrigate farms, parks, commercial projects, and private lawns. It has a centrally located factory in a U.S. city that manufactures the products it markets to retail outlets across the nation. It also maintains a division that provides installation and warranty servicing in six metropolitan areas.
The mission of Waterways is to manufacture quality parts that can be used for effective irrigation projects that also conserve water. By that effort, the company hopes to satisfy its customers, provide rapid and responsible service, and serve the community and the employees who represent them in each community.
The company has been growing rapidly, so management is considering new ideas to help the company continue its growth and maintain the high quality of its products. Waterways was founded by Will Winkman, who is the company president and chief executive officer (CEO). Working with him from the company’s inception was Will’s brother, Ben, whose sprinkler designs and ideas about the installation of proper systems have been a major basis of the company’s success. Ben is the vice president who oversees all aspects of design and production in the company.
The factory itself is managed by Todd Senter who hires his line managers to supervise the factory employees. The factory makes all of the parts for the irrigation systems. The purchasing department is managed by Hector Hines.
The installation and training division is overseen by vice president Henry Writer, who supervises the managers of the six local installation operations. Each of these local managers hires his or her own local service people. These service employees are trained by the home office under Henry Writer’s direction because of the uniqueness of the company’s products.
There is a small human resources department under the direction of Sally Fenton, a vice president who handles the employee paperwork, though hiring is actually performed by the separate departments. Sam Totter is the vice president who heads the sales and marketing area; he oversees 10 well trained salespeople.
The accounting and finance division of the company is headed by Abe Headman, who is the chief financial officer (CFO) and a company vice president; he is a member of the Institute of Management Accountants and holds a certificate in management accounting. He has a small staff of Certified Public Accountants, including a controller and a treasurer, and a staff of accounting input operators who maintain the financial records.
A partial list of Waterways’ accounts and their balances for the month of November follows.
|
Accounts Receivable |
$ 290,000 |
|
Advertising Expenses |
54,000 |
|
Cash |
260,000 |
|
Depreciation—Factory Equipment |
16,800 |
|
Depreciation—Office Equipment |
2,400 |
|
Direct Labor |
22,000 |
|
Factory Supplies Used |
16,000 |
|
Factory Utilities |
10,200 |
|
Finished Goods Inventory, November 30 |
68,800 |
|
Finished Goods Inventory, October 31 |
72,550 |
|
Indirect Labor |
48,000 |
|
Office Supplies Expense |
1,600 |
|
Other Administrative Expenses |
72,000 |
|
Prepaid Expenses |
42,150 |
|
Raw Materials Inventory, November 30 |
52,700 |
|
Raw Materials Inventory, October 31 |
38,000 |
|
Raw Materials Purchases |
184,500 |
|
Rent—Factory Equipment |
47,000 |
|
Repairs—Factory Equipment |
4,500 |
|
Salaries Expense (administrative) |
325,000 |
|
Sales |
1,350,000 |
|
Sales Commissions |
40,500 |
|
Work in Process Inventory, October 31 |
52,900 |
|
Work in Process Inventory, November 30 |
42,000 |
Instructions
(a) Based on the information given, construct an organizational chart of Waterways Corporation.
(b) A list of accounts and their values are given above. From this information, prepare a cost of goods manufactured schedule, an income statement, and a partial balance sheet for Waterways Corporation for the month of November.
Katy Perry Manufacturing Company specializes in producing fashion outfits. On July 31, 2012,a tornado touched down at its factory and general office. The inventories in the warehouse and the factory were completely destroyed as was the general office nearby. Next morning, through a careful search of the disaster site, however, Jim Craig, the company’s controller, and Teresa Perry, the cost accountant, were able to recover a small part of manufacturing cost data for the current month.
“What a horrible experience,” sighed Jim. “And the worst part is that we may not have enough records to use in filing an insurance claim.”
“It was terrible,” replied Teresa. “However, I managed to recover some of the manufacturing cost data that I was working on yesterday afternoon. The data indicate that our direct labor cost in July totaled $240,000 and that we had purchased $345,000 of raw materials. Also, I recall that the amount of raw materials used for July was $350,000. But I’m not sure this information will help. The rest of our records are blown away.”
“Well, not exactly,” said Jim. “I was working on the year to date income statement when the tornado warning was announced. My recollection is that our sales in July were $1,260,000 and our gross profit ratio has been 40% of sales. Also, I can remember that our cost of goods available for sale was $770,000 for July.”
“Maybe we can work something out from this information!” exclaimed Teresa. “My experience tells me that our manufacturing overhead is usually 60% of direct labor.”
“Hey, look what I just found,” cried Teresa. “It’s a copy of this June’s balance sheet, and it shows thatour inventories as of June 30 are Finished Goods $38,000, Work in Process $25,000, and Raw Materials $19,000.”
“Super,” yelled Jim. “Let’s go work something out.”
In order to file an insurance claim, Katy Perry Company must determine the amount of its inventories as of July 31, 2012, the date of the tornado touchdown.
Instructions
With the class divided into groups, determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods inventory accounts as of the date of the tornado touchdown.
B.J. King is a fairly large manufacturing company located in the southern United States. The company manufactures tennis rackets, tennis balls, tennis clothing, and tennis shoes, all bearing the company’s distinctive logo, a large green question mark on a white flocked tennis ball. The company’s sales have been increasing over the past 10 years.
The tennis racket division has recently implemented several advanced manufacturing techniques. Robot arms hold the tennis rackets in place while glue dries, and machine vision systems check for defects. The engineering and design team uses computerized drafting and testing of new products. The following managers work in the tennis racket division.
Andre Agassi, Sales Manager (supervises all sales representatives).
Serena Williams, technical specialist (supervises computer programmers).
Pete Sampras, cost accounting manager (supervises cost accountants).
Andy Roddick, production supervisor (supervises all manufacturing employees).
Venus Williams, engineer (supervises all new product design teams).
Instructions
(a) What are the primary information needs of each manager?
(b) Which, if any, financial accounting report(s) is each likely to use?
(c) Name one special purpose management accounting report that could be designed for each manager. Include the name of the report, the information it would contain, and how frequently it should be issued.
Anchor Glass Container Corporation, the third largest manufacturer of glass containers in the United States, supplies beverage and food producers and consumer products manufacturers nationwide. Parent company Consumers Packaging Inc. (Toronto Stock Exchange: CGC) is a leading international designer and manufacturer of glass containers.
The following management discussion appeared in a recent annual report of Anchor Glass.
|
Anchor Glass Container Corporation Management Discussion |
|
Cost of Products Sold Cost of products sold as a percentage of net sales was 89.3% in the current year compared to 87.6% in the prior year. The increase in cost of products sold as a percentage of net sales principally reflected the impact of operational problems during the second quarter of the current year at a major furnace at one of the Company’s plants, higher downtime, and costs and expenses associated with an increased number of scheduled capital improvement projects, increases in labor, and certain other manufacturing costs (with no corresponding selling price increases in the current year). Reduced fixed costs from the closing of the Streator, Illinois, plant in June of the current year and productivity and efficiency gains partially offset these cost increases. |
Instructions
What factors affect the costs of products sold at Anchor Glass Container Corporation?
Steve Joyce, controller for Prather Industries, was reviewing production cost reports for the year. One amount in these reports continued to bother him—advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower moving products. It was still too early to tell whether the advertising campaign was successful.
There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Joyce believed that this cost should be reported as an expense of the current period, based on the conservatism principle. Others argued that it should be reported as Prepaid Advertising and reported as a current asset.
The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved in this situation?
(c) What would you do if you were Steve Joyce?
Wolverine Genetics Company of Flint, Michigan, spreads herbicides and applies liquid fertilizer for local farmers. On May 31, 2011, the company’s cash account per its general ledger showed the following balance.
|
CASH |
NO. 101 |
||||
|
Date |
Explanation |
Ref. |
Debit |
Credit |
Balance |
|
May 31 |
Balance |
13,287 |
|||
The bank statement from Flint State Bank on that date showed the following balance.
|
FLINT STATE BANK |
|||
|
Checks and Debits |
Deposits and Credits |
Daily Balance |
|
|
XXX |
XXX |
5/31 |
13,332 |
A comparison of the details on the bank statement with the details in the cash account revealed the following facts.
1. The statement included a debit memo of $35 for the printing of additional company checks.
2. Cash sales of $1,720 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $1,820.The bank credited Wolverine Genetics Company for the correct amount.
3. Outstanding checks at May 31 totaled $1,225, and deposits in transit were $2,100.
4. On May 18, the company issued check no. 1181 for $911 to G. Fischer, on account.The check, which cleared the bank in May, was incorrectly journalized and posted by Wolverine Genetics Company for $119.
5. A $4,000 note receivable was collected by the bank for Wolverine Genetics Company on May 31 plus $80 interest. The bank charged a collection fee of $25. No interest has been accrued on the note.
6. Included with the cancelled checks was a check issued by Carr Company to Henry Ford for $900 that was incorrectly charged to Wolverine Genetics Company by the bank.
7. On May 31, the bank statement showed an NSF charge of $1,308 for a check issued by Bo Sclembech, a customer, to Wolverine Genetics Company on account.
Instructions
(a) Prepare the bank reconciliation at May 31, 2011.
(b) Prepare the necessary adjusting entries for Wolverine Genetics Company at May 31, 2011.
Bummer Company’s bank statement from Fifth National Bank at August 31, 2011, includes the information shown on the next page.
|
Balance,August 1 |
$11,284 |
Bank credit memoranda: |
|
|
August deposits |
47,521 |
Collection of note |
|
|
Checks cleared in August |
46,475 |
receivable plus $105 |
|
|
Balance,August 31 |
16,856 |
interest |
$4,505 |
|
Interest earned |
41 |
||
|
Bank debit memorandum: |
|||
|
Safety deposit box rent |
20 |
A summary of the Cash account in the ledger for August shows: Balance, August 1, $10,959; receipts $50,050; disbursements $47,794; and balance, August 31, $13,215. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $2,600 and outstanding checks of $2,925. The deposit in transit was the first deposit recorded by the bank in August. In addition, you determine that there were two errors involving company checks drawn in August: (1) A check for $340 to a creditor on account that cleared the bank in August was journalized and posted for $430. (2) A salary check to an employee for $275 was recorded by the bank for $277.
Instructions
(a) Prepare a bank reconciliation at August 31.
(b) Journalize the adjusting entries to be made by Bummer Company at August 31.Assume that interest on the note has not been accrued by the company.
Gazarra Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, Johnny Stacatto handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations. The balance per the bank statement on October 31, 2011, was $15,453. Outstanding checks were: no. 62 for $107.74, no. 183 for $127.50, no. 284 for $215.26, no. 862 for $162.10, no. 863 for $192.78, and no. 864 for $140.49. Included with the statement was a credit memorandum of $340 indicating the collection of a note receivable for Gazarra Company by the bank on October 25. This memorandum has not been recorded by Gazarra Company. The company’s ledger showed one cash account with a balance of $18,608.81. The balance included undeposited cash on hand. Because of the lack of internal controls, Stacatto took for personal use all of the undeposited receipts in excess of $3,226.18. He then prepared the following bank reconciliation in an effort to conceal his theft of cash.
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BANK RECONCILIATION |
||
|
Cash balance per books, October 31 |
$18,608.81 |
|
|
Add: Outstanding checks |
$162.10 |
|
|
No. 862 |
192.78 |
|
|
No. 863 |
140.49 |
|
|
No. 864 |
$162.10 |
410.31 |
|
19,019.18 |
||
|
Less: Undeposited receipts |
3,226.18 |
|
|
Unadjusted balance per bank, October 31 |
15,793.00 |
|
|
Less: Bank credit memorandum |
340.00 |
|
|
Cash balance per bank statement, October 31 |
$15,453.00 |
Instructions
(a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.)
(b) Indicate the three ways that Stacatto attempted to conceal the theft and the dollar amount pertaining to each method.
(c) What principles of internal control were violated in this case?
All organizations should have systems of internal control. Universities are no exception. This site discusses the basics of internal control in a university setting. Address: www.bc.edu/offices/audit/controls l, or go to www.wiley.com/college/weygandt Steps: Go to the site shown above. Instructions The front page of this site provides links to pages that answer six critical questions. Use these links to answer the following questions.
(a) In a university setting who has responsibility for evaluating the adequacy of the system of internal control?
(b) What do reconciliations ensure in the university setting? Who should review the reconciliation?
(c) What are some examples of physical controls?
(d) What are two ways to accomplish inventory counts?
The board of trustees of a local church is concerned about the internal accounting controls for the offering collections made at weekly services. The trustees ask you to serve on a three person audit team with the internal auditor of a local college and a CPA who has just joined the church.
At a meeting of the audit team and the board of trustees you learn the following.
1. The church’s board of trustees has delegated responsibility for the financial management and audit of the financial records to the finance committee.This group prepares the annual budget and approves major disbursements. It is not involved in collections or record keeping. No audit has been made in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to serve one month. The ushers take the collection plates to a basement office at the rear of the church. They hand their plates to the head usher and return to the church service.After all plates have been turned in, the head usher counts the cash received .The head usher then places the cash in the church safe along with a notation of the amount counted .The head usher volunteers to serve for 3 months.
3. The next morning the financial secretary opens the safe and recounts the collection. The secretary withholds $150–$200 in cash, depending on the cash expenditures expected for the week, and deposits the remainder of the collections in the bank. To facilitate the deposit, church members who contribute by check are asked to make their checks payable to “Cash.”
4. Each month, the financial secretary reconciles the bank statement and submits a copy of the reconciliation to the board of trustees. The reconciliations have rarely contained any bank errors and have never shown any errors per books.
Instructions
With the class divided into groups, answer the following.
(a) Indicate the weaknesses in internal accounting control over the handling of collections.
(b) List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for (1) the ushers, (2) the head usher, (3) the financial secretary, and (4) the finance committee.
(c) What church policies should be changed to improve internal control?
You are the assistant controller in charge of general ledger accounting at Riverside Bottling Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30 the cash balance is $80,000, which you report to Gena Schmitt, the financial vice president. Gena excitedly instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Gena says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Gena continues, “I talked to Oconto Distributors (one of Riverside’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”
Instructions
(a) Who will suffer negative effects if you do not comply with Gena Schmitt’s instructions? Who will suffer if you do comply?
(b) What are the ethical considerations in this case?
(c) What alternatives do you have?
After studying this chapter, you should be able to:
1 Identify the different types of receivables.
2 Explain how companies recognize accounts receivable.
3 Distinguish between the methods and bases companies use to value accounts receivable.
4 Describe the entries to record the disposition of accounts receivable.
5 Compute the maturity date of and interest on notes receivable.
6 Explain how companies recognize notes receivable.
7 Describe how companies value notes receivable.
8 Describe the entries to record the disposition of notes receivable.
9 Explain the statement presentation and analysis of receivables.
The following selected transactions relate to Falcetto Company.
Mar. 1 Sold $20,000 of merchandise to Potter Company, terms 2/10, n/30.
11 Received payment in full from Potter Company for balance due.
12 Accepted Juno Company’s $20,000, 6 month, 12% note for balance due.
13 Made Falcetto Company credit card sales for $13,200.
15 Made Visa credit card sales totaling $6,700. A 3% service fee is charged by Visa.
Apr. 11 Sold accounts receivable of $8,000 to Harcot Factor. Harcot Factor assesses a service charge of 2% of the amount of receivables sold.
13 Received collections of $8,200 on Falcetto Company credit card sales andadded finance charges of 1.5% to the remaining balances.
May 10 Wrote off as uncollectible $16,000 of accounts receivable. Falcetto uses the percentage of sales basis to estimate bad debts.
June 30 Credit sales recorded during the first 6 months total $2,000,000.The bad debt percentage is 1% of credit sales.
At June 30, the balance in the allowance account is $3,500.
July 16 One of the accounts receivable written off in May was from J. Simon, who pays the amount due, $4,000, in full.
Instructions
Prepare the journal entries for the transactions.
Blinka Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use.The entry to record this transaction by Blinka Retailers will include a credit to Sales of $50,000 and a debit(s) to:
|
a. Cash |
$48,000 |
|
and Service Charge Expense |
$ 2,000 |
|
b. Accounts Receivable |
$48,000 |
|
and Service Charge Expense |
$ 2,000 |
|
c. Cash |
$50,000 |
|
d. Accounts Receivable |
$50,000 |
Ginter Co. holds Kolar Inc.’s $10,000, 120 day, 9% note. The entry made by Ginter Co. when the note is collected, assuming no interest has been previously accrued, is:
|
a. Cash |
10,300 |
|
|
Notes Receivable |
10,300 |
|
|
b. Cash |
10,000 |
|
|
Notes Receivable |
10,000 |
|
|
c. Accounts Receivable |
10,300 |
|
|
Notes Receivable |
10,000 |
|
|
Interest Revenue |
300 |
|
|
d. Cash |
10,300 |
|
|
Notes Receivable |
10,000 |
|
|
Interest Revenue |
300 |
Compute the missing amounts for each of the following notes.
|
Annual |
Total |
||
|
Principal |
Interest Rate |
Time |
Interest |
|
(a) ? |
9% |
120 days |
$ 600 |
|
(b) $30,000 |
10% |
3 years |
? |
|
(c) $60,000 |
? |
5 months |
$2,000 |
|
(d) $45,000 |
8% |
? |
$1,200 |
Bacala Corporation incurred the following costs while manufacturing its product.
|
Materials used in product |
$100,000 |
Advertising expense |
$45,000 |
|
Depreciation on plant |
60,000 |
Property taxes on plant |
14,000 |
|
Property taxes on store |
7,500 |
Delivery expense |
21,000 |
|
Labor costs of assembly line workers |
110,000 |
Sales commissions |
35,000 |
|
Factory supplies used |
13,000 |
Salaries paid to sales clerks |
50,000 |
Instructions
(a) Identify each of the costs as direct materials, direct labor, manufacturing overhead, or period costs.
(b) Explain the basic difference in accounting for product costs and period costs.
Drew Company reports the following costs and expenses in May.
|
Factory utilities |
$ 11,500 |
Direct labor |
$69,100 |
|
Depreciation on factory equipment |
12,650 |
Sales salaries |
46,400 |
|
Depreciation on delivery trucks |
3,800 |
Property taxes on factory building |
2,500 |
|
Indirect factory labor |
48,900 |
Repairs to office equipment |
1,300 |
|
Indirect materials |
80,800 |
Factory repairs |
2,000 |
|
Direct materials used |
137,600 |
Advertising |
18,000 |
|
Factory manager’s salary |
8,000 |
Office supplies used |
2,640 |
Instructions
From the information, determine the total amount of:
(a) Manufacturing overhead.
(b) Product costs.
(c) Period costs.
Sami Company is a manufacturer of personal computers. Various costs and expenses associated with its operations are as follows.
1. Property taxes on the factory building.
2. Production superintendents’ salaries.
3. Memory boards and chips used in assembling computers.
4. Depreciation on the factory equipment.
5. Salaries for assembly line quality control inspectors.
6. Sales commissions paid to sell personal computers.
7. Electrical components used in assembling computers.
8. Wages of workers assembling personal computers.
9. Soldering materials used on factory assembly lines.
10. Salaries for the night security guards for the factory building. The company intends to classify these costs and expenses into the following categories: (a) direct materials, (b) direct labor, (c) manufacturing overhead, and (d) period costs.
Instructions
List the items (1) through (10). For each item, indicate the cost category to which it belongs.
The administrators of San Mateo County’s Memorial Hospital are interested in identifying the various costs and expenses that are incurred in producing a patient’s X ray. A list of such costs and expenses is presented below.
1. Salaries for the X ray machine technicians.
2. Wages for the hospital janitorial personnel.
3. Film costs for the X ray machines.
4. Property taxes on the hospital building.
5. Salary of the X ray technicians’ supervisor.
6. Electricity costs for the X ray department.
7. Maintenance and repairs on the X ray machines.
8. X ray department supplies.
9. Depreciation on the X ray department equipment.
10. Depreciation on the hospital building.
The administrators want these costs and expenses classified as: (a) direct materials, (b) direct labor, or (c) service overhead.
Instructions
List the items (1) through (10). For each item, indicate the cost category to which the item belongs.
Speedi Delivery Service reports the following costs and expenses in June 2012.
|
Indirect materials |
$ 5,400 |
Drivers’ salaries |
$11,000 |
|
Depreciation on delivery equipment |
11,200 |
Advertising |
1,600 |
|
Dispatcher’s salary |
5,000 |
Delivery equipment repairs |
300 |
|
Property taxes on office building |
870 |
Office supplies |
650 |
|
CEO’s salary |
12,000 |
Office utilities |
990 |
|
Gas and oil for delivery trucks |
2,200 |
Repairs on office equipment |
180 |
Instructions
Determine the total amount of (a) delivery service (product) costs and (b) period costs.
Craig Corporation incurred the following costs while manufacturing its product.
|
Materials used in product |
$100,000 |
Advertising expense |
$45,000 |
|
Depreciation on plant |
60,000 |
Property taxes on plant |
14,000 |
|
Property taxes on store |
7,500 |
Delivery expense |
21,000 |
|
Labor costs of assembly line workers |
110,000 |
Sales commissions |
35,000 |
|
Factory supplies used |
23,000 |
Salaries paid to sales clerks |
50,000 |
Work in process inventory was $12,000 at January 1 and $15,500 at December 31. Finished goods inventory was $60,000 at January 1 and $55,600 at December 31.
Instructions
(a) Compute cost of goods manufactured.
(b) Compute cost of goods sold.
An incomplete cost of goods manufactured schedule is presented below.
|
ORLANDO MANUFACTURING COMPANY |
||||
|
Cost of Goods Manufactured Schedule |
||||
|
For the Year Ended December 31, 2012 |
||||
|
Work in process (1/1) |
$210,000 |
|||
|
Direct materials |
||||
|
Raw materials inventory (1/1) |
$ ? |
|||
|
Add: Raw materials purchases |
158,000 |
|||
|
Total raw materials available for use |
? |
|||
|
Less: Raw materials inventory (12/31) |
12,500 |
|||
|
Direct materials used |
$190,000 |
|||
|
Direct labor |
$ 18,000 |
? |
||
|
Manufacturing overhead |
36,000 |
|||
|
Indirect labor |
68,000 |
|||
|
Factory depreciation |
122,000 |
|||
|
Factory utilities |
||||
|
Total overhead |
||||
|
Total manufacturing costs |
? |
|||
|
Total cost of work in process |
? |
|||
|
Less: Work in process (12/31) |
81,000 |
|||
|
Cost of goods manufactured |
$510,000 |
|||
Instructions
Complete the cost of goods manufactured schedule for Orlando Manufacturing Company.
Manufacturing cost data for Fortney Company are presented below.
|
Case A |
Case B |
Case C |
|
|
Direct materials used |
(a) |
$58,400 |
$130,000 |
|
Direct labor |
$ 57,000 |
86,000 |
(g) |
|
Manufacturing overhead |
46,500 |
81,600 |
102,000 |
|
Total manufacturing costs |
185,650 |
(d) |
253,700 |
|
Work in process 1/1/12 |
(b) |
16,500 |
(h) |
|
Total cost of work in process |
221,500 |
(e) |
337,000 |
|
Work in process 12/31/12 |
(c) |
11,000 |
70,000 |
|
Cost of goods manufactured |
185,275 |
(f) |
(i) |
Instructions
Indicate the missing amount for each letter (a) through (i).
Incomplete manufacturing cost data for Juego Company for 2012 are presented as follows for four different situations.
|
Direct |
Direct |
Total |
Work in |
Work in |
Cost of |
||
|
Materials |
Labor |
Manufacturing |
Manufacturing |
Process |
Process |
Goods |
|
|
Used |
Used |
Overhead |
Costs |
1/1 |
12/31 |
Manufactured |
|
|
(1) |
$127,000 |
$140,000 |
$ 77,000 |
(a) |
$33,000 |
(b) |
$360,000 |
|
(2) |
(c) |
200,000 |
132,000 |
$450,000 |
(d) |
$40,000 |
470,000 |
|
(3) |
80,000 |
100,000 |
(e) |
245,000 |
60,000 |
80,000 |
(f) |
|
(4) |
70,000 |
(g) |
75,000 |
288,000 |
45,000 |
(h) |
270,000 |
Instructions
(a) Indicate the missing amount for each letter.
(b) Prepare a condensed cost of goods manufactured schedule for situation (1) for the year ended December 31, 2012.
Troy Corporation has the following cost records for June 2012.
|
Indirect factory labor |
$ 4,500 |
Factory utilities |
$ 400 |
|
Direct materials used |
20,000 |
Depreciation, factory equipment |
1,400 |
|
Work in process, 6/1/12 |
3,000 |
Direct labor |
30,000 |
|
Work in process, 6/30/12 |
3,800 |
Maintenance, factory equipment |
1,800 |
|
Finished goods, 6/1/12 |
5,000 |
Indirect materials |
2,200 |
|
Finished goods, 6/30/12 |
7,500 |
Factory manager’s salary |
3,000 |
|
Indirect factory labor |
$ 4,500 |
Factory utilities |
$ 400 |
|
Direct materials used |
20,000 |
Depreciation, factory equipment |
1,400 |
|
Work in process, 6/1/12 |
3,000 |
Direct labor |
30,000 |
Instructions
(a) Prepare a cost of goods manufactured schedule for June 2012.
(b) Prepare an income statement through gross profit for June 2012 assuming net sales are $87,100.
Tiffany Pratt, the bookkeeper for Bush, Clinton, and Obama, a political consulting firm, has recently completed an accounting course at her local college. One of the topics covered in the course was the cost of goods manufactured schedule. Tiffany wondered if such a schedule could be prepared for her firm. She realized that, as a service oriented company, it would have no work in process inventory to consider.
Listed below are the costs her firm incurred for the month ended August 31, 2012.
|
Supplies used on consulting contracts |
$ 1,200 |
|
Supplies used in the administrative offices |
1,500 |
|
Depreciation on equipment used for contract work |
900 |
|
Depreciation used on administrative office equipment |
1,050 |
|
Salaries of professionals working on contracts |
12,600 |
|
Salaries of administrative office personnel |
7,700 |
|
Janitorial services for professional offices |
400 |
|
Janitorial services for administrative offices |
500 |
|
Insurance on contract operations |
800 |
|
Insurance on administrative operations |
900 |
|
Utilities for contract operations |
1,400 |
|
Utilities for administrative offices |
1,300 |
Instructions
(a) Prepare a schedule of cost of contract services provided (similar to a cost of goods manufactured schedule) for the month.
(b) For those costs not included in (a), explain how they would be classified and reported in the financial statements.
Yacob Manufacturing Company produces blankets. From its accounting records it prepares the following schedule and financial statements on a yearly basis.
(a) Cost of goods manufactured schedule.
(b) Income statement.
(c) Balance sheet.
The following items are found in its ledger and accompanying data.
1. Direct labor
2. Raw materials inventory, 1/1
3. Work in process inventory, 12/31
4. Finished goods inventory, 1/1
5. Indirect labor
6. Depreciation on factory machinery
7. Work in process, 1/1
8. Finished goods inventory, 12/31
9. Factory maintenance salaries
10. Cost of goods manufactured
11. Depreciation on delivery equipment
12. Cost of goods available for sale
13. Direct materials used
14. Heat and electricity for factory
15. Repairs to roof of factory building
16. Cost of raw materials purchases
Instructions
List the items (1)–(16). For each item, indicate by using the appropriate letter or letters, the schedule and/or financial statement(s) in which the item will appear.
An analysis of the accounts of Zuniga Manufacturing reveals the following manufacturing cost data for the month ended June 30, 2012.
|
Inventories |
Beginning |
Ending |
|
Raw materials |
$9,000 |
$13,100 |
|
Work in process |
5,000 |
7,000 |
|
Finished goods |
9,000 |
6,000 |
Costs incurred: Raw materials purchases $54,000, direct labor $57,000, manufacturing overhead $19,900. The specific overhead costs were: indirect labor $5,500, factory insurance $4,000,machinery depreciation $4,000, machinery repairs $1,800, factory utilities $3,100, miscellaneous factory costs $1,500. Assume that all raw materials used were direct materials.
Instructions
(a) Prepare the cost of goods manufactured schedule for the month ended June 30, 2012.
(b) Show the presentation of the ending inventories on the June 30, 2012, balance sheet.
Pohl Motor Company manufactures automobiles. During September 2012 the company purchased 5,000 head lamps at a cost of $9 per lamp. Todd withdrew 4,650 lamps from the warehouse during the month. Fifty of these lamps were used to replace the head lamps in autos used by traveling sales staff. The remaining 4,600 lamps were put in autos manufactured during the month.
Of the autos put into production during September 2012, 90% were completed and transferred to the company’s storage lot. Of the cars completed during the month, 75% were sold by September 30.
Instructions
(a) Determine the cost of head lamps that would appear in each of the following accounts at September 30, 2012: Raw Materials, Work in Process, Finished Goods, Cost of Goods Sold, and Selling Expenses.
(b) Write a short memo to the chief accountant, indicating whether and where each of the accounts in (a) would appear on the income statement or on the balance sheet at September 30, 2012.
The following is a list of terms related to managerial accounting practices.
1. Activity based costing.
2. Just in time inventory.
3. Balanced scorecard.
4. Value chain.
Instructions
Match each of the terms with the statement below that best describes the term.
(a) A performance measurement technique that attempts to consider and evaluate all aspects of performance using financial and nonfinancial measures in an integrated fashion.
(b) The group of activities associated with providing a product or service.
(c) An approach used to reduce the cost associated with handling and holding inventory by reducing the amount of inventory on hand.
(d) A method used to allocate overhead to products based on each product’s use of the activities that cause the incurrence of the overhead cost.
Fabila Company specializes in manufacturing a unique model of bicycle helmet. The model is well accepted by consumers, and the company has enough orders to keep the factory reduction at 10,000 helmets per month (80% of its full capacity). Fabila’s monthly manufacturing cost and other expense data are as follows.
|
Rent on factory equipment |
$ 7,000 |
|
Insurance on factory building |
1,500 |
|
Raw materials (plastics, polystyrene, etc.) |
75,000 |
|
Utility costs for factory |
900 |
|
Supplies for general office |
300 |
|
Wages for assembly line workers |
43,000 |
|
Depreciation on office equipment |
800 |
|
Miscellaneous materials (glue, thread, etc.) |
1,100 |
|
Factory manager’s salary |
5,700 |
|
Property taxes on factory building |
400 |
|
Advertising for helmets |
14,000 |
|
Sales commissions |
7,000 |
|
Depreciation on factory building |
1,500 |
Instructions
(a) Prepare an answer sheet with the following column headings.
|
Product Costs |
||||
|
Cost |
Direct |
Direct |
Manufacturing |
Period |
|
Item |
Materials |
Labor |
Overhead |
Costs |
Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. Total the dollar amounts in each of the columns.
(b) Compute the cost to produce one helmet.
Kabana Company, a manufacturer of stereo systems, started its production in October 2012. For the preceding 3 years Kabana had been a retailer of stereo systems. After a thorough survey of stereo system markets, Kabana decided to turn its retail store into a stereo equipment factory.
Raw materials cost for a stereo system will total $74 per unit. Workers on the production lines are on average paid $12 per hour. A stereo system usually takes 5 hours to complete. In addition, the rent on the equipment used to assemble stereo systems amounts to $4,900 per month. Indirect materials cost $5 per system. A supervisor was hired to oversee production; her monthly salary is $3,000.
Factory janitorial costs are $1,300 monthly. Advertising costs for the stereo system will be $8,500 per month. The factory building depreciation expense is $7,200 per year. Property taxes on the factory building will be $9,000 per year.
Instructions
(a) Prepare an answer sheet with the following column headings.
|
Product Costs |
||||
|
Cost |
Direct |
Direct |
Manufacturing |
Period |
|
Item |
Materials |
Labor |
Overhead |
Costs |
Assuming that Kabana manufactures, on average, 1,300 stereo systems per month, enter each cost item on your answer sheet, placing the dollar amount per month under the appropriate headings. Total the dollar amounts in each of the columns.
(b) Compute the cost to produce one stereo system.
Incomplete manufacturing costs, expenses, and selling data for two different cases are as follows.
|
Case |
||
|
1 |
2 |
|
|
Direct Materials Used |
$ 7,600 |
$ (g) |
|
Direct Labor |
5,000 |
8,000 |
|
Manufacturing Overhead |
8,000 |
4,000 |
|
Total Manufacturing Costs |
(a) |
18,000 |
|
Beginning Work in Process Inventory |
1,000 |
(h) |
|
Ending Work in Process Inventory |
(b) |
3,000 |
|
Sales |
24,500 |
(i) |
|
Sales Discounts |
2,500 |
1,400 |
|
Cost of Goods Manufactured |
17,000 |
22,000 |
|
Beginning Finished Goods Inventory |
(c) |
3,300 |
|
Goods Available for Sale |
18,000 |
(j) |
|
Cost of Goods Sold |
(d) |
(k) |
|
Ending Finished Goods Inventory |
3,400 |
2,500 |
|
Gross Profit |
(e) |
7,000 |
|
Operating Expenses |
2,500 |
(l) |
|
Net Income |
(f) |
5,000 |
Instructions
(a) Indicate the missing amount for each letter.
(b) Prepare a condensed cost of goods manufactured schedule for Case 1.
(c) Prepare an income statement and the current assets section of the balance sheet for Case 1.
Assume that in Case 1 the other items in the current assets section are as follows: Cash $4,000, Receivables (net) $15,000, Raw Materials $600, and Prepaid Expenses $400.
The following data were taken from the records of Blumbey Manufacturing Company for the fiscal year ended June 30, 2012.
|
Raw Materials |
Factory Insurance |
$ 4,600 |
|
|
Inventory 7/1/11 |
$ 48,000 |
Factory Machinery |
|
|
Raw Materials |
Depreciation |
16,000 |
|
|
Inventory 6/30/12 |
39,600 |
Factory Utilities |
27,600 |
|
Finished Goods |
Office Utilities Expense |
8,650 |
|
|
Inventory 7/1/11 |
96,000 |
Sales |
554,000 |
|
Finished Goods |
Sales Discounts |
4,200 |
|
|
Inventory 6/30/12 |
95,900 |
Plant Manager’s Salary |
29,000 |
|
Work in Process |
Factory Property Taxes |
9,600 |
|
|
Inventory 7/1/11 |
19,800 |
Factory Repairs |
1,400 |
|
Work in Process |
Raw Materials Purchases |
96,400 |
|
|
Inventory 6/30/12 |
18,600 |
Cash |
32,000 |
|
Direct Labor |
149,250 |
||
|
Indirect Labor |
24,460 |
||
|
Accounts Receivable |
27,000 |
Instructions
(a) Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.)
(b) Prepare an income statement through gross profit.
(c) Prepare the current assets section of the balance sheet at June 30, 2012.
Dibene Company is a manufacturer of computers. Its controller resigned in October 2012. An inexperienced assistant accountant has prepared the following income statement for the month of October 2012.
|
DIBENE COMPANY |
||
|
Income Statement |
||
|
For the Month Ended October 31, 2012 |
||
|
Sales (net) |
$780,000 |
|
|
Less: Operating expenses |
||
|
Raw materials purchases |
$264,000 |
|
|
Direct labor cost |
190,000 |
|
|
Advertising expense |
90,000 |
|
|
Selling and administrative salaries |
75,000 |
|
|
Rent on factory facilities |
60,000 |
|
|
Depreciation on sales equipment |
45,000 |
|
|
Depreciation on factory equipment |
31,000 |
|
|
Indirect labor cost |
28,000 |
|
|
Utilities expense |
12,000 |
|
|
Insurance expense |
8,000 |
803,000 |
|
Net loss |
$(23,000) |
|
Prior to October 2012, the company had been profitable every month. The company’s presidentis concerned about the accuracy of the income statement. As her friend, you have been asked to review the income statement and make necessary corrections. After examining other manufacturing cost data, you have acquired additional information as follows.
1. Inventory balances at the beginning and end of October were:
|
October 1 |
October 31 |
|
|
Raw materials |
$18,000 |
$34,000 |
|
Work in process |
16,000 |
14,000 |
|
Finished goods |
30,000 |
48,000 |
2. Only 70% of the utilities expense and 60% of the insurance expense apply to factory operations. The remaining amounts should be charged to selling and administrative activities.
Instructions
(a) Prepare a schedule of cost of goods manufactured for October 2012.
(b) Prepare a correct income statement for October 2012.
(Learning Objective 2, 3, 4: Measuring the effects of stock issuance, treasury stock, and dividend transactions on stockholders’ equity) Wholegrain Health Foods, Inc., is authorized to issue 5,000,000 shares of $1 par common stock. In its initial public offering during 20X4, Wholegrain issued 500,000 shares of its $1 par common stock for $7.00 per share. Over the next year, Wholegrain’s stock price increased and the company issued 400,000 more shares at an average price of $8.50. During 20X6, the price of Wholegrain’s common stock dropped to $7, and the company purchased 60,000 shares of its common stock for the treasury. After the market price of the common stock rose in 20X7, Wholegrain sold 40,000 shares of the treasury stock for $8 per share. During the 5 years 20X4 through 20X8, Wholegrain earned net income of $620,000 and declared and paid cash dividends of $140,000. Stock dividends of $280,000 were distributed to the stockholders in 20X7, with $35,000 credited to common stock and $245,000 credited to additional paid in capital. At December 31, 20X8, the company has total assets of $14,200,000 and total liabilities of $6,920,000.
Required
Show the computation of Wholegrain’s total stockholders’ equity at December 31, 20X8. Present a detailed computation of each element of stockholders’ equity.
(Learning Objective 2, 4: Analyzing the stockholders’ equity and dividends of a corporation) Steeltrap Security included the following stockholders’ equity on its balance sheet:
|
Stockholders’ Equity |
|
|
Preferred stock Authorized 20,000 shares in each class: |
|
|
$5.00 Cumulative Convertible Preferred Stock, $50.00 par value, 2,500 shares issued |
$ 125,000 |
|
$2.50 Cumulative Convertible Preferred Stock, $25.00 par value, 4,000 shares issued |
100,000 |
|
Common stock—$2 par value: |
|
|
Authorized 80,000 shares, issued 48,000 shares |
96,000 |
|
Additional paid in capital common |
288,000 |
|
Retained earnings |
529,000 |
|
$1,138,000 |
Required
1. Identify the different issues of stock Steeltrap Security has outstanding.
2. Which class of stock did Steeltrap issue at par value, and which class did it issue above par value?
3. Suppose Steeltrap passed its preferred dividends for 1 year. Would the company have to pay these dividends in arrears before paying dividends to the common stockholders? Why?
4. What amount of preferred dividends must Steeltrap declare and pay each year to avoid having preferred dividends in arrears?
5. Assume preferred dividends are in arrears for 20X7. Journalize the declaration of a $50,000 cash dividend for 20X8. No explanation is needed.
(Learning Objective 2, 3, 4: Accounting for stock issuance, dividends, and treasury stock) Madrid Jewelry Company reported the following summarized balance sheet at
December 31, 20X8:
|
Assets |
|
|
Current assets |
$33,400 |
|
Property and equipment, net |
51,800 |
|
Total assets |
$85,200 |
|
Liabilities and Equity |
|
|
Liabilities |
$37,800 |
|
Stockholders’ equity: |
|
|
$0.50 cumulative preferred stock, $5 par, 400 shares issued |
2,000 |
|
Common stock, $1 par, 6,000 shares issued |
6,000 |
|
Paid in capital in excess of par, common |
17,400 |
|
Retained earnings |
22,000 |
|
Total liabilities and equity |
$85,200 |
During 20X9, Madrid completed these transactions that affected stockholders’ equity:
|
Feb. 13 |
Issued 5,000 shares of common stock for $4 per share. |
|
June 7 |
Declared the regular cash dividend on the preferred stock. |
|
24 |
Paid the cash dividend. |
|
Aug. 9 |
Distributed a 10% stock dividend on the common stock. Market price of the common stock was $5 per share. |
|
Oct. 26 |
Reacquired 500 shares of common stock as treasury stock, paying $6 per share. |
|
Nov. 20 |
Sold 200 shares of the treasury stock for $8 per share. |
Required
1. Journalize Madrid’s transactions. Explanations are not required.
2. Report Madrid Jewelry Company’s stockholders’ equity at December 31, 20X9. Net
income for 20X9 was $27,000.
(Learning Objective 3, 4: Measuring the effects of dividend and treasury stock transactions on a company) Niles Corporation completed the following selected transactions during the current year:
|
Mar. 3 |
Distributed a 10% stock dividend on the 90,000 shares of common stock outstanding ($2.50 par). The market value of the common stock was $25 per share. |
|
May 16 |
Declared a cash dividend on the 5%, $100 par preferred stock (5,000 shares outstanding). |
|
30 |
Paid the cash dividends. |
|
Oct. 26 |
Purchased 1,500 shares of treasury stock at $24 per share. |
|
Dec. 8 |
Sold all of the treasury stock for $27 per share. |
|
19 |
Issued 10,000 shares of common stock ($2.50 par) for $28 per share. |
Required
Analyze each transaction in terms of its effect on the accounting equation of Niles Corporation.
(Learning Objective 3, 6: Preparing a corporation’s balance sheet; measuring profitability) The following accounts and related balances of Kingston Appliances, Inc., are arranged in no particular order.
|
Dividends payable |
44,000 |
Accounts payable |
$ 31,000 |
|
Total assets, December 31, 20X6 |
$ 3,000 |
Retained earnings |
? |
|
Net income |
461,000 |
Common stock, $1 par; 100,000 shares authorized, 42,000 shares issued |
42,000 |
|
Common stockholders’ equity, December 31, 20X6 |
36,200 |
Inventory |
93,000 |
|
Interest expense |
283,000 |
Property, plant, and equipment, net |
181,000 |
|
Treasury stock, common, 1,600 shares at cost |
3,800 |
Goodwill |
6,000 |
|
Cash |
11,000 |
Preferred stock, 4%, $10 par, 25,000 shares authorized, 3,700 shares issued |
37,000 |
|
Prepaid expenses |
13,000 |
Additional paid in capital common |
140,000 |
|
Patent, net |
31,000 |
||
|
Accrued liabilities |
17,000 |
||
|
Long term note payable |
79,000 |
||
|
Accounts receivable, net |
71,000 |
Required
1. Prepare Kingston’s classified balance sheet in the account format at December 31, 20X7.
2. Compute rate of return on total assets and rate of return on common stockholders’ equity for the year ended December 31, 20X7.
3. Do these rates of return suggest strength, weakness, or a mid range? Give your reason.
Indicate whether the following statements are true or false.
1. Managerial accountants have a single role within an organization, collecting and reporting costs to management.
2. Financial accounting reports are general purpose and intended for external users.
3. Managerial accounting reports are special purpose and issued as frequently as needed.
4. Managers’ activities and responsibilities can be classified into three broad functions: cost accounting, budgeting, and internal control.
5. As a result of the Sarbanes Oxley Act of 2002, managerial accounting reports must now comply with generally accepted accounting principles (GAAP).
6. Top managers must certify that a company maintains an adequate system of internal controls.
The following information is available for Keystone Manufacturing Company.
|
March 1 |
March 31 |
||
|
Raw material inventory |
$12,000 |
$10,000 |
|
|
Work in process inventory |
2,500 |
4,000 |
|
|
Materials purchased in March |
$ 90,000 |
||
|
Direct labor in March |
75,000 |
||
|
Manufacturing overhead in March |
220,000 |
Prepare the cost of goods manufactured schedule for the month of March.
Match the descriptions that follow with the corresponding terms.
Descriptions:
1. All activities associated with providing a product or service.
2. A method of allocating overhead based on each product’s use of activities in making the product.
3. Systems implemented to reduce defects in finished products with the goal of achieving zero defects.
4. A performance measurement approach that uses both financial and nonfi nancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion.
5. Inventory system in which goods are manufactured or purchased just as they are needed for use.
Terms:
a. Activity based costing
b. Balanced scorecard
c. Just in time (JIT) inventory
d. Total quality management (TQM)
e. Value chain
Giant Manufacturing Co. specializes in manufacturing different models of bicycles. Assume that the market has responded enthusiastically to a new model, the Jaguar. As a result, the company has established a separate manufacturing facility to produce these bicycles. The company produces 1,000 of these bicycles per month. Giant’s monthly manufacturing cost and other expenses data related to these bicycles are as follows.
|
1. Rent on manufacturing equipment (lease cost) |
$2,000/month |
|
2. Insurance on manufacturing building |
$750/month |
|
3. Raw materials (frames, tires, etc.) |
$80/bicycle |
|
4. Utility costs for manufacturing facility |
$1,000/month |
|
5. Supplies for administrative office |
$800/month |
|
6. Wages for assembly line workers in manufacturing facility |
$30/bicycle |
|
7. Depreciation on office equipment |
$650/month |
|
8. Miscellaneous materials (lubricants, solders, etc.) |
$1.20/bicycle |
|
9. Property taxes on manufacturing building |
$2,400/year |
|
10. Manufacturing supervisor’s salary |
$3,000/month |
|
11. Advertising for bicycles |
$30,000/year |
|
12. Sales commissions |
$10/bicycle |
|
13. Depreciation on manufacturing building |
$1,500/month |
Instructions
(a) Prepare an answer sheet with the following column headings.
|
Product Costs |
||||
|
Cost |
Direct |
Direct |
Manufacturing |
Period |
|
Item |
Materials |
Labor |
Overhead |
Costs |
Enter each cost item on your answer sheet, placing an “X” under the appropriate headings.
(b) Compute total manufacturing costs for the month.
Superior Manufacturing Company has the following cost and expense data for the year ending December 31, 2012.
|
Raw materials, 1/1/12 |
$ 30,000 |
Insurance, factory |
$ 14,000 |
|
Raw materials, 12/31/12 |
20,000 |
Property taxes, factory building |
6,000 |
|
Raw materials purchases |
205,000 |
Sales (net) |
1,500,000 |
|
Indirect materials |
15,000 |
Delivery expenses |
100,000 |
|
Work in process, 1/1/12 |
80,000 |
Sales commissions |
150,000 |
|
Work in process, 12/31/12 |
50,000 |
Indirect labor |
90,000 |
|
Finished goods, 1/1/12 |
110,000 |
Factory machinery rent |
40,000 |
|
Finished goods, 12/31/12 |
120,000 |
Factory utilities |
65,000 |
|
Direct labor |
350,000 |
Depreciation, factory building |
24,000 |
|
Factory manager’s salary |
35,000 |
Administrative expenses |
300,000 |
Instructions
(a) Prepare a cost of goods manufactured schedule for Superior Company for 2012.
(b) Prepare an income statement for Superior Company for 2012.
(c) Assume that Superior Company’s ledgers show the balances of the following current asset accounts: Cash $17,000, Accounts Receivable (net) $120,000, Prepaid Expenses $13,000, and Short term Investments $26,000. Prepare the current assets section of the balance sheet for Superior Company as of December 31, 2012.
Indicate whether the following statements are true or false.
1. Managerial accountants explain and report manufacturing and nonmanufacturing costs, determine cost behaviors, and perform cost volume profit analysis, but are not involved in the budget process.
2. Financial accounting reports pertain to subunits of the business and are very detailed.
3. Managerial accounting reports must follow GAAP and are audited by CPAs.
4. Managers’ activities and responsibilities can be classified into three broad functions: planning, directing, and controlling.
5. As a result of the Sarbanes Oxley Act of 2002 (SOX), top managers must certify that the company maintains an adequate system of internal control.
6. Management accountants follow a code of ethics developed by the Institute of Management Accountants.
The following information is available for Sanchez Manufacturing Company.
|
April 1 |
April 31 |
||
|
Raw material inventory |
$10,000 |
$14,000 |
|
|
Work in process inventory |
5,000 |
3,500 |
|
|
Materials purchased in April |
$ 98,000 |
||
|
Direct labor in April |
60,000 |
||
|
Manufacturing overhead in April |
180,000 |
Match the descriptions that follow with the corresponding terms.
Descriptions:
1. Inventory system in which goods are manufactured or purchased just as they are needed for use.
2. A method of allocating overhead based on each product’s use of activities in making the product.
3. Systems that are especially important to firms adopting just in time inventory methods.
4. One part of the value chain for a manufacturing company.
5. The U.S. economy is trending toward this.
6. A performance measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company’s operations in an integrated fashion.
Terms:
(a) Activity based costing
(b) Balanced scorecard
(c) Total quality management (TQM)
(d) Research and development, and product design
(e) Service industries
(f) Just in time (JIT) inventory
Direct materials are a:
|
Product |
Manufacturing |
Period |
|
|
Cost |
Overhead |
Cost |
|
|
a. |
Yes |
Yes |
No |
|
b. |
Yes |
No |
No |
|
c. |
Yes |
Yes |
Yes |
|
d. |
No |
No |
No |
Complete the following comparison table between managerial and financial accounting.
|
Financial Accounting |
Managerial Accounting |
|
|
Primary users |
||
|
Types of reports |
||
|
Frequency of reports |
||
|
Purpose of reports |
||
|
Content of reports |
||
|
Verification |
BE19 2
The Sarbanes Oxley Act of 2002 (SOX) has important implications for the financial community. Explain two implications of SOX.
Presented below are Bennett Company’s monthly manufacturing cost data related to its personal computer products.
|
(a) Utilities for manufacturing equipment |
$116,000 |
|
(b) Raw material (CPU, chips, etc.) |
$ 85,000 |
|
(c) Depreciation on manufacturing building |
$880,000 |
|
(d) Wages for production workers |
$191,000 |
Enter each cost item in the following table, placing an “X” under the appropriate headings.
|
Product Costs |
|||
|
Direct |
Direct |
Manufacturing |
|
|
Materials |
Labor |
Overhead |
|
|
(a) |
|||
|
(b) |
|||
|
(c) |
|||
|
(d) |
Presented below are incomplete manufacturing cost data. Determine the missing amounts for three different situations.
|
Direct |
Direct |
Total |
||
|
Materials |
Labor |
Manufacturing |
Manufacturing |
|
|
Used |
Used |
Overhead |
Costs |
|
|
(1) |
$25,000 |
$61,000 |
$ 50,000 |
? |
|
(2) |
? |
$75,000 |
$140,000 |
$296,000 |
|
(3) |
$55,000 |
? |
$111,000 |
$310,000 |
Use the same data from BE19–10 above and the data below. Determine the missing amounts.
|
Total |
Work |
Work |
Cost of |
|
|
Manufacturing |
in Process |
in Process |
Goods |
|
|
Costs |
(1/1) |
(12/31) |
Manufactured |
|
|
(1) |
? |
$120,000 |
$82,000 |
? |
|
(2) |
$296,000 |
? |
$98,000 |
$321,000 |
|
(3) |
$310,000 |
$463,000 |
? |
$715,000 |
Denis Mayer has prepared the following list of statements about managerial accounting and financial accounting.
1. Financial accounting focuses on providing information to internal users.
2. Analyzing cost volume profit relationships is part of managerial accounting.
3. Preparation of budgets is part of financial accounting.
4. Managerial accounting applies only to merchandising and manufacturing companies.
5. Both managerial accounting and financial accounting deal with many of the same economic events.
6. Managerial accounting reports are prepared only quarterly and annually.
7. Financial accounting reports are general purpose reports.
8. Managerial accounting reports pertain to subunits of the business.
9. Managerial accounting reports must comply with generally accepted accounting principles.
10. Although managerial accountants are expected to behave ethically, there is no code of ethical standards for managerial accountants.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Presented below is a list of costs and expenses usually incurred by Gurule Corporation, a manufacturer of furniture, in its factory.
1. Salaries for assembly line inspectors.
2. Insurance on factory machines.
3. Property taxes on the factory building.
4. Factory repairs.
5. Upholstery used in manufacturing furniture.
6. Wages paid to assembly line workers.
7. Factory machinery depreciation.
8. Glue, nails, paint, and other small parts used in production.
9. Factory supervisors’ salaries.
10. Wood used in manufacturing furniture.
Instructions
Classify the above items into the following categories: (a) direct materials, (b) direct labor, and (c) manufacturing overhead.
(Learning Objective 2, 3, 4: Explaining the changes in stockholders’ equity) Apollo Corporation reported the following stockholders’ equity data (all dollars in millions except par value per share):
|
December 31, |
||
|
20X2 |
20X1 |
|
|
Preferred stock |
$ 604 |
$ 740 |
|
Common stock, $1 par value |
900 |
891 |
|
Additional paid in capital |
1,490 |
1,468 |
|
Retained earnings |
20,661 |
19,108 |
|
Treasury stock, common |
(2,758) |
(2,643) |
Apollo earned net income of $2,960 during 20X2. For each account except Retained Earnings, 1 transaction explains the change from the December 31, 20X1, balance to the December 31, 20X2, balance. Two transactions affected Retained Earnings. Give a full explanation, including the dollar amount, for the change in each account.
(Learning Objective 2, 3, 4: Accounting for changes in stockholders’ equity) Fun City, Inc., ended 20X5 with 8 million shares of $1 par common stock issued and outstanding. Beginning additional paid in capital was $13 million, and retained earnings totaled $40 million.In March 20X6, Fun City issued 2 million shares of common stock at a price of $2 per share.In May, the company distributed a 10% stock dividend at a time when Fun City’s common stock had a market value of $3 per share. Then in October, Fun City’s stock price dropped to $1 per share and the company purchased 2 million shares of treasury stock. For the year, Fun City earned net income of $26 million and declared cash dividends of $17 million. Complete the following tabulation to show what Fun City should report for stockholders’ equity at December 31, 20X6. Journal entries are not required. (Challenge)
|
(Amounts in millions) |
Common Stock |
+ |
Additional Paid In Capital |
+ |
Retained Earnings |
Treasury Stock |
= |
Total Equity |
|
|
Balance, Dec. 31, 20X5 |
$8 |
$13 |
$40 |
$0 |
$61 |
||||
|
Issuance of stock |
|||||||||
|
Stock dividend |
|||||||||
|
Purchase of treasury stock |
|||||||||
|
Net income |
|||||||||
|
Cash dividends |
|||||||||
|
Balance, Dec. 31, 20X6 |
$ |
$ |
$ |
$ |
$ |
Team Spirit, Inc., issues 240,000 shares of no par common stock for $5 per share. The journal entry is:
|
Cash |
240,000 |
|
|
Common Stock |
240,000 |
|
|
Cash |
1,200,000 |
|
|
Common Stock |
240,000 |
|
|
Gain on the Sale of Stock |
960,000 |
|
|
Cash |
1,200,000 |
|
|
Common Stock |
1,200,000 |
|
|
Cash |
1,200,000 |
|
|
Common Stock |
480,000 |
|
|
Paid in Capital in Excess of Stated Value—Common |
720,000 |
These account balances at December 31 relate to Sportaid, Inc.:
|
Accounts Payable |
$ 51,700 |
Paid in Capital in Excess of Par—Common |
$280,000 |
|
Accounts Receivable |
81,350 |
Preferred Stock, 10%, $100 Par |
89,000 |
|
Common Stock |
313,000 |
Retained Earnings |
71,800 |
|
Treasury Stock |
5,000 |
Notes Receivable |
12,500 |
|
Bonds Payable |
3,400 |
What is total paid in capital for Sportaid, Inc.?
a. $682,000
b. $701,345
c. $694,445
d. $753,800
e. None of the above.
These account balances at December 31 relate to Sportaid, Inc.:
|
Accounts Payable |
$ 51,700 |
Paid in Capital in Excess of Par—Common |
$280,000 |
|
Accounts Receivable |
81,350 |
Preferred Stock, 10%, $100 Par |
89,000 |
|
Common Stock |
313,000 |
Retained Earnings |
71,800 |
|
Treasury Stock |
5,000 |
Notes Receivable |
12,500 |
|
Bonds Payable |
3,400 |
What is total stockholders’ equity for Sportaid, Inc.?
a. $753,800
b. $758,800
c. $748,800
d. $764,735
e. None of the above.
These account balances at December 31 relate to Sportaid, Inc.:
|
Accounts Payable |
$ 51,700 |
Paid in Capital in Excess of Par—Common |
$280,000 |
|
Accounts Receivable |
81,350 |
Preferred Stock, 10%, $100 Par |
89,000 |
|
Common Stock |
313,000 |
Retained Earnings |
71,800 |
|
Treasury Stock |
5,000 |
Notes Receivable |
12,500 |
|
Bonds Payable |
3,400 |
Sportaid’s net income for the period is $119,600 and beginning common stockholders’
equity is $681,400. Calculate Sportaid’s return on common stockholders’ equity.
a. 15.7%
b. 16.5%
c. 17.5%
d. 18.6%
A company paid $20 per share to purchase 500 shares of its common stock as treasury stock. The stock was originally issued at $15 per share. The journal entry to record the purchase of the treasury stock is:
|
Treasury Stock |
10,000 |
|
|
Cash |
10,000 |
|
|
Treasury Stock |
7,500 |
|
|
Retained Earnings |
2,500 |
|
|
Cash |
10,000 |
|
|
Treasury Stock |
5,000 |
|
|
Paid in Capital in Excess of Par |
5,000 |
|
|
Cash |
10,000 |
|
|
Common Stock |
10,000 |
|
|
Cash |
10,000 |
(Learning Objective 1, 2, 5: Explaining the features of a corporation’s stock) Reinhart Corporation is conducting a special meeting of its board of directors to address some concerns raised by the stockholders. Stockholders have submitted the following questions.
Answer each question.
1. Why are common stock and retained earnings shown separately in the shareholders’ equity section of the balance sheet?
2. Lou Harris, a Reinhart shareholder, proposes to give some land she owns to the company in exchange for shares of the company stock. How should Reinhart Corporation determine the number of shares of our stock to issue for the land?
3. Preferred shares generally are preferred with respect to dividends and in the event of our liquidation. Why would investors buy our common stock when preferred stock is available?
4. What does the redemption value of our preferred stock require us to do?
5. One of our stockholders owns 100 shares of Reinhart stock and someone has offered to buy her shares for their book value. Our stockholder asks us the formula for computing the book value of her stock.
(Learning Objective 2: Recording corporate transactions and preparing the stockholders’ equity section of the balance sheet) The partners who own Bassett Furniture Co. wished to avoid the unlimited personal liability of the partnership form of business, so they incorporated as BFC Inc. The charter from the state of Florida authorizes the corporation to issue 10,000 shares of $6 no par preferred stock and 250,000 shares of $5 par common stock. In its first month, BFC completed the following transactions:
|
Jan. 3 |
Issued 1,000 shares of common stock to the promoter for assistance with issuance of the common stock. The promotional fee was $10,000. Debit Organization Expense. |
|
6 |
Issued 5,000 shares of common stock to Jo Bassett and 3,800 shares to Mel Bassett in return for cash equal to the stock’s market value of $11 per share. The Bassetts were partners in Bassett Furniture Co. |
|
12 |
Issued 1,000 shares of preferred stock to acquire a patent with a market value of $110,000. |
|
22 |
Issued 1,500 shares of common stock for $12 cash per share. |
Required
Record the transactions in the journal.
2. Prepare the stockholders’ equity section of the BFC Inc. balance sheet at January1.The ending balance of Retained Earnings is $89,000.
(Learning Objective 2, 4: Preparing the stockholders’ equity section of the balance sheet) Lima Corp. has the following stockholders’ equity information: Lima’s charter authorizes the company to issue 10,000 shares of 5% preferred stock with par value of $100 and 400,000 shares of no par common stock. The company issued 1,000 shares of the preferred stock at $100 per share. It issued 100,000 shares of the common stock for a total of $370,000. The company’s retained earnings balance at the beginning of 20X8 was $40,000, and net income for the year was $90,000. During 20X8, Lima declared the specified dividend on preferred and a $0.50 per share dividend on common. Preferred dividends for 20X7 were in arrears.
Required
Prepare the stockholders’ equity section of Lima Corp.’s balance sheet at December 31, 20X8. Show the computation of all amounts. Journal entries are not required. (pp. 504–505)
(Learning Objective 3: Purchasing treasury stock to fight off a takeover of the corporation) Gary Swan Imports, Inc., is located in Jacksonville, Florida. Swan is the only company with reliable sources for its imported gifts. The company does a brisk business with specialty stores such as Macy’s. Swan’s recent success has made the company a prime target for a takeover. An investment group from Miami is attempting to buy 51% of Swan’s outstanding stock against the wishes of Swan’s board of directors. Board members are convinced that the Miami investors would sell the most desirable pieces of the business and leave little of value. At the most recent board meeting, several suggestions were advanced to fight off the hostile takeover bid. The suggestion with the most promise is to purchase a huge quantity of treasury stock. Swan has the cash to carry out this plan.
Required
1. Suppose you are a significant stockholder of Gary Swan Imports, Inc. Write a memorandum to explain to the board how the purchase of treasury stock would make it difficult for the Miami group to take over Swan. Include in your memo a discussion of the effect that purchasing treasury stock would have on stock outstanding and on the size of the corporation.
2. Suppose Swan management is successful in fighting off the takeover bid and later sells the treasury stock at prices greater than the purchase price. Explain what effect these sales will have on assets, stockholders’ equity, and net income.
(Learning Objective 2, 3, 4: Measuring the effects of stock issuance, treasury stock, and dividend transactions on stockholders’ equity) Federal Exchange Corporation is authorized to issue 500,000 shares of $1 par common stock. In its initial public offering during 20X2, Federal Exchange issued 200,000 shares of its $1 par common stock for $12 per share. Over the next year, Federal Exchange’s common stock price increased, and the company issued 100,000 more shares at an average price of $14.50. During 20X4, the price of Federal Exchange’s common stock dropped to $8, and Federal Exchange purchased 30,000 shares of its common stock for the treasury. After the market price of the common stock increased in 20X5, Federal Exchange sold 20,000 shares of the treasury stock for $11 per share. During the 5 years 20X2 to 20X6, Federal Exchange earned net income of $295,000 and declared and paid cash dividends of $119,000. Stock dividends of $110,000 were distributed to the stockholders in 20X3, with $14,000 credited to common stock and $96,000 credited to additional paid in capital. At December 31, 20X6, total assets of the company are $7,030,000, and liabilities add up to $3,024,000.
Required
Show the computation of Federal Exchange Corporation’s total stockholders’ equity at December 31, 20X6. Present a detailed computation of each element of stockholders’ equity.
(Learning Objective 2, 4: Analyzing the stockholders’ equity and dividends of a corporation) Teak Outdoor Furniture Company included the following stockholders’ equity on its year end balance sheet at February 28:
|
Stockholders’ Equity |
|
|
Preferred stock, 5.5% cumulative—par value $20 per share; |
|
|
authorized 100,000 shares in each class; |
|
|
Class A—issued 75,000 shares |
$ 1,500,000 |
|
Class B—issued 92,000 shares |
1,840,000 |
|
Common stock—par value $5 per share; |
|
|
authorized 1,000,000 shares; |
|
|
issued 280,000 shares |
1,400,000 |
|
Additional paid in capital, common |
5,540,000 |
|
Retained earnings |
8,330,000 |
|
$18,610,000 |
|
Required
1. Identify the different issues of stock Teak Outdoor Furniture Company has outstanding.
2. Give the summary entries to record issuance of all the Teak stock. Assume that all the stock was issued for cash. Explanations are not required.
3. Suppose Teak passed its preferred dividends for 3 years. Would the company have to pay those dividends in arrears before paying dividends to the common stockholders? Give your reason.
4. What amount of preferred dividends must Teak declare and pay each year to avoid having preferred dividends in arrears?
5. Assume that preferred dividends are in arrears for 20X8. Record the declaration of an $800,000 dividend on February 28, 20X9. An explanation is not required.
(Learning Objective 2, 3, 4: Accounting for stock issuance, dividends, and treasury stock) Boston Enterprises reported the following summarized balance sheet at December 31, 20X7:
|
Assets |
|
|
Current assets |
$18,200 |
|
Property and equipment, net |
34,700 |
|
Total assets |
$52,900 |
|
Liabilities and Equity |
|
|
Liabilities |
$ 6,200 |
|
Stockholders’ equity: |
|
|
$5 cumulative preferred stock, $10 par, 180 shares issued |
1,800 |
|
Common stock, $1 par, 2,400 shares issued |
2,400 |
|
Paid in capital in excess of par, common |
23,500 |
|
Retained earnings |
19,000 |
|
Total liabilities and equity |
$52,900 |
During 20X8, Boston completed these transactions that affected stockholders’ equity:
|
Feb. 22 |
Issued 1,000 shares of common stock for $16 per share. |
|
May 4 |
Declared the regular cash dividend on the preferred stock. |
|
24 |
Paid the cash dividend. |
|
July 9 |
Distributed a 10% stock dividend on the common stock. Market price of the common stock was $18 per share. |
|
Nov. 19 |
Reacquired 800 shares of common stock as treasury stock, paying $14 per share. |
|
Dec. 8 |
Sold 600 shares of the treasury stock for $15 per share. |
Required
1. Journalize Boston’s transactions. Explanations are not required.
2. Report Boston’s stockholders’ equity at December 31, 20X8. Net income for 20X8 was $62,000.
(Learning Objective 3, 4: Measuring the effects of dividend and treasury stock transactions on a company) Dairy Freeze of Texas, Inc., completed the following transactions during 20X6, the company’s tenth year of operations:
|
Mar. 18 |
Issued 10,000 shares of company stock ($5 par) for cash of $250,000. |
|
Apr. 22 |
Purchased 2,000 shares of the company’s own common stock at $22 per share. |
|
Aug. 6 |
Sold 700 shares of treasury common stock for $26 per share. |
|
Sept. 1 |
Declared a cash dividend on the 10,000 shares of $0.60 no par preferred stock. |
|
Nov. 18 |
Paid the cash dividends. |
|
Feb. 2 |
Distributed a 10% stock dividend on the 30,000 shares of $1 par common stock outstanding. The market value of the common stock was $25 per share. |
Required
Analyze each transaction in terms of its effect on the accounting equation of Dairy Freeze of Texas, Inc.
(Learning Objective 3, 6: Preparing a corporation’s balance sheet; measuring profitability) The following accounts and related balances of Bluebird Designers, Inc., as of December 31, 20X8, are arranged in no particular order.
|
Cash |
14,000 |
Interest expense |
$ 16,100 |
|
Accounts receivable, net |
$41,000 |
Property, plant, and equipment, net |
357,000 |
|
Paid in capital in excess of par common |
24,000 |
Common stock, $1 par, 500,000 shares authorized, 115,000 shares issued |
115,000 |
|
Accrued liabilities |
19,000 |
Prepaid expenses |
10,000 |
|
Long term note payable |
26,000 |
Common stockholders’ equity, December 31, 20X7 |
222,000 |
|
Inventory |
98,000 |
Net income |
31,000 |
|
Dividends payable |
99,000 |
Total assets, December 31, 20X7 |
494,000 |
|
Retained earnings |
9,000 |
Treasury stock, 18,000 shares at cost |
22,000 |
|
Accounts payable |
? |
||
|
Trademark, net |
131,000 |
||
|
Preferred stock, $0.50, no par, 10,000 shares authorized and issued |
9,000 |
||
|
Goodwill |
27,000 |
Required
1. Prepare the company’s classified balance sheet in the account format at December 31, 20X8.
2. Compute rate of return on total assets and rate of return on common stockholders’ equity for the year ended December 31, 20X8.
3. Do these rates of return suggest strength or weakness? Give your reason.
(Learning Objective 1, 3, 4: Explaining the features of a corporation’s stock) The board of directors of Free stroke Swim Centers, Inc., is meeting to address the concerns of stockholders. Stockholders have submitted the following questions for discussion at the board meeting. Answer each question.
1. Why did Free stroke organize as a corporation if a corporation must pay an additional layer of income tax?
2. How is preferred stock similar to common stock? How is preferred stock similar to debt?
3. Free stroke purchased treasury stock for $50,000 and a year later sold it for $65,000.
Explain to the stockholders whether the $15,000 excess is profit to be reported on the company’s income statement. Explain your answer.
4. Would Free stroke investors prefer to receive cash dividends or stock dividends? Explain your reasoning.
(Learning Objective 2: Recording corporate transactions and preparing the stockholders’ equity section of the balance sheet) The charter from the state of Utah authorizes Challenger Canoes, Inc., to issue 10,000 shares of 6%, $100 par preferred stock and 100,000 shares of $1 par common stock. In its first month, Challenger completed the following transactions:
|
Oct. 6 |
Issued 300 shares of common stock to the lawyer for assistance with chartering the corporation. The lawyer’s fee was $1,500. Debit Organization Expense. |
|
9 |
Issued 9,000 shares of common stock to Jerry Grant and 12,000 shares to Sheila Hoffman in return for cash equal to the stock’s market value of $5 per share. Grant and Hoffman are executives of the company. |
|
10 |
Issued 400 shares of preferred stock to acquire a patent with a market value of $40,000. |
|
26 |
Issued 2,000 shares of common stock for cash of $12,000. |
Required
1. Record the transactions in the journal.
2. Prepare the stockholders’ equity section of the Challenger balance sheet at October 31. The ending balance of Retained Earnings is $49,000.
(Learning Objective 2, 4: Preparing the stockholders’ equity section of the balance sheet) The charter of Samuells’ Sportswear authorizes the company to issue 5,000 shares of 5%, $100 par preferred stock and 500,000 shares of no par common stock. Samuells’ issued 1,000 shares of the preferred stock at $100 per share. It issued 100,000 shares of the common stock for $427,000. The company’s retained earnings balance at the beginning of 20X6 was $61,000. Net income for 20X6 was $80,000, and the company declared a 5% cash dividend on preferred stock for 20X6.
Required
Prepare the stockholders’ equity section of Samuells’ Sportswear, Inc.’s, balance sheet at December 31, 20X6. Show the computation of all amounts. Journal entries are not required.
(Learning Objective 3: Fighting off a takeover of the corporation) Calpak Outdoor Sports is positioned ideally in the water sports business. Located in Denver, Colorado, Calpak is the only company with a distribution network for its imported goods. The company does a brisk business with specialty stores such as Cabella’s, REI, and Academy Sports. Calpak’s recent success has made the company a prime target for a takeover. Against the wishes of Calpak’s board of directors, an investment group from Los Angeles is attempting to buy 51% of Calpak’s outstanding stock. Board members are convinced that the Los Angeles investors would sell off the most desirable pieces of the business and leave little of value. At the most recent board meeting, several suggestions were advanced to fight off the hostile takeover bid.
Required
Suppose you are a significant stockholder of Calpak Outdoor Sports. Write a short memo to the board to propose an action that would make it difficult for the investor group to take over Calpak. Include in your memo a discussion of the effect your proposed action would have on the company’s assets, liabilities, and total stockholders’ equity.
(Learning Objective 1, 2, 5: Analyzing current and contingent liabilities) Refer to YUM! Brands’ financial statements in Appendix A at the end of this book.
1. YUM’s balance sheet reports a combined total for Accounts payable and other current liabilities. Give the breakdown of the reported total at the end of 2006. (Challenge)
2. Income tax provision is another title for income tax expense. Why is YUM’s income tax provision larger than income taxes payable at the end of each year? (Challenge)
3. Did YUM borrow more or pay off more short term and long term debt during 2006? How can you tell? (Challenge)
4. How would experienced analysts rate YUM’s overall debt position—risky, safe, or average? Compute the ratio at December 30, 2006 that answers this question.
(Learning Objective 1, 2, 3, 5: Analyzing current liabilities and long term debt) Pier 1 Imports’ financial statements in Appendix B at the end of this book report a number of liabilities. Show amounts in thousands.
1. How would experienced analysts rate Pier 1’s overall debt position at year end 2006— risky, safe, or average? Compute the ratio that enables you to answer this question.
2. The statement of cash flow reports that Pier 1 completed 2 notes payable transactions and 1 long term debt transaction during 2006. Journalize those transactions.
3. Use the data on the faces of Pier 1’s 2006 income statement and balance sheet to estimate Pier 1’s average interest rate during 2006 on all company borrowings. Use the beginning balance of long term debt for 2006. (Challenge)
Alcenon Corporation leases the majority of the assets that it uses in operations. Alcenon prefers operating leases (versus capital leases) in order to keep the lease liability off its balance sheet and maintain a low debt ratio. Alcenon is negotiating a 10 year lease on an asset with an expected useful life of 15 years. The lease requires Alcenon to make 10 annual lease payments of $20,000 each, with the first payment due at the beginning of the lease term. The leased asset has a market value of $135,180. The lease agreement specifies no transfer of title to the lessee and includes no bargain purchase option.
Write a report for Alcenon’s management to explain what conditions must be present for Alcenon to be able to account for this lease as an operating lease.
Test your understanding of the first half of this chapter by deciding whether each of the following statements is true or false.
a. The policy making body in a corporation is called the board of directors.
b. The owner of 100 shares of preferred stock has greater voting rights than the owner of 100 shares of common stock.
c. Par value stock is worth more than no par stock.
d. Issuance of 1,000 shares of $5 par value stock at $12 increases contributed capital by $12,000.
e. The issuance of no par stock with a stated value is fundamentally different from issuing par value stock.
f. A corporation issues its preferred stock in exchange for land and a building with a combined market value of $200,000. This transaction increases the corporation’s owners’ equity by $200,000 regardless of the assets’ prior book values.
g. Preferred stock is a riskier investment than common stock.
2. Adolfo Company has 2 classes of common stock. Only the Class A common stockholders are entitled to vote. The company’s balance sheet included the following presentation:
|
Stockholders’ Equity |
|
|
Capital stock: |
|
|
Class A common stock, voting, $1 par value, authorized and issued 1,260,000 shares |
$ 1,260,000 |
|
Class B common stock, nonvoting, no par value, authorized and issued 46,200,000 shares |
11,000,000 |
|
12,260,000 |
|
|
Additional paid in capital |
2,011,000 |
|
Retained earnings |
872,403,000 |
|
$886,674,000 |
|
Required
a. Record the issuance of the Class A common stock. Use the Adolfo account titles.
b. Record the issuance of the Class B common stock. Use the Adolfo account titles.
c. How much of Adolfo’s stockholders’ equity was contributed by the stockholders? How much was provided by profitable operations? Does this division of equity suggest that the company has been successful? Why or why not?
d. Write a sentence to describe what Adolfo’s stockholders’ equity means.
The balance sheet of Trendline Corp. reported the following at December 31, 20X6.
|
Stockholders’ Equity |
|
|
Preferred stock, 4%, $10 par, 10,000 shares authorized and issued (redemption value, $110,000) |
$100,000 |
|
Common stock, no par, $5 stated value, 100,000 shares authorized, 50,000 shares issued |
250,000 |
|
Paid in capital in excess of par or stated value: |
|
|
Common stock |
239,500 |
|
Retained earnings |
395,000 |
|
Less: Treasury stock, common (1,000 shares) |
(8,000) |
|
Total stockholders’ equity |
$976,500 |
Required
a. Is the preferred stock cumulative or noncumulative? How can you tell?
b. What is the total amount of the annual preferred dividend?
c. How many shares of common stock are outstanding?
d. Compute the book value per share of the common stock. No preferred dividends are in arrears, and Trendline has not yet declared the 20X6 dividend.
2. Use the following accounts and related balances to prepare the classified balance sheet of Whitehall, Inc., at September 30, 20X7. Use the account format of the balance sheet.
|
Common stock, $1 par, 50,000 shares authorized, 20,000 shares issued |
20,000 |
Long term note payable |
80,000 |
|
Dividends payable |
4,000 |
Inventory |
85,000 |
|
Cash |
9,000 |
Property, plant, and equipment, net |
226,000 |
|
Accounts payable |
28,000 |
Accounts receivable, net |
23,000 |
|
Paid in capital in excess of par common |
115,000 |
Preferred stock, $3.75, no par, 10,000 shares authorized, 2,000 shares issued |
24,000 |
|
Treasury stock, common, 1,000 shares at cost |
6,000 |
Accrued liabilities |
3,000 |
|
Retained earnings |
75,000 |
(Learning Objective 2: Issuing stock—par value stock and no par stock) At fiscal year end 2006, Hewlett Packard and Krispy Kreme Doughnuts reported these adapted amounts on their balance sheets (all amounts in millions):
|
Hewlett Packard: |
|
|
Common stock, 1 cent par value, 2,700 shares issued |
$ 27 |
|
Additional paid in capital |
17,966 |
|
Krispy Kreme Doughnuts: |
|
|
Common stock, no par value, 62 shares issued |
$298 |
Assume each company issued its stock in a single transaction. Journalize each company’s issuance of its stock, using its actual account titles. Explanations are not required.
(Learning Objective 2: Issuing stock to finance the purchase of assets) This Short Exercise demonstrates the similarity and the difference between 2 ways to acquire plant assets.
|
Case A—Issue stock and buy the assets in separate transactions: |
Case B—Issue stock to acquire the assets in a single transaction: |
|
Longview Corporation issued 10,000 shares of its $5 par common stock for cash of $200,000. In a separate transaction, Longview used the cash to purchase a building for $160,000 and equipment for $40,000. Journalize the 2 transactions. |
Tyler Corporation issued 10,000 shares of its $5 par common stock to acquire a building valued at $160,000 and equipment worth $40,000. Journalize this transaction. |
Compare the balances in all the accounts after making both sets of entries. Are the account balances the same or different?
(Learning Objective 2: Preparing the stockholders’ equity section of a balance sheet) The financial statements of Eppley Employment Services, Inc., reported the following accounts (adapted, with dollar amounts in thousands except for par value):
|
Paid in capital in excess of par |
$198 |
Total revenues |
$1,390 |
|
Other stockholders’ equity (negative) |
25 |
Accounts payable |
646 |
|
Common stock $0.01 par; 600 shares issued |
6 |
Retained earnings |
2,566 |
|
Long term debt |
(29) |
Other current liabilities |
805 |
|
Total expenses |
420 |
Prepare the stockholders’ equity section of Eppley’s balance sheet. Net income has already been closed to Retained Earnings.
(Learning Objective 3: Accounting for the purchase and sale of treasury stock) General Marketing Corporation reported the following stockholders’ equity at December 31. (adapted and in millions):
|
Common stock |
$ 243 |
|
Additional paid in capital |
297 |
|
Retained earnings |
2,159 |
|
Treasury stock |
(691) |
|
Total stockholders’ equity |
$2,008 |
During the next year, General Marketing purchased treasury stock at a cost of $28 million and resold treasury stock for $7 million (this treasury stock had cost General Marketing $3 million). Record the purchase and resale of General Marketing’s treasury stock. Overall, how much did stockholders’ equity increase or decrease as a result of the 2 treasury stock transactions?
(Learning Objective 6: Computing return on assets and return on equity for a leading company) Sony Corpration’s 2006 financial statements reported the following items, with 2005 figures given for comparison (adapted and in millions). Compute Sony’sreturn on assets and return on common equity for 2006. Evaluate the rates of return as strong or weak. ¥ is the symbol for the Japanese yen.
|
2006 |
2005 |
|
|
Balance sheet |
||
|
Total assets |
¥10,608 |
¥9,499 |
|
Total liabilities |
¥ 7,404 |
¥6,629 |
|
Total stockholders’ equity (all common) |
3,204 |
2,870 |
|
Total liabilities and equity |
¥10,608 |
¥9,499 |
|
Income statement |
||
|
Revenues and other income |
¥ 7,629 |
|
|
Operating expense |
7,284 |
|
|
Interest expense |
29 |
|
|
Other expense |
192 |
|
|
Net income |
¥ 124 |
(Learning Objective 2: Issuing stock and reporting stockholders’ equity) Burgers & Fries, Inc., is authorized to issue 100,000 shares of common stock and 5,000 shares of preferred stock. During its first year, the business completed the following stock issuance transactions:
|
July 19 |
Issued 10,000 shares of $2.50 par common stock for cash of $6.50 per share. |
|
Oct . 3 |
Issued 500 shares of $1.50 no par preferred stock for $50,000 cash. |
|
11 |
Received inventory valued at $11,000 and equipment with market value of $8,500 for 3,300 shares of the $2.50 par common stock. |
Required
1. Journalize the transactions. Explanations are not required.
2. Prepare the stockholders’ equity section of Burgers & Fries’ balance sheet. The ending balance of retained earnings is a deficit of $42,000.
(Learning Objective 2: Stockholders’ equity section of a balance sheet) Citadel Sporting Goods is authorized to issue 5,000 shares of preferred stock and 10,000 shares of common stock. During a 2 month period, Citadel completed these stock issuance transactions:
|
June 23 |
Issued 1,000 shares of $1 par common stock for cash of $16 per share. |
|
July 2 |
Issued 300 shares of $4.50, no par preferred stock for $20,000 cash. |
|
12 |
Received inventory valued at $15,000 and equipment with market value of $43,000 for 3,000 shares of the $1 par common stock. |
Required
Prepare the stockholders’ equity section of the Citadel Sporting Goods balance sheet for the transactions given in this exercise. Retained earnings has a balance of $49,000. Journal entries are not required.
(Learning Objective 2, 3: Stockholders’ equity section of a balance sheet) Sagebrush Software had the following selected account balances at December 31, 20X6 (in thousands, except par value per share). Prepare the stockholders’ equity section of Sagebrush Software’s balance sheet (in thousands).
|
Inventory |
$ 653 |
Common stock, $0.25 par per share, 800 shares authorized, 360 shares issued |
$ 90 |
|
Property, plant, and equipment, net |
857 |
Retained earnings |
2,202 |
|
Paid in capital in excess of par |
901 |
Accounts receivable, net |
600 |
|
Treasury stock, 120 shares at cost |
1,380 |
Notes payable |
1,122 |
|
Other stockholders’ equity |
(729) |
How can Sagebrush have a larger balance of treasury stock than the sum of Common Stock and Paid in Capital in Excess of Par?
(Learning Objective 2, 3, 4: Recording stock issuance, treasury stock, and dividend transactions) At December 31, 20X7, Blumenthall Corporation reported the stockholders’ equity accounts shown here (as adapted, with dollar amounts in millions, except share amounts).
|
Common stock $1.50 par value per share, 1,800 million shares issued |
$ 2,700 |
|
Capital in excess of par value |
8,100 |
|
Retained earnings |
1,200 |
|
Treasury stock, at cost |
0 |
|
Total stockholders’ equity |
$12,000 |
Blumenthall’s 20X8 transactions included the following:
a. Net income, $440 million.
b. Issuance of 6 million shares of common stock for $12.50 per share.
c. Purchase of 1 million shares of treasury stock for $14 million.
d. Declaration and payment of cash dividends of $30 million.
Journalize Blumenthall’s transactions in b, c, and d. Explanations are not required.
(Learning Objective 2, 3, 4, 5: Inferring transactions from a company’s stockholders’ equity) OPTICAL PRODUCTS COMPANY reported the following shareholders’ equity on its balance sheet:
|
Shareholders’ Equity |
December 31, |
|
|
(Dollars and shares in millions) |
20X9 |
20X8 |
|
Preferred stock—$1 per share par value; authorized 20 shares; Convertible Preferred Stock; issued and outstanding: 20X9 and 20X8—6 and 12 shares, respectively |
$ 6 |
$ 12 |
|
Common stock—$1 per share par value; authorized 1,000 shares; issued: 20X9 and 20X8—564 and 364 shares, respectively |
564 |
364 |
|
Additional paid in capital |
2,706 |
1,536 |
|
Retained earnings |
6,280 |
5,006 |
|
Treasury stock, common—at cost 20X9—49 shares; 20X8—9 shares |
(1,235) |
(215) |
|
Total shareholders’ equity |
8,321 |
6,703 |
|
Total liabilities and shareholders’ equity |
$48,918 |
$45,549 |
Required
1. What caused OPTICAL PRODUCTS’ preferred stock to decrease during 20X9? Cite all the possible causes.
2. What caused OPTICAL PRODUCTS’ common stock to increase during 20X9? Identify all the possible causes.
3. How many shares of OPTICAL PRODUCTS’ common stock were outstanding at December 31, 20X9?
4. OPTICAL PRODUCTS’ net income during 20X9 was $1,410 million. How much were OPTICAL PRODUCTS’ dividends during the year?
5. During 20X9, OPTICAL PRODUCTS sold no treasury stock. What average price per share did OPTICAL PRODUCTS pay for the treasury stock the company purchased during 20X9?
(Learning Objective 4: Recording a stock dividend and reporting stockholders’ equity) The stockholders’ equity for Dairy Queen Drive Ins (DQ) on December 31, 2009, follows (adapted).
|
Stockholders’ Equity |
|
|
Common stock, $0.10 par, 2,000,000 shares authorized, 500,000 shares issued |
$ 50,000 |
|
Paid in capital in excess of par common |
962,000 |
|
Retained earnings |
7,122,000 |
|
Other equity |
(195,000) |
|
Total stockholders’ equity |
$7,939,000 |
On April 15, 2010, the market price of DQ common stock was $17 per share. Assume DQ distributed a 10% stock dividend on this date.
Required
1. Journalize the distribution of the stock dividend.
2. Prepare the stockholders’ equity section of the balance sheet after the stock dividend. (Challenge)
3. Why is total stockholders’ equity unchanged by the stock dividend?
4. Suppose DQ had a cash balance of $540,000 on April 16, 2010. What is the maximum amount of cash dividends DQ can declare?
(Learning Objective 4: Reporting stockholders’ equity after a stock split) Solar tech Corp. had the following stockholders’ equity at January 31 (dollars in millions, except par value per share):
|
Common stock, $0.10 par, 500 million shares authorized, 440 million shares issued |
$ 44 |
|
Additional paid in capital |
318 |
|
Retained earnings |
2,393 |
|
Other equity |
(149) |
|
Total stockholders’ equity |
$2,606 |
On March 7, Solar tech split its $0.10 par common stock 2 for 1. Prepare the stockholders’ equity section of the balance sheet immediately after the split. E9 30 (Learning Objective 5: Measuring the book value per share of common stock) The balance sheet of Oriental Rug Company reported the following:
|
Redeemable preferred stock, 6%, $60 par value, redemption value $10,000; outstanding 100 shares |
$ 6,000 |
|
Common stockholders’ equity: |
|
|
8,000 shares issued and outstanding |
87,200 |
|
Total stockholders’ equity |
$93,200 |
Required
1. Compute the book value per share for the common stock, assuming all preferred dividends are fully paid up (none in arrears).
2. Compute the book value per share of the common stock, assuming that 3 years’ preferred dividends including the current year, are in arrears.
3. Oriental Rug’s common stock recently traded at market price of $7.75 per share. Does this mean that Oriental Rug’s stock is a good buy at $7.75?
(Learning Objective 6: Evaluating profitability) Lexington Inns reported these figures for 20X4 and 20X3 (in millions):
|
Balance sheet |
20X4 |
20X3 |
|
Total assets |
$15,695 |
$13,757 |
|
Common stock and additional paid in capital |
43 |
388 |
|
Retained earnings |
11,519 |
16,510 |
|
Other equity |
(2,914) |
(9,294) |
|
Income statement |
||
|
Operating income |
$ 4,021 |
$ 3,818 |
|
Interest expense |
219 |
272 |
|
Net income |
1,486 |
1,543 |
Compute Lexington’s return on assets and return on common stockholders’ equity for 20X4. Do these rates of return suggest strength or weakness? Give your reason.
(Learning Objective 6: Evaluating profitability) Carolina Atlantic Company included the following items in its financial statements for 20X7, the current year (amounts in millions):
|
Payment of long term debt |
$17,055 |
Dividends paid |
$ 225 |
|
Proceeds from issuance of common stock |
8,425 |
Interest expense: |
|
|
Total liabilities: |
Current year |
1,437 |
|
|
Current year end |
32,320 |
Preceding year |
597 |
|
Preceding year end |
38,023 |
Net income: |
|
|
Total stockholders’ equity: |
23,478 |
Current year |
1,882 |
|
Current year end |
14,048 |
Preceding year |
2,001 |
|
Preceding year end |
6,582 |
Operating income: |
|
|
Borrowings |
Current year |
4,884 |
|
|
Preceding year |
4,012 |
||
Compute Carolina Atlantic’s return on assets and return on common equity during 20X7 (the current year). Carolina Atlantic has no preferred stock outstanding. Do the company’s rates of return look strong or weak? Give your reason.
(Learning Objective 2, 3, 4: Reconstructing transactions from the financial statements) A 1 Networking Solutions began operations on January 1, 20X7, and immediately issued its stock, receiving cash. A 1’s balance sheet at December 31, 20X7, reported the following stockholders’ equity:
|
Common stock, $1 par |
$ 50,000 |
|
Additional paid in capital |
200,600 |
|
Retained earnings |
38,000 |
|
Treasury stock, 500 shares |
(2,000) |
|
Total stockholders’ equity |
$286,600 |
During 20X7, A 1
a. Issued stock for $5 per share.
b. Purchased 800 shares of treasury stock, paying $4 per share.
c. Resold some of the treasury stock.
d. Earned net income of $56,000 and declared and paid cash dividends. Revenues were $171,000 and expenses totaled $115,000.
Required
Journalize all of A 1’s stockholders’ equity transactions during the year. A 1’s entry d. to close net income to Retained Earnings was:
|
Revenues |
171,000 |
|
Expenses |
115,000 |
|
Retained Earnings |
56,000 |
Adrian, Inc. manufactures and sells computer monitors with a 3 year warranty. Warranty costs are expected to average 8% of sales during the warranty period. The following table shows the sales and actual warranty payments during the first 2 years of operations:
|
Year |
Sales |
Warranty Payments |
|
20X1 |
$500,000 |
$ 4,000 |
|
20X2 |
700,000 |
32,000 |
Based on these facts, what amount of warranty liability should Adrian, Inc. report on its balance sheet at December 31, 20X2?
a. $32,000
b. $36,000
c. $60,000
d. $96,000
Sweetwater Company sells $100,000 of 10%, 15 year bonds for 97 on April 1, 20X1. The market rate of interest on that day is 10 1/2%. Interest is paid each year on April 1. The entry to record the sale of the bonds on April 1 would be.
|
Cash |
97,000 |
|
|
Bonds Payable |
97,000 |
|
|
Cash |
100,000 |
|
|
Bonds Payable |
100,000 |
|
|
Cash |
97,000 |
|
|
Discount on Bonds Payable |
||
|
Bonds Payable |
100,000 |
|
|
Cash |
100,000 |
|
|
Discount on Bonds Payable |
3,000 |
|
|
Bonds Payable |
97,000 |
(Learning Objective 1: Measuring current liabilities) Sea Spray Marine experienced these events during the current year.
a. December revenue totaled $110,000, and in addition, Sea Spray collected sales tax of 5%. The tax amount will be sent to the state of Maine early in January.
b. On October 31, Sea Spray signed a 6 month, 7% note payable to purchase a boat costing $90,000. The note requires payment of principal and interest at maturity.
c. On August 31, Sea Spray received cash of $1,800 in advance for service revenue. This revenue will be earned evenly over 6 months.
d. Revenues of $900,000 were covered by Sea Spray’s service warranty. At January 1, estimated warranty payable was $11,300. During the year, Sea Spray recorded warranty expense of $31,000 and paid warranty claims of $34,700.
e. Sea Spray owes $100,000 on a long term note payable. At December 31, 6% interest for the year plus $20,000 of this principal are payable within 1 year.
Required
For each item, indicate the account and the related amount to be reported as a current liability on the Sea Spray Marine balance sheet at December 31.
(Learning Objective 1: Recording liability related transactions) The following transactions of Smooth Sounds Music Company occurred during 20X5 and 20X6:
|
20X5 |
|
|
Mar. 3 |
Purchased a Steinway piano (inventory) for $40,000, signing a 6 month, 8% note payable. |
|
Apr. 30 |
Borrowed $50,000 on a 9% note payable that calls for annual installment payments of $25,000 principal plus interest. Record the short term note payable in a separate account from the long term note payable. |
|
Sept. 3 |
Paid the 6 month, 8% note at maturity. |
|
Dec. 31 |
Accrued warranty expense, which is estimated at 2% of sales of $190,000. |
|
31 |
Accrued interest on the outstanding note payable. |
|
20X6 |
|
|
Apr. 30 |
Paid the first installment plus interest for 1 year on the outstanding note payable. |
Required
Record the transactions in Smooth Sounds’ journal. Explanations are not required.
(Learning Objective 2, 5: Issuing bonds at a discount, amortizing by the straight line method, and reporting bonds payable on the balance sheet) On February 28, 20X4, ETrade Inc., issues 8 1/2%, 20 year bonds payable with a face value of $200,000. The bonds pay interest on February 28 and August 31. ETrade amortizes bonds by the straight line method.
Required
1. If the market interest rate is 7 5/8% when ETrade issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.
2. If the market interest rate is 9% when ETrade issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.
Assume that the issue price of the bonds is 97. Journalize the following bond transactions.
a. Issuance of the bonds on February 28, 20X4.
b. Payment of interest and amortization of the bonds on August 31, 20X4.
c. Accrual of interest and amortization of the bonds on December 31, 20X4.
d. Payment of interest and amortization of the bonds on February 28, 20X5.
4. Report interest payable and bonds payable as they would appear on the ETrade balance sheet at December 31, 20X4.
(Learning Objective 2: Accounting for bonds payable at a discount and amortizing by the straight line method)
|
2007 |
|
|
Jan. 1 |
Issued $500,000 of 8%, 10 year bonds payable at 97. |
|
July 1 |
Paid semiannual interest and amortized bonds by the straight line method on the 8% bonds payable. |
|
Dec. 31 |
Accrued semiannual interest expense and amortized bonds by the straight line method on the 8% bonds payable. |
|
2008 |
|
|
Jan. 1 |
Paid semiannual interest. |
|
2017 |
|
|
Jan. 1 |
Paid the 8% bonds at maturity. |
2. At December 31, 2007, after all year end adjustments, determine the carrying amount of Trekker’s bonds payable, net.
3. For the 6 months ended July 1, 2007, determine for Trekker:
a. Interest expense b. Cash interest paid
What causes interest expense on the bonds to exceed cash interest paid?
(Learning Objective 2, 3, 5: Analyzing a company’s long term debt and reporting long term debt on the balance sheet (effective interest method)) Notes to the E Z Boy Recliners financial statements reported the following data on December 31, Year 1 (the end of the fiscal year):
|
Note 6. Indebtedness Bonds payable, 5%, due in Year 6 |
$600,000 |
|
|
Less: Discount |
(25,274) |
$574,726 |
|
Notes payable, 8.3%, payable in $50,000 annual installments starting in Year 5 |
250,000 |
|
E Z Boy amortizes bonds by the effective interest method.
Required
1. Answer the following questions about E Z Boy’s long term liabilities:
a. What is the maturity value of the 5% bonds?
b. What are E Z Boy’s annual cash interest payments on the 5% bonds?
c. What is the carrying amount of the 5% bonds at December 31, year 1?
2. Prepare an amortization table through December 31, Year 4, for the 5% bonds. The market interest rate for these bonds was 6%. E Z Boy pays interest annually on December 31. How much is E Z Boy’s interest expense on the 5% bonds for the year ended December 31, Year 4?
3. Show how E Z Boy Recliners, would report the bonds payable and notes payable at December 31, Year 4.
(Learning Objective 2, 3, 5: Issuing convertible bonds at a discount, amortizing by the effective interest method, retiring bonds early, converting bonds, and reporting the bonds payable on the balance sheet) On December 31, 20X7, Digital Connections issued 8%, 10 year convertible bonds payable with a maturity value of $500,000. The semiannual interest dates are June 30 and December 31. The market interest rate is 9%, and the issue price of the bonds is 94. Digital Connections amortizes bonds by the effective interest method.
Required
1. Prepare an effective interest method amortization table for the first 4 semiannual interest periods. 2. Journalize the following transactions:
a. Issuance of the bonds on December 31, 20X7. Credit Convertible Bonds Payable.
b. Payment of interest and amortization of the bonds on June 30, 20X8.
c. Payment of interest and amortization of the bonds on December 31, 20X8.
d. Conversion by the bondholders on July 1, 20X9, of bonds with face value of $200,000 into 10,000 shares of Digital Connections’ $1 par common stock.
3. Show how Digital Connections would report the remaining bonds payable on its balance sheet at December 31, 20X9.
(Learning Objective 4: Financing operations with debt or with stock) Outback Sporting Goods is embarking on a massive expansion. Assume plans call for opening 20 new stores during the next 2 years. Each store is scheduled to be 50% larger than the company’s existing locations, offering more items of inventory, and with more elaborate displays. Management estimates that company operations will provide $1 million of the cash needed for expansion. Outback must raise the remaining $6 million from outsiders. The board of directors is considering obtaining the $6 million either through borrowing or by issuing common stock.
Required
Write a memo to Outback’s management discussing the advantages and disadvantages of borrowing and of issuing common stock to raise the needed cash. Which method of raising the funds would you recommend?
(Learning Objective 5: Reporting liabilities on the balance sheet; times interest earned ratio) The accounting records of Pacer Foods, Inc., include the following items at December 31, 20X8:
|
Mortgage note payable, current |
$ 50,000 |
Accumulated depreciation, equipment |
$219,000 |
|
Accumulated pension benefit obligation |
463,000 |
Discount on bonds payable (all long term) |
7,000 |
|
Bonds payable, long term |
490,000 |
Operating income |
291,000 |
|
Mortgage note payable, long term |
150,000 |
Equipment |
487,000 |
|
Bonds payable, current portion |
70,000 |
Pension plan assets (market value) |
382,000 |
|
Interest expense |
67,000 |
Interest payable |
9,000 |
Required
1. Show how each relevant item would be reported on the Pacer Foods, Inc., classified balance sheet, including headings and totals for current liabilities and long term liabilities.
2. Answer the following questions about Pacer’s financial position at December 31, 20X8:
a. What is the carrying amount of the bonds payable (combine the current and longterm amounts)?
b. Why is the interest payable amount so much less than the amount of interest expense? (Challenge)
How many times did Pacer cover its interest expense during 20X8?
(Learning Objective 1: Measuring current liabilities) Goldwater Corporation experienced these 5 events during the current year:
a. December sales totaled $50,000, and Goldwater collected an additional state sales tax of 6%. This amount will be sent to the state of Indiana early in January.
b. On November 30, Goldwater received rent of $6,000 in advance for a lease on unused store space. This rent will be earned evenly over 3 months.
c. On September 30, Goldwater signed a 6 month, 9% note payable to purchase store fixtures costing $12,000. The note requires payment of principal and interest at maturity.
d. Sales of $400,000 were covered by Goldwater’s product warranty. At January 1, estimated warranty payable was $12,400. During the year, Goldwater recorded warranty expense of $22,300 and paid warranty claims of $24,600.
e. Goldwater owes $100,000 on a long term note payable. At December 31, 6% interest since July 31 and $20,000 of this principal are payable within 1 year.
Required
For each item, indicate the account and the related amount to be reported as a current liability on the Goldwater Corporation balance sheet at December 31.
(Learning Objective 1: Recording liability related transactions) Assume that the following transactions of Mardell Book Stores occurred during 20X8 and 20X9.
Required
Record the transactions in the company’s journal. Explanations are not required.
|
20X8 |
|
|
Jan. 9 |
Purchased store fixtures at a cost of $50,000, signing an 8%, 6 month note payable for that amount. |
|
June 30 |
Borrowed $200,000 on a 9% note payable that calls for annual installment payments of $50,000 principal plus interest. Record the short term note payable in a separate account from the longterm note payable. |
|
July 9 |
Paid the 6 month, 8% note at maturity. |
|
Dec. 31 |
Accrued warranty expense, which is estimated at 3% of sales of $600,000. |
|
31 |
Accrued interest on the outstanding note payable. |
|
20X9 |
|
|
June 30 |
Paid the first installment and interest for 1 year on the outstanding note payable. |
(Learning Objective 2: Recording bond transactions (at par) and reporting bonds payable on the balance sheet) Assume the board of directors of Fiesta Bowl Arizona Corporation authorizes the issue of $1 million of 8%, 20 year bonds payable. The semiannual interest dates are March 31 and September 30. The bonds are issued on March 31, 20X8, at par.
Required
1. Journalize the following transactions:
a. Issuance of the bonds on March 31, 20X8.
b. Payment of interest on September 30, 20X8.
c. Accrual of interest on December 31, 20X8.
d. Payment of interest on March 31, 20X9.
2. Report interest payable and bonds payable as they would appear on the Fiesta Bowl Arizona Corporation balance sheet at December 31, 20X8.
(Learning Objective 2, 5: Issuing notes at a discount, amortizing by the straight line method, and reporting notes payable on the balance sheet) On February 28, 20X8, Kids R Us, Inc., issues 7%, 10 year notes payable with a face value of $300,000. The notes pay interest on February 28 and August 31, and Kids R Us amortizes bonds by the straight line method.
Required
1. If the market interest rate is 6% when Kids R Us issues its notes, will the notes be priced at par, at a premium, or at a discount? Explain.
2. If the market interest rate is 8% when Kids R Us issues its notes, will the notes be priced at par, at a premium, or at a discount? Explain.
3. Assume that the issue price of the notes is 96. Journalize the following note payable transactions:
a. Issuance of the notes on February 28, 20X8.
b. Payment of interest and amortization of the bonds on August 31, 20X8.
c. Accrual of interest and amortization of the bonds on December 31, 20X8.
d. Payment of interest and amortization of the bonds on February 28, 20X9.
4. Report interest payable and notes payable as they would appear on the Kids R Us balance sheet at December 31, 20X8.
(Learning Objective 2: Accounting for bonds payable at a discount and amortizing by the straight line method)
|
20X4 |
|
|
Jan. 1 |
Issued $100,000 of 8%, 5 year bonds payable at 94. |
|
July 1 |
Paid semiannual interest and amortized the bonds by the straight line method on our 8% bonds payable. |
|
Dec. 31 |
Accrued semiannual interest expense and amortized the bonds by the straight line method on our 8% bonds payable. |
|
20X9 |
|
|
Jan. 1 |
Paid semiannual interest. |
|
20X5 |
|
|
Jan. 1 |
Paid the 8% bonds at maturity. |
2. At December 31, 20X4, after all year end adjustments, determine the carrying amount of Ski Boats Unlimited’s bonds payable, net.
3. For the 6 months ended July 1, 20X4, determine the following for Ski Boats Unlimited:
a. Interest expense b. Cash interest paid What causes interest expense on the bonds to exceed cash interest paid?
(Learning Objective 2, 3, 5: Issuing convertible bonds at a premium, by the effective interest method, retiring bonds early, converting bonds, and reporting the bonds payable on the balance sheet) On December 31, 20X6, Caribbean Cruise Lines (CCL) issues 9%, 10 year convertible bonds payable with a maturity value of $300,000. The semiannual interest dates are June 30 and December 31. The market interest rate is 8%, and the issue price of the bonds is 106. CCL amortizes bonds by the effective interest method.
Required
1. Prepare an effective interest method amortization table for the first 4 semiannual interest periods.
2. Journalize the following transactions.
a. Issuance of the bonds on December 31, 20X6. Credit Convertible Bonds Payable.
b. Payment of interest and amortization of the bonds on June 30, 20X7.
c. Payment of interest and amortization of the bonds on December 31, 20X7.
d. Conversion by the bondholders on July 1, 20X8, of bonds with face value of $150,000 into 10,000 shares of CCL’s $1 par common stock.
3. Show how Caribbean Cruise Lines would report the remaining bonds payable on its balance sheet at December 31, 20X8.
(Learning Objective 4: Financing operations with debt or with stock) Two businesses in very different circumstances are pondering how to raise $2 million. Pizzazz.com has fallen on hard times. Net income has been low for the last 3 years, even falling by 10% from last year’s level of profits, and cash flow also took a nose dive. Top management has experienced some turnover and has stabilized only recently. To become competitive again, Pizzazz.com needs $2 million to invest in new technology. MeToo Personals is in the midst of its most successful period since it began operations in 2005. Net income has increased by 25%. The outlook for the future is bright with new markets opening up and competitors unable to compete with MeToo Personals. As a result MeToo is planning a large scale expansion.
Required
Propose a plan for each company to raise the needed cash. Which company should borrow? Which company should issue stock? Consider the advantages and the disadvantages of raising money by borrowing and by issuing stock and discuss them in your answer.
(Learning Objective 5: Reporting liabilities on the balance sheet, times interest earned ratio) The accounting records of Hartford Financial Services include the following items at December 31, 20X6:
|
Interest expense |
39,000 |
|
Bonds payable, current portion |
50,000 |
|
Accumulated depreciation, building |
70,000 |
|
Mortgage note payable, long term |
215,000 |
|
Bonds payable, long term |
250,000 |
|
Building |
160,000 |
|
Premium on bonds payable(all long term) |
$ 13,000 |
|
Interest payable |
3,900 |
|
Pension plan assets(market value) |
402,000 |
|
Operating income |
104,000 |
|
Accumulated pension benefit obligation |
436,000 |
Required
1. Show how each relevant item would be reported on Hartford Financial Services’ classified balance sheet. Include headings and totals for current liabilities and long term liabilities.
2. Answer the following questions about the financial position of Hartford Financial Services at December 31, 20X6:
a. What is the carrying amount of the bonds payable (combine the current and long term amounts)?
b. Why is the interest payable amount so much less than the amount of interest expense? (Challenge)
How many times did Hartford cover its interest expense during 20X6?
(Learning Objective 2: Exploring an actual bankruptcy) In 20X2, Enron Corporation filed for Chapter 11 bankruptcy protection, shocking the business community: How could a company this large and this successful go bankrupt? This case explores the causes and the effects of Enron’s bankruptcy. At December 31, 20X0, and for the 4 years ended on that date, Enron reported the following (amounts in millions):
|
Balance Sheet (summarized) |
||||
|
Total assets |
$65,503 |
|||
|
Total liabilities |
54,033 |
|||
|
Total stockholders’ equity |
11,470 |
|||
|
Income Statements (excerpts) |
||||
|
20X0 |
19X9 |
19X8 |
19X7 |
|
|
Net income |
$979* |
$893 |
$703 |
$105 |
Unknown to investors and lenders, Enron also controlled hundreds of partnerships that owed vast amounts of money. These special purpose entities (SPEs) did not appear on the Enron financial statements. Assume that the SPEs’ assets totaled $7,000 million and their liabilities stood at $6,900 million; assume a 10% interest rate on these liabilities. During the 4 year period up to 20X0, Enron’s stock price shot up from $17.50 to $90.56. Enron used its escalating stock price to finance the purchase of the SPEs by guaranteeing lenders that Enron would give them Enron stock if the SPEs could not pay their loans. In 20X1, the SEC launched an investigation into Enron’s accounting practices. It was alleged that Enron should have been including the SPEs in its financial statements all along. Enron then restated net income for years up to 20X0, wiping out nearly $600 million of total net income (and total assets) for this 4 year period. Enron’s stock price tumbled, and the guarantees to the SPEs’ lenders added millions to Enron’s liabilities (assume the full amount of the SPEs’ debt). To make matters worse, the assets of the SPEs lost much of their value; assume that their market value is only $500 million.
Required
1. Compute the debt ratio that Enron reported at the end of 20X0. Recompute this ratio after including the SPEs in Enron’s financial statements. Also compute Enron’s times interest earned ratio both ways for 20X0. Assume that the changes to Enron’s financial position occurred during 20X0.
2. Why does it appear that Enron failed to include the SPEs in its financial statements? How do you view Enron after including the SPEs in the company’s financial statements? (Challenge)
(Learning Objective 4: Analyzing alternative ways of raising $5 million) Business is going well for Park ’N Fly, the company that operates remote parking lots near major airports. The board of directors of this family owned company believes that Park ’N Fly could earn an additional $1.5 million income before interest and taxes by expanding into new markets. However, the $5 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders. The directors are considering 3 financing plans.
Plan A is to borrow at 6%. Plan B is to issue 100,000 shares of common stock. Plan C is to issue 100,000 shares of nonvoting, $3.75 preferred stock ($3.75 is the annual dividend paid on each share of preferred stock).* Park ’N Fly presently has net income of $3.5 million and 1 million shares of common stock outstanding. The company’s income tax rate is 35%.
Required
1. Prepare an analysis to determine which plan will result in the highest earnings per share of common stock.
(Learning Objective 2, 3: Measuring profitability based on different inventory and depreciation methods) Suppose you are considering investing in 2 businesses, La Petite France Bakery and Burgers Ahoy!. The 2 companies are virtually identical, and both began operations at the beginning of the current year. During the year, each company purchased inventory as follows:
|
Jan. 4 |
10,000 units at $4 |
= |
40,000 |
|
Apr. 6 |
5,000 units at 5 |
= |
25,000 |
|
Aug. 9 |
7,000 units at 6 |
= |
42,000 |
|
Nov. 27 |
10,000 units at 7 |
= |
70,000 |
|
Totals |
32,000 |
$177,000 |
During the first year, both companies sold 25,000 units of inventory. In early January, both companies purchased equipment costing $150,000 that had a 10 year estimated useful life and a $20,000 residual value. La Petite France uses the inventory and depreciation methods that maximize reported income. By contrast, Burgers uses the inventory and depreciation methods that minimize income tax payments. Assume that both companies’ trial balances at December 31 included the following:
|
Sales revenue |
$350,000 |
|
Operating expenses |
50,000 |
The income tax rate is 40%.
Required
1. Prepare both companies’ income statements.
2. Which company has more cash to invest in promising projects? If prices continue rising over the long term, which company would you prefer to invest in? Why? (Challenge)
(Learning Objective 1, 6: Plant assets and intangible assets) The following questions are unrelated except that they all apply to plant assets and intangible assets:
1. The manager of Carpet World regularly debits the cost of repairs and maintenance of plant assets to Plant and Equipment. Why would she do that, since she knows she is violating GAAP?
2. The manager of Horizon Software regularly buys plant assets and debits the cost to Repairs and Maintenance Expense. Why would he do that, since he knows this action violates GAAP?
3. It has been suggested that because many intangible assets have no value except to the company that owns them, they should be valued at $1.00 or zero on the balance sheet. Many accountants disagree with this view. Which view do you support? Why?
(Learning Objective 2, 3, 6: Analyzing plant assets) Refer to YUM! Brands’ financial statements in Appendix A at the end of the book, and answer the following questions: 1. Which depreciation method does YUM use for reporting to stockholders and creditors in the financial statements? What type of depreciation method does the company probably use for income tax purposes? Why is this method preferable for tax purposes?
2. Depreciation expense is embedded in the expense amounts listed on the income statement. It is reported on the statement of cash flows. How much was YUM’s depreciation and amortization expense during fiscal year 2006? How much was YUM’s accumulated depreciation and amortization at the end of 2006? Explain why accumulated depreciation and amortization exceeds depreciation and amortization expense for the current year.
3. How much did YUM spend on property, plant, and equipment during 2006? In 2005? Evaluate the trend in these capital expenditures as to whether it conveys good news or bad news for YUM. Explain
4. YUM reports 2 separate intangible assets. What are they? How does YUM account for each of these intangibles over its lifetime?
(Learning Objective 2, 4, 7: Explaining plant asset activity) Refer to the Pier 1 Imports financial statements in Appendix B at the end of this book. This case leads you through a comprehensive analysis of Pier 1’s long term assets. Its purpose is to show you how to account for plant asset (properties) transactions in summary form.
1. On the statement of cash flows, how much did Pier 1 pay for capital expenditures during 2006? How much cash did Pier 1 receive from the disposition of properties (fixed assets) during 2006? Consider the loss on disposal of fixed assets reported under Cash Flow from Operating Activities, and determine the book value of plant assets that Pier 1 sold during 2006. Do not round these amounts.
2. Use the answer to requirement 1, plus the amount of depreciation and amortization reported on the statement of cash flows, to explain all the activity in the Properties, Net account during 2006. Of the total depreciation and amortization for 2006, assume that $10 million related to Other Noncurrent Assets and not to Properties. Use either a T account or an equation for your analysis. For this requirement, show amounts in millions and round to the nearest $1 million.
3. Which depreciation method does Pier 1 use? Over what useful life does Pier 1 depreciate buildings, equipment, furniture, and fixtures?
4. Were Pier 1’s plant assets proportionately newer or older at the end of 2006 (versus 2005)? Explain your answer. (Challenge)
Visit a local business.
Required
1. List all its plant assets.
2. If possible, interview the manager. Gain as much information as you can about the business’s plant assets. For example, try to determine the assets’ costs, the depreciation method the company is using, and the estimated useful life of each asset category. If an interview is impossible, then develop your own estimates of the assets’ costs, useful lives, and book values, assuming an appropriate depreciation method.
3. Determine whether the business has any intangible assets. If so, list them and gain as much information as possible about their nature, cost, and estimated useful lives. 4. Write a detailed report of your findings and be prepared to present your results to the class.
Assume that the Estée Lauder Companies, Inc., faced the following liability situations at June 30, 20X4, the end of the company’s fiscal year. Show how Estée Lauder would report these liabilities on its balance sheet at June 30, 20X4.
a. Salary expense for the last payroll period of the year was $900,000. Of this amount, employees’ withheld income tax totaled $88,000 and FICA taxes were $61,000. These payroll amounts will be paid in early July.
b. On fiscal year 20X4 sales of $400 million, management estimates warranty expense of 2%. One year ago, at June 30, 20X3, Estimated Warranty Payable stood at $3 million. Warranty payments were $9 million during the year ended June 30, 20X4. c. The company pays royalties on its purchased trademarks. Royalties for the trademarks are equal to a percentage of Estée Lauder’s sales. Assume that sales in 20X4 were $400 million and were subject to a royalty rate of 3%. At June 30, 20X4, Estée Lauder owes two thirds of the year’s royalty, to be paid in July.
d. Long term debt totals $100 million and is payable in annual installments of $10 million each. The interest rate on the debt is 7%, and the interest is paid each December 31.
Which company, South west or UAL, would you expect to have the higher debt ratio? Compute the 2 companies’ debt ratios to confirm your opinion. Summarized balance sheets follow at December 31, 2006.
|
Millions |
||
|
Southwest |
UAL |
|
|
Total assets |
$13,460 |
$25,369 |
|
Total liabilities |
$ 7,011 |
$23,221 |
|
Stockholders’ equity |
6,449 |
2,148 |
|
Total liabilities and equity |
$13,460 |
$25,369 |
The Cessna Aircraft Company has outstanding an issue of 8% convertible bonds that mature in 2018. Suppose the bonds are dated October 1, 2008, and pay interest each April 1 and October 1.
Required
1. Complete the following effective interest amortization table through October 1, 2010. Bond Data
Maturity (face) value—$100,000 Stated interest rate—8% Interest paid—4% semiannually, $4,000 $100,000 × 0.08 × 6/12) Market interest rate at the time of issue—9% annually, 4 1/2% semiannually Issue price—93.5
|
Amortization Table |
|||||
|
A |
B |
C |
D |
E |
|
|
Semiannual Interest Date |
Interest Payment (4% of Maturity Amount) |
Interest Expense (4½% of Preceding Bond Carrying Amount) |
Discount Amortization (B A) |
Discount Account Balance (Preceding D C) |
Bond Carrying Amount($100,000 D) |
|
10 1 08 |
|||||
|
4 1 09 |
|||||
|
10 1 09 |
|||||
|
4 1 10 |
|||||
|
10 1 10 |
|||||
2. Using the amortization table, record the following transactions:
a. Issuance of the bonds on October 1, 2008.
b. Accrual of interest and amortization of the bonds on December 31, 2008.
c. Payment of interest and amortization of the bonds on April 1, 2009.
d. Conversion of one third of the bonds payable into no par stock on October 2, 2010. For no par stock, transfer the bond carrying amount into the Common Stock account. There is no Additional Paid in Capital account.
e. Retirement of two thirds of the bonds payable on October 2, 2010. Purchase price of the bonds was based on their call price of 102.
(Learning Objective 4: Earnings per share effects of financing with bonds versus stock) Assume that YouTube, Inc., needs $1 million to expand the company. YouTube is considering the issuance of either
• $1,000,000 of 7% bonds payable to borrow the money, or
• 100,000 shares of common stock at $10 per share
Before any new financing, YouTube expects to earn net income of $400,000, and the company already has 200,000 shares of common stock outstanding. YouTube believes the expansion will increase income before interest and income tax by $200,000. YouTube’s income tax rate is 30%.To determine which plan is likely to result in the higher earnings per share. Based solely on the earnings per share comparison, which financing plan would you recommend for YouTube?
(Learning Objective 4: Computing the times interest earned ratio) Zigzag International reported the following data in 20X8 (in millions):
|
Net operating revenues |
$29.2 |
|
Operating expenses |
25.3 |
|
Operating income |
3.9 |
|
Nonoperating items: |
|
|
Interest expense |
(1.4) |
|
Other |
(0.2) |
|
Net income |
$ 2.3 |
Compute Zigzag’s times interest earned ratio, and write a sentence to explain what the ratio value means. Would you be willing to lend Zigzag $1 million? State your reason.
(Learning Objective 5: Reporting liabilities, including capital lease obligations) Trinidad Industries has the following selected accounts at December 31, 20X7:
|
Bonds payable |
7,000 |
|
Equipment |
44,000 |
|
Current portion of bonds payable |
10,000 |
|
Notes payable, long term |
31,000 |
|
Interest payable (due March 1, 20X8) |
$300,000 |
|
Accounts payable |
114,000 |
|
Discount on bonds payable (all long term) |
50,000 |
|
Accounts receivable |
60,000 |
Prepare the liabilities section of Trinidad’s balance sheet at December 31, 20X7, to show how Trinidad would report these items.
(Learning Objective 1: Recording note payable transactions) Joy’s Lahaina Grill completed the following note payable transactions.
|
20X6 |
|
|
July1 |
Purchased kitchen equipment costing $60,000 by issuing a 1 year, 8% note payable. |
|
Dec. 31 |
Accrued interest on the note payable. |
|
20X7 |
|
|
July 1 |
Paid the note payable at maturity. |
1. How much interest expense must be accrued at December 31, 20X6?
2. Determine the amount of Joy’s final payment on July 1, 20X7.
3. How much interest expense will Joy’s report for 20X6 and for 20X7?
(Learning Objective 1, 5: Analyzing liabilities) Geodesic Domes, Inc., builds environmentally sensitive structures. The company’s 20X8 revenues totaled $360 million, and at December 31, 20X8, the company had $65 million in current assets. The December 31, 20X8, balance sheet reported the liabilities and stockholders’ equity as follows.
|
At year end (In millions) |
20X8 |
20X7 |
|
|
Liabilities and Shareholders’ Equity |
|||
|
Current Liabilities |
|||
|
Accounts payable |
$ 29 |
$ 26 |
|
|
Accrued expenses |
16 |
20 |
|
|
Employee compensation and benefits |
9 |
11 |
|
|
Current portion of long term debt |
59 |
— |
|
|
Total Current Liabilities |
115 |
57 |
|
|
Long Term Debt |
31 |
115 |
|
|
Postretirement Benefits Payable |
21 |
27 |
|
|
Other Liabilities |
73 |
17 |
|
|
Shareholders’ Equity |
$299 |
70 |
|
|
Total Liabilities and Shareholders’ Equity |
5 |
$286 |
|
Required
1. Describe each of Geodesic Domes, Inc.’s, liabilities and state how the liability arose.
2. What were the company’s total assets at December 31, 20X8? Was the company’s debt ratio at the end of 20X8 high, low, or in a middle range?
(Learning Objective 1: Reporting a contingent liability) L&M Electronics’ revenues for 20X3 totaled $25.9 million. As with most companies, L&M is a defendant in lawsuits related to its products. Note 14 of the L&M Annual Report for 20X3 reported: The company is involved in various legal proceedings. It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.
Required
1. Suppose L&M’s lawyers believe that a significant legal judgment against the company is reasonably possible. How should L&M report this situation in its financial statements?
2. Suppose L&M’s lawyers believe it is probable that a $2 million judgment will be rendered against the company. Report this situation in L&M’s financial statements. Journalize any entry required by GAAP. Explanations are not required.
(Learning Objective 1, 5: Reporting current and long term liabilities) Assume that Pinnacle Golf Equipment completed these selected transactions during December 20X7.
a. Sales of $2,000,000 are subject to estimated warranty cost of 3%. The estimated warranty payable at the beginning of the year was $30,000, and warranty payments for the year totaled $55,000.
b. On December 1, Pinnacle signed a $100,000 note payable that requires annual payments of $20,000 plus 9% interest on the unpaid balance each December 1.
c. Academy Sports, a chain of sporting goods stores, ordered $100,000 of golf equipment. With its order, Academy Sports sent a check for $100,000, and Pinnacle shipped $85,000 of the goods. Pinnacle will ship the remainder of the goods on January 3, 20X8.
d. The December payroll of $100,000 is subject to employee withheld income tax of 9% and FICA tax of 8%. On December 31, Pinnacle pays employees their take home pay and accrues all tax amounts.
Required
Classify each liability as current or long term and report the liability and its amount that would appear on the Pinnacle Golf Equipment balance sheet at December 31, 20X7. Show a total for current liabilities.
(Learning Objective 2, 3: Measuring cash amounts for a bond; amortizing the bonds by the straight line method) City Bank has $200,000 of 8% debenture bonds outstanding. The bonds were issued at 102 in 2004 and mature in 2024.
Required
1. How much cash did City Bank receive when it issued these bonds?
2. How much cash in total will City Bank pay the bondholders through the maturity date of the bonds? (Challenge)
3. Take the difference between your answers to Requirements 1 and 2. This difference represents City Bank’s total interest expense over the life of the bonds. (Challenge)
4. Compute City Bank’s annual interest expense by the straight line amortization method. Multiply this amount by 20. Your 20 year total should be the same as your answer to
(Learning Objective 4: Analyzing alternative plans for raising money) Altman & Associates is considering 2 plans for raising $500,000 to expand operations. Plan A is to borrow at 8%, and plan B is to issue 100,000 shares of common stock. Before any new financing, Altman has net income of $500,000 and 100,000 shares of common stock outstanding. Assume you own most of Altman’s existing stock. Management believes the company can use the new funds to earn additional income of $420,000 before interest and taxes. Altman’s income tax rate is 30%.
Required
1. Analyze Altman’s situation to determine which plan will result in higher earnings per share.
2. Which plan results in the higher earnings per share? Which plan allows you to retain control of the company? Which plan creates more financial risk for the company? Which plan do you prefer? Why? Present your conclusion in a memo to Altman’s board of directors.
(Learning Objective 1, 5: Reporting current liabilities) Assume the top management of Best Buy Co., Inc., examines company accounting records at February 7, three weeks before the end of the fiscal year (amounts in billions):
|
Total current assets |
$ 8.0 |
|
Noncurrent asset |
3.9 |
|
$11.9 |
|
|
Total current liabilities |
6.0 |
|
Noncurrent liabilities |
0.6 |
|
Owners’ equity |
5.3 |
|
$11.9 |
Suppose Best Buy’s top management wants to achieve a current ratio of 1.4. How much in current liabilities should Best Buy pay off within the next 3 weeks to achieve its goal? (Challenge)
(Learning Objective 2, 3, 5: Refinancing old bonds payable with new bonds) United Products completed one of the most famous debt refinancings in history. A debt refinancing occurs when a company issues new bonds payable to retire old bonds. The company debits the old bonds payable and credits the new bonds payable. United had $125 million of 5 1/2% bonds payable outstanding, with 20 years to maturity. United retired these old bonds by issuing $75 million of new 9% bonds payable to the holders of the old bonds and paying the bondholders $13 million in cash. United issued both groups of bonds at par so there was no bond premium or discount. At the time of the debt refinancing, United had total assets of $600 million and total liabilities of $450 million. Net income for the most recent year was $6.5 million on sales of $1 billion.
Required
1. Journalize the debt refinancing transaction. (Challenge)
2. Compute annual interest expense for both the old and the new bond issues. (Challenge)
3. Why did United Products refinance the old 5 1/2% bonds payable with the new 9% bonds? Consider interest expense, net income, and the debt ratio. (Challenge)
(Learning Objective 2, 3: Analyzing bond transactions) This (adapted) advertisement appeared in The Wall Street Journal. (Note: A subordinated debenture is an unsecured bond payable whose rights are less than the rights of other bondholders.)
Required
1. Journalize Mark IV’s issuance of these bonds payable on March 15, 2007. No explanation is required, but describe the transaction in detail, indicating who received cash, who paid cash, and how much.
2. Why is the stated interest rate on these bonds so high?
3. Compute the semi annual cash interest payment on the bonds.
4. Compute the semi annual interest expense under the straight line amortization method.
5. Compute both the first year (from March 15, 2007, to March 15, 2008) and the second year interest expense (March 15, 2008, to March 15, 2009) under the effective interest amortization method. The market rate of interest at the date of issuance was 14%. Why is interest expense greater in the second year?
The Tale of the Segments
The segment information from the 1998 annual report of the Kellogg Company follows:
The Company manufactures and markets ready to eat cereal and other grain based convenience food products, including toaster pastries, frozen waffles, cereal bars, and bagels, throughout the world. Principal markets for these products include the United States and Great Britain. Operations are managed via four major geographic areas North America, Europe, Asia Pacific, and Latin America—which are the basis of the Company’s reportable operating segment information disclosed below. The measurement of operating segment results is generally consistent with the presentation of the Consolidated Statement of Earnings and Balance Sheet. Intercompany transactions between reportable operating segments were insignificant in all periods presented.
|
(millions) |
1998 |
1997 |
1996 |
|
Net sales |
|||
|
North America |
$4,175.9 |
$4,260.8 |
$4,086.3 |
|
Europe |
1,698.5 |
1,702.0 |
1,749.6 |
|
Asia Pacific |
377.0 |
411.9 |
433.2 |
|
Latin America |
510.7 |
455.4 |
407.5 |
|
Consolidated |
$6,762.1 |
$6,830.1 |
$6,676.6 |
|
Operating profit excluding non recurring charges |
|||
|
North America |
$ 831.6 |
$ 884.8 |
$ 762.3 |
|
Europe |
211.4 |
305.8 |
305.1 |
|
Asia Pacific |
48.3 |
51.1 |
61.3 |
|
Latin America |
107.2 |
111.8 |
94.2 |
|
Corporate and other |
(232.9) |
(160.3) |
(127.9) |
|
Consolidated (a) |
$ 965.6 |
$1,193.2 |
$1,095.0 |
|
Depreciation and amortization |
|||
|
North America |
$ 152.1 |
$ 153.7 |
$ 135.1 |
|
Europe |
54.6 |
59.6 |
59.9 |
|
Asia Pacific |
21.3 |
21.9 |
20.7 |
|
Latin America |
14.2 |
12.5 |
10.2 |
|
Corporate and other |
35.9 |
39.6 |
25.6 |
|
Consolidated |
$ 278.1 |
$ 287.3 |
$ 251.5 |
|
(millions) |
1998 |
1997 |
1996 |
|
Total assets |
|||
|
North America |
$2,430.8 |
$2,519.2 |
$2,574.0 |
|
Europe |
1,336.0 |
1,154.5 |
1,254.1 |
|
Asia Pacific |
328.4 |
309.5 |
449.2 |
|
Latin America |
380.9 |
361.4 |
285.6 |
|
Corporate and other |
1,516.7 |
1,405.1 |
1,316.5 |
|
Elimination entries |
(941.3) |
(872.1) |
(829.4) |
|
Consolidated |
$5,051.5 |
$4,877.6 |
$5,050.0 |
|
(millions) |
1998 |
1997 |
1996 |
|
Additions to long lived assets |
|||
|
North America |
$ 82.5 |
$ 166.5 |
$ 544.6 |
|
Europe |
169.1 |
60.7 |
71.9 |
|
Asia Pacific |
40.3 |
24.3 |
34.7 |
|
Latin America |
41.7 |
43.3 |
17.7 |
|
Corporate and other |
98.5 |
94.9 |
138.3 |
|
Consolidated |
$ 432.1 |
$ 389.7 |
$ 807.2 |
|
(a) Reconciliation to operating profit as reported: |
1998 |
1997 |
1996 |
|
Operating profit excluding nonrecurring charges |
$ 965.6 |
$1,193.2 |
$1,095.0 |
|
Non recurring charges |
(70.5) |
(184.1) |
(136.1) |
|
Operating profit as reported |
$ 895.1 |
$1,009.1 |
$ 958.9 |
|
Supplemental geographic information is provided below for revenues from external |
|||
|
customers and long lived assets: |
|||
|
(millions) |
1998 |
1997 |
1996 |
|
Net sales |
|||
|
United States |
$3,858.0 |
$3,922.2 |
$3,733.7 |
|
Great Britain |
743.6 |
719.0 |
673.8 |
|
Other foreign countries |
2,160.5 |
2,188.9 |
2,269.1 |
|
Consolidated |
$6,762.1 |
$6,830.1 |
$6,676.6 |
|
Long lived assets |
|||
|
United States |
$1,644.2 |
$1,707.1 |
$1,720.0 |
|
Great Britain |
553.0 |
452.4 |
463.2 |
|
Other foreign countries |
1,330.3 |
1,225.2 |
1,304.3 |
|
Consolidated |
$3,527.5 |
$3,384.7 |
$3,487.5 |
|
Supplemental product information is provided below for revenues from external |
|||
|
customers: |
|||
|
(millions) |
1998 |
1997 |
1996 |
|
Ready to eat cereal net sales |
$5,265.4 |
$5,435.8 |
$5,543.8 |
|
Convenience foods net sales |
1,496.7 |
1,394.3 |
1,132.8 |
|
Consolidated |
$6,762.1 |
$6,830.1 |
$6,676.6 |
Required
a. 1. Prepare horizontal common size analysis for net sales by segment and consolidated total. Use 1996 as the base.
2. Prepare horizontal common size analysis for operating profit, excluding non recurring charges by segment and consolidated total. Use 1996 as the base. (Exclude corporate and other.)
3. Prepare horizontal common size analysis for total assets by segment and consolidated total. Use 1996 as the base. (Exclude corporate and other and elimination entries.)
b. Use the supplemental geographic information for revenues from external customers and long lived assets for the following:
1. Net sales—Prepare horizontal common size. Use 1996 as the base.
2. Long lived assets—Prepare horizontal common size. Use 1996 as the base.
c. Use the supplemental product information for revenues and external customers for the following:
1. Prepare horizontal common size. Use 1996 as the base.
2. Prepare vertical common size for 1996, 1997, and 1998. Use consolidated as the base.
d. Comment on possible significant insights from the analysis in parts (a) through (c).
Stock Split
Micron Technology Inc. and subsidiaries reported the following in its 1994 annual report:
Micron Technology, Inc.
Consolidated Balance Sheet (In Part)
(Amounts in Millions)
|
September 1, 1994 |
September 2, 1993 |
||
|
Shareholders’ equity: |
|||
|
Common stock, $0.10 per value; authorized, |
|||
|
150.0 million shares; issued and outstanding, |
|||
|
101.9 and 95.8 million shares |
$ 10.2 |
$ 4.0 |
|
|
Additional paid in capital |
369.7 |
353.3 |
|
|
Retained earnings |
670.8 |
282.5 |
|
|
Unamortized stock compensation |
(1.4) |
(0.3) |
|
|
Total shareholders’ equity |
$1,049.3 |
$639.5 |
|
|
Micron Technology, Inc. |
|||
|
Consolidated Statements of Operations (In Part) |
|||
|
(Amounts in millions, except for per share amounts) |
|||
|
Fiscal year ended |
September 1, 1994 |
September 2, 1993 |
September 3, 1992 |
|
Net sales |
$1,628.6 |
$828.3 |
$506.3 |
|
Operating income |
620.1 |
165.9 |
13.7 |
|
Net income |
400.5 |
104.1 |
6.6 |
|
Earnings per share: |
|||
|
Primary |
$ 3.83 |
$ 1.04 |
$ 0.07 |
|
Fully diluted |
3.80 |
1.03 |
0.07 |
|
Number of shares used in per |
|||
|
share calculation: |
|||
|
Primary |
104.5 |
100.2 |
97.3 |
|
Fully diluted |
105.2 |
101.3 |
97.3 |
On March 1, 1994, the company’s board of directors announced a 5 for 2 stock split effected in the form of a stock dividend to shareholders of record as of April 1, 1994. A total of 60,942,448 additional shares were issued in conjunction with the stock split.
The company distributed cash in lieu of fractional shares resulting from the stock split. The company’s par value of $0.10 per share remained unchanged. As a result, $6.1 million was transferred from additional paid in capital to common stock. All historical share and per share amounts have been restated to reflect retroactively the stock split.
|
1993 Annual Report: |
|||
|
Micron Technology, Inc. |
|||
|
Consolidated Balance Sheet (In Part) |
|||
|
(Amounts in thousands) |
|||
|
September 2, 1993 |
September 3, 1992 |
||
|
Shareholders’ equity: |
|||
|
Common stock, $0.10 par value; authorized, |
|||
|
100,000,000 shares; issued and outstanding, |
|||
|
40,099,156 and 38,336,565 |
$ 4,010 |
$ 3,834 |
|
|
Additional paid in capital |
353,277 |
327,179 |
|
|
Retained earnings |
282,468 |
180,341 |
|
|
Unamortized stock compensation |
(246) |
(187) |
|
|
Total shareholders’ equity |
$639,509 |
511,167 |
|
|
Micron Technology, Inc. |
|||
|
Consolidated Statements of Operations (In Part) |
|||
|
(Amounts in thousands except for per share amounts) |
|||
|
September 2, 1993 |
September 3, 1992 |
August 29, 1991 |
|
|
Net sales |
$828,270 |
$506,300 |
$425,362 |
|
Operating income |
$165,946 |
$ 13,716 |
$ 11,761 |
|
Net income |
$104,065 |
$ 6,626 |
$ 5,079 |
|
Earnings per share: |
|||
|
Primary |
$ 2.60 |
$ 0.17 |
$ 0.13 |
|
Fully diluted |
2.57 |
0.17 |
0.13 |
|
Number of shares used in per share |
|||
|
calculations: |
|||
|
Primary |
40,070,000 |
38,912,000 |
37,821,000 |
|
Fully diluted |
40,520,000 |
38,912,000 |
38,032,000 |
Required a. The 1993 annual report indicated that 40,520,000 shares were used to compute the 1993 fully diluted earnings per share. The 1994 annual report indicated that 101,300,000 shares were used to compute the
1993 fully diluted earnings per share. Why was there the change in the number of shares? Show the calculation of the change in number of shares.
b. What caused the change in reported fully diluted earnings per share in 1993, from $2.57 to $1.03? Show the calculation.
c. Speculate on reasons for the stock split.
d. How will the book value per share be affected by the stock split?
e. For a stock split, the par, or stated value, of the stock is usually changed in proportion to the stock split, and no change is made to retained earnings, additional paid in capital, or capital stock. How was this stock split handled?
Why the Change?
USBANCOR presented the following with its 1998 annual report from the consolidated statement of income.
|
1998 |
1997 |
1996 |
|
|
Year ended December 31 |
(In thousands, except per share data) |
||
|
Income before income taxes |
$28,799 |
$32,800 |
$27,263 |
|
Provision for income taxes |
7,655 |
9,303 |
7,244 |
|
Net income |
$21,144 |
$23,497 |
$20,019 |
|
Per common share data:1 |
|||
|
Basic: |
|||
|
Net income |
|||
|
Average number of shares outstanding |
$1.51 |
$1.56 |
$1.28 |
|
Diluted: |
14,011,893 |
15,043,128 |
15,586,092 |
|
Net income |
$1.48 |
$1.54 |
$1.28 |
|
Average number of shares outstanding |
14,257,557 |
15,274,272 |
15,694,761 |
|
Cash dividends declared |
$.60 |
$.53 |
$.46 |
(1) All per share and share data have been adjusted to reflect a 3 for 1 split effected in the form of a 200% stock dividend that was distributed on July 31, 1998, to shareholders of record on July 16, 1998.
From consolidated balance sheet:
|
At December 31 |
1998 |
1997 |
|
(In thousands) |
||
|
Stockholders’ equity1 |
||
|
Preferred stock, no par value; 2,000,000 shares |
||
|
authorized: there were no shares issued and |
||
|
outstanding on December 31, 1998, and 1997 |
||
|
Common stock, par value $2.50 per share; 24,000,000 |
||
|
shares authorized; 17,350,136 shares issued and |
||
|
13,512,317 outstanding on December 31, 1998; |
||
|
17,282,028 shares issued and 14,681,154 shares |
||
|
outstanding on December 31, 1997 |
$ 43,375 |
$ 14,402 |
|
Treasury stock at cost, 3,837,819 shares on |
||
|
December 31, 1998, and 2,600,874 shares on |
||
|
December 1997 |
(61,521) |
(31,175) |
|
Surplus |
65,495 |
93,934 |
|
Retained earnings |
91,737 |
78,866 |
|
Accumulated other comprehensive income |
2,584 |
2,153 |
|
Total stockholders’ equity |
141,670 |
158,180 |
|
Total liabilities and stockholders’ equity |
$2,377,081 |
$2,239,110 |
(1) All share data has been adjusted to reflect a 3 for 1 stock split effected in the form of
a 200% stock dividend that was distributed on July 31, 1998, to shareholders of record on July 16, 1998.
Per the 1998 annual report the market price for the common stock was $19.88 for 1998 and $24.33 for 1997.
Required: a. 1. How many shares of common stock were outstanding at December 31, 1998?
2. What was the weighted average common shares for the year ended December 31, 1998?
3. Which share number is used to compute earnings per share?
4. Why did the outstanding shares decrease between 1997 and 1998?
b. When computing the price/earnings ratio, should the basic or diluted earnings per share be used? Why?
c. 1. For the 1997 annual report, would the net income have been $23,497,000? Explain.
2. For the 1997 annual report, would the diluted earnings per share have been $1.54 for 1997? Explain.
d. 1. Compute the book value for 1998 and 1997.
2. Considering the earnings per share and the cash dividends per share for 1998, why did the book value decrease?
e. Compute the dividend payout for 1998, 1997, and 1996.
Stock Option Plans
Cooper Tire & Rubber Company and Xerox Corporation
Selected data from the 1998 annual report of Cooper Tire & Rubber Company follows:
Stock Options (In Part)
The Company has elected to follow APB No. 25, “Accounting for Stock Issued to Employees,” in accounting for employee stock options. Under APB No. 25, no compensation expense is recognized because the exercise price of the Company’s employee stock options equals the market price of the underlying stock at the date of grant.
SFAS No. 123, “Accounting for Stock Based Compensation,” is effective for awards granted by the Company during fiscal years beginning after December 15, 1994. The Standard requires, if APB No. 25 is followed, disclosure of pro forma information regarding net income and earnings per share determined as if the Company accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions:
|
Risk free interest rate |
1998 |
1997 |
1996 |
|
Dividend yield |
5.50% |
6.10% |
6.60% |
|
Expected volatility of the Company’s |
1.30% |
1.00% |
1.00% |
|
common stock |
0.251 |
0.197 |
0.206 |
|
Expected life |
5.0 years |
6.2 years |
5.4 years |
The weighted average fair value of options granted in 1998, 1997 and 1996 was $5.84, $7.52, and $5.58, respectively. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period. The Company’s reported and pro forma information follows:
|
1998 |
1997 |
1996 |
|
|
Net income: |
|||
|
Reported |
$126,967* |
$122,411* |
$107,884* |
|
Pro forma |
125,142* |
121,603* |
107,363* |
|
Basic and diluted earnings per share: |
|||
|
Reported |
$1.64 |
$1.55 |
$1.30 |
|
Pro forma |
1.61 |
1.54 |
1.29 |
*In thousands
Xerox Corporation
Selected data from the 1998 annual report of Xerox follows:
We do not recognize compensation expense relating to employee stock options because the exercise price of the option equals the fair value of the stock on the effective date of grant. If we had determined the compensation based on the value as determined by the modified Black Scholes option pricing model, in accordance with SFAS No. 123, the pro forma net income and earnings per share would be as follows:
|
1998 |
1997 |
1996 |
|
|
Net income as reported |
$395* |
$1,452* |
$1,206* |
|
Net income pro forma |
350* |
1,429* |
1,189* |
|
Basic earnings per share as reported |
0.53 |
2.16 |
1.78 |
|
Basic earnings per share pro forma |
0.46 |
2.12 |
1.75 |
|
Diluted earnings per share as reported |
0.52 |
2.02 |
1.66 |
|
Diluted earnings per share pro forma |
0.45 |
1.99 |
1.64 |
*In millions
The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts.
As reflected in the pro forma amounts in the table above, the fair value of each option granted in 1998, 1997 and 1996 was $13.31, $9.03 and $5.25, respectively. The fair value of each option granted was estimated on the date of grant using the following weighted average assumptions:
|
1998 |
1997 |
1996 |
|
|
Risk free interest rate |
5.2% |
6.1% |
5.7% |
|
Expected life in years |
5.3 |
5.0 |
5.5 |
|
Expected volatility |
24.9% |
23.5% |
22.0% |
|
Expected dividend yield |
1.4% |
1.9% |
2.6% |
Required a. For Cooper Tire & Rubber Company:
1. Compute the difference between reported net income and pro forma net income for 1998, 1997, and 1996.
2. Compute the difference between reported basic and diluted earnings per share and pro forma earnings per share for 1998, 1997, and 1996.
3. Comment on the apparent materiality of stock options issued to employees.
b. For Xerox Corporation:
1. Compute the difference between reported net income and pro forma net income for 1998, 1997, and 1996.
2. Compute the difference between reported diluted earnings per share and pro forma diluted earnings per share.
3. Comment on the apparent materiality of stock options issued to employees.
c. Cooper specializes in the manufacturing and marketing of rubber products for consumer use. Xerox is a leader in the global document market.
Considering the nature of these industries, which would you expect to make the more substantial use of employee options? Give your reasons.
Show how to compute cost of goods manufactured. Use the following amounts: direct materials used ($24,000), direct labor ($9,000), manufacturing overhead ($17,000), beginning work in process inventory ($5,000), and ending work in process inventory ($4,000).
1. Auto USA spent $300 million in total to produce 50,000 cars this year. The $300 million breaks down as follows: The Company spent $50 million on fixed costs to run its manufacturing plants and $5,000 of variable costs to produce each car. Next year, it plans to produce 60,000 cars using the existing production facilities.
a. What is the current average cost per car this year?
b. Assuming there is no change in fixed costs or variable costs per unit, what is the total forecasted cost to produce 60,000 cars next year?
c. What is the forecasted average cost per car next year?
d. Why does the average cost per car vary between years?
Indentify type of company from balance sheets
The current asset sections of the balance sheets of three companies follow. Which company is a service company? Which is a merchandiser? Which is a manufacturer? How can you tell?
|
X Treme |
Y Not? |
Zesto |
|||
|
Cash |
$ 2,500 |
Cash |
$ 3,000 |
Cash |
$ 2,000 |
|
Accounts receivable |
5,500 |
Accounts receivable |
6,000 |
Accounts receivable |
5,000 |
|
Inventory |
8,000 |
Prepaid expenses |
500 |
Raw materials inventory |
1,000 |
|
Prepaid expenses |
300 |
Total |
$ 9,500 |
Work in process inventory |
800 |
|
Total |
$ 16,300 |
Finished goods inventor |
4,000 |
||
|
Total |
$ 12,800 |
Identify types of companies and inventories
Fill in the blanks with one of the following terms: manufacturing, service, merchandising,
Retailer (s),wholesaler(s), raw materials inventory, merchandise inventory, work in process inventory, finished goods inventory, freight in, the cost of merchandise.
a. __________ companies generally have no inventory.
b. Boeing is a _______ company.
c. Merchandiser’s inventory consists of ______ and ________
d. _____companies carry three types of inventories: _____, __and ____.
e. Prudential insurance Company is a ______ company.
f. Two types of ____companies include __ and __.
g. Direct materials are stored in _____.
h. Sears is a ____company.
i. Manufacturers sell from their stock of ____.
j. Labor costs usually account for the highest percentage of ___ companies’ costs.
K. Partially completed units are kept in the ___
Classify inventoriable and period costs
Classify each of Georgia Pacific”s costs as either inventoriable product costs or period costs. Georgia Pacific is manufacturer of paper, lumber, and building material products.
a. Depreciation on the gypsum board plant
b. Purchase of lumber to be cut into boards
c. Life insurance on CEO
d. Salaries of scientist studying ways to speed forest growth
e. Cost of new software to track inventory during production
f. Cost of electricity at one of Georgia Pacific”s paper mills
g. Salaries of Georgia Pacific”s to executives
h. Cost of chemical applied to lumber to inhibit mold from developing
i. Cost of TV ads promoting environmental awareness
Classify a manufacturer”s costs
Classify eacho f the following costs as a period cost or an inventoriable product cost.
If you classify the cost as an inventoriable product cost, further classify it as direct material (DM), direct labor (DL), or manufacturing overhead (MOH).
a, Depreciation on automated production equipment
b. Telephone bills relating to customer service call center
c. Wages and benefits paid to assembly line workers in the manufacturing plant
d. Repairs and maintenance on factory equtpment
e. Lease payment on administrative headquarters
f. Salaries paid to quality control inspectors in the plant
g. Property insurance 40% of building is used for sales and administration;60% of building is used for manufacturing
h. Standard packaging materials used to package individual units of product for sale( for example, cereal boxes in which cereal is packaged
Classify costs incurred by a dairy processing company
Each of the following costs pertains to Dairy Plains, a dairy processing company. Classify each of the company’s costs as a period cost or an inventoriable product cost. Further classify inventoriable product costs as direct material (DM), direct labor (DL), or manufacturing overhead (MOH).
|
Cost |
Period Cost or Incentoriable Product Cost? |
DM, DL, or MOH? |
|
|
1. |
Cost of milk purchased from local dairy farmers |
||
|
2. |
Lubricants used in running bottling machines |
||
|
3. |
Depreciation on refrigerated trucks used to collect raw milk from local dairy farmers |
||
|
4. |
Property tax on dairy processing plant |
||
|
5. |
Television advertisements for Dairy Plains’ products |
||
|
6. |
Gasoline used to operate refrigerated trucks delivering finished dairy products to grocery stores |
||
|
7. |
Company president’s annual bonus |
||
|
8. |
Plastic gallon containers in which milk is packaged |
||
|
9. |
Depreciation on marketing department’s computers |
||
|
10. |
Wages and salaries paid to machine operators at dairy processing plant |
||
|
11. |
Research and development on improving milk pasteurization process |
Determine total manufacturing overhead
Snap’s manufacture dsisposable cameras, suppose the company’s March records include the items described below. What is Snap’s total manufacturing overhead cost in March?
|
Glue for camera frames |
$ 250 |
|
Depreciation expense on company cars used by sales force |
3,000 |
|
Plant depreciation expense |
10,000 |
|
Interest expense |
2,000 |
|
Company president’s salary |
25,000 |
|
Plant supervisor’s salary |
4,000 |
|
Plant janitor’s salary |
1,000 |
|
Oil for manufacturing equipment |
25 |
|
Flashbulbs |
50,000 |
Compute Cost of Goods Sold for a merchandiser
Given the following information for Circuits Plus, an electronics e –tailer, compute the cost of goods sold.
|
Web site maintenance |
$ 7,000 |
|
Delivery expenses |
1,000 |
|
Freight in |
3,000 |
|
Import duties |
1,000 |
|
Purchases |
40,000 |
|
Ending inventory |
5,500 |
|
Revenues |
60,000 |
|
Marketing expenses |
10,000 |
|
Beginning inventory |
3,500 |
Calculate direct materials used
You are a new accounting intern at Sunny’s Bikes. Your boss gives you the following information and asks you to compute the cost of direct materials used (assume that the company’s raw materials inventory contains only direct materials.)
|
Purchases of direct materials |
$ 16,000 |
|
Import duties |
1,000 |
|
Freight in |
200 |
|
Freight out |
1,000 |
|
Ending raw materials inventory |
1,500 |
|
Beginning raw materials inventory |
4,000 |
(Recording plant asset transactions; reporting on the balance sheet) Ambold Lock & Key, Inc. has a hefty investment in security equipment, as reported in the company’s balance sheet at December 31, 20X5:
|
Property, plant, and equipment, at cost: |
|
|
Land |
$ 200,000 |
|
Buildings |
310,000 |
|
Less: Accumulated depreciation |
(40,000) |
|
Security equipment |
620,000 |
|
Less: Accumulated depreciation |
(370,000) |
In early July 20X6, Ambold purchased additional security equipment at a cost of $80,000. Ambold depreciates buildings by the straight line method over 20 years with residual value of $70,000. Due to obsolescence, security equipment has a useful life of only 8 years and is being depreciated by the double declining balance method with zero residual value.
Required
1. Journalize Ambold’s plant asset purchase and depreciation transactions for 20X6.
2. Report plant assets on the company’s December 31, 20X6, balance sheet.
(Learning Objective 1, 2, 4: Recording plant asset transactions, exchanges, and changes in useful life) Schmaltz Cable Company’s balance sheet reports the following assets under Property and Equipment: Land, Buildings, Office Furniture, Communication Equipment, and Televideo Equipment. The company has a separate accumulated depreciation account for each of these assets except land. Assume that Schmaltz completed the following transactions:
|
Jan. 3 |
Traded in communication equipment with accumulated depreciation of $85,000 (cost of $96,000) for similar new equipment with a quoted price of $118,000. The seller gave Schmaltz a trade in allowance of $18,000 on the old equipment, and Schmaltz paid $100,000 in cash. |
|
June 30 |
Sold a building that had cost of $495,000 and had accumulated depreciation of $255,000 through December 31 of the preceding year. Depreciation is computed on a straight line basis. The building has a 40 year life and a residual value of $95,000. Schmaltz received $50,000 cash and a $250,000 note receivable. |
|
Nov. 4 |
Purchased used communication and televideo equipment from Time Warner Cable. Total cost was $80,000 paid in cash. An independent appraisal valued the communication equipment at $75,000 and the televideo equipment at $25,000. |
|
Dec. 31 |
Recorded depreciation as follows: Equipment is depreciated by the double declining balance method over a 5 year life with zero residual value. Record depreciation separately on the equipment purchased on January 3 and on November 4. |
Required
Record the transactions in the journal of Schmaltz Cable Company.
(Learning Objective 2: Explaining the concept of depreciation) The board of directors of Gemstar Instruments is having its quarterly meeting. Accounting policies are on the agenda, and depreciation is being discussed. A new board member has some strong opinions. Jeffrey Hatton, an environmental engineer, argues that depreciation must be coupled with a fund to replace company assets. Otherwise, there is no substance to depreciation, he argues. He also challenges the 3 year estimated life over which Gemstar Instruments is depreciating company computers. He notes that the computers will last at least 5 years. Hatton argues for depreciating computers over 5 years instead of 3.
Required
Write a paragraph or 2 to explain the accounting concept of depreciation to Jeffrey Hatton and to answer his arguments.
(Learning Objective 2, 3: Computing depreciation by 3 methods and the cash flow advantage of accelerated depreciation for tax purposes) On January 2, 20X1, St. Paul Vision Center purchased equipment at a cost of $63,000. Before placing the equipment in service, St. Paul spent $2,200 for special chips, $800 for a platform, and $4,000 to customize the equipment. St. Paul management estimates that the equipment will remain in service for 6 years and have a residual value of $16,000. The equipment can be expected to process 18,000 examinations in each of the first 4 years and 14,000 tests in each of the next 2 years. In trying to decide which depreciation method to use, Lana Rich, the general manager, requests a depreciation schedule for each method (straight line, units of production, and double declining balance).
Required
1. Prepare a depreciation schedule for each of the depreciation methods, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2. St. Paul reports to creditors in the financial statements using the depreciation method that maximizes reported income in the early years of asset use. For income tax purposes, however, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year that St. Paul uses the equipment. Identify the depreciation methods that meet the general manager’s objectives, assuming the income tax authorities would permit the use of any of the methods.
3. Cash provided by operations before income tax is $100,000 for the equipment’s first year. The income tax rate is 35%. For the 2 depreciation methods identified in Requirement 2, compare the net income and cash provided by operations (cash flow). Show which method gives the net income advantage and which method gives the cash flow advantage.
(Learning Objective 2, 4, 7: Analyzing plant asset transactions from a company’s financial statements) Hewlett Packard Company (HP) is the leading computer company in the world. The excerpts that follow are adapted from HP’s financial statements for fiscal year 2006.
|
Balance Sheet (dollars in millions) |
||
|
October 31, |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Total current assets |
$48,264 |
$43,334 |
|
Property, plant, and equipment |
15,024 |
13,880 |
|
Less: Accumulated depreciation |
8,561 |
7,429 |
|
Goodwill |
16,853 |
16,441 |
|
Statement of Cash Flows (dollars in millions) |
||
|
Year Ended October 31, |
||
|
2006 |
2005 |
|
|
Cash Flows from Operating Activities: |
||
|
Net income |
$ 6,198 |
$ 2,398 |
|
Noncash items affecting net income: Depreciation |
2,353 |
2,344 |
|
Cash Flows from Investing Activities: |
||
|
Capital expenditures |
$(2,536) |
$(1,995) |
|
Acquisition of businesses |
(855) |
(641) |
Required
Answer these questions about Hewlett Packard’s plant assets and goodwill:
1. How much was HP’s cost of plant assets at October 31, 2006? How much was the book value of plant assets? Show computations.
2. The financial statements give 4 evidences that HP purchased plant assets and goodwill during 2006. What are they?
3. Prepare T accounts for Property, Plant, and Equipment; Accumulated Depreciation; and Goodwill. Then show all the activity in each account during 2006. Label each increase or decrease and give its dollar amount. During 2006, HP sold plant assets that had cost the company $1,392 million (accumulated depreciation on these assets was $1,221 million). Assume there was no loss on goodwill during 2006.
(Learning Objective 5: Accounting for natural resources and the related expense) Mainstay Pipeline Company operates a pipeline that provides natural gas to several East Coast cities. Mainstay’s balance sheet includes the asset Oil Properties. Mainstay paid $5 million cash for petroleum reserves that contained an estimated 500,000 barrels of oil. The company paid $350,000 for additional geologic tests of the property and $110,000 to prepare the surface for drilling. Prior to production, the company signed a $40,000 note payable to have a building constructed on the property. Because the building provides on site headquarters for the drilling effort and will be abandoned when the oil is depleted, its cost is debited to the Oil Properties account and included in depletion charges. During the first year of production, Mainstay removed 80,000 barrels of oil, which it sold on credit for $38 per barrel. Operating expenses related to this project totaled $660,000 for the first year, all paid in cash. In addition, Mainstay accrued income tax at the rate of 40%.
Required
1. Record all of Mainstay’s transactions for the year.
2. Prepare the company’s income statement for this oil and gas project for the first year. Evaluate the profitability of the project.
(Learning Objective 7: Reporting plant asset transactions on the statement of cash flows) Assume that at the end of 20X2, Verizon, the telecommunications company, had total assets of $15.2 billion and total liabilities of $10.5 billion. Included among the assets were property, plant, and equipment with a cost of $17.1 billion and accumulated depreciation of $10.2 billion. Assume that Verizon completed the following selected transactions during 20X3: The company earned total revenues of $16.9 billion and incurred total expenses of $13.2 billion, which included depreciation of $1.7 billion. During the year, Verizon paid $2.8 billion for new property, plant, and equipment and sold old plant assets for $1.0 billion. The cost of the assets sold was $1.6 billion, and their accumulated depreciation was $0.4 billion.
Required
1. Explain how to determine whether Verizon had a gain or a loss on the sale of old plant assets. What was the amount of the gain or loss, if any?
2. Show how Verizon would report property, plant, and equipment on the balance sheet at December 31, 20X3, after all the year’s activity.
3. Show how Verizon would report operating activities and investing activities on its statement of cash flows for 20X3. Ignore gains and losses.
I Often Paint Fakes*
An art dealer bought a canvas signed “Picasso” and traveled all the way to Cannes to discover whether it was genuine. Picasso was working in his studio. He cast a single look at the canvas and said, “It’s a fake.”
A few months later the dealer bought another canvas signed “Picasso.” Again he traveled to Cannes and again Picasso, after a single glance, grunted: “It’s a fake.” “But cher maitre,” expostulated the dealer, “it so happens that I saw you with my own eyes working on this very picture several years ago.”
Picasso shrugged: “I often paint fakes.”
Required a. Assume that the accounting report was prepared using generally accepted accounting principles. Does this imply that the report is exactly accurate? Discuss.
b. In your opinion do accountants paint fakes? Discuss.
The CEO Retires*
Dan Murphy awoke at 5:45 a.m., just like he did every workday morning. No matter that he went to sleep only four hours ago. The Orange Bowl game had gone late into the evening, and the New Year’s Day party was so good, no one wanted to leave. At least Dan could awake easily this morning. Some of his guests had lost a little control celebrating the first day of the new year, and Dan was not a person who ever lost control. The drive to the office was easier than most days. Perhaps there were a great many parties last night. All the better as it gave Dan time to think. The dawn of a new year; his last year. Dan would turn 65 next December, and the company had a mandatory retirement policy. A good idea he thought; to get new blood in the organization. At least that’s what he thought on the climb up. From just another college graduate within the corporate staff, all the way to the Chief Executive Officer’s suite. It certainly is a magnificent view from the top. To be CEO of his own company. Well not really, as it was the stockholders’ company, but he had been CEO for the past eight years. Now he too must turn the reins over. “Must,” now that’s the operative word. He knew it was the best thing for the company. Turnover kept middle management aggressive, but he also knew that he wouldn’t leave if he had a choice. So Dan resolved to make his last year the company’s best year ever. It was that thought which kept his attention, yet the focus of consideration and related motivations supporting such a strategy changed as he continued to strategize. At first, Dan thought that it would be a fine way to give something back to a company that had given him so much. His 43 years with the company had given him challenges which filled his life with meaning and satisfaction, provided him with a good living, and made him a man respected and listened to in the business community. But the thought that the company was also forcing him to give all that up made his thoughts turn more inward. Of course, the company had done many things for him, but what of all the sacrifices he had made? His whole heart and soul were tied to the company. In fact, one could hardly think of Dan Murphy without thinking of the company, in much the same way as prominent corporate leaders and their firms are intrinsically linked. But the company would still be here this time next year, and what of him? Yes, he would leave the company strong, because by leaving it strong, it would strengthen his reputation as a great leader. His legacy would carry and sustain him over the years. But would it? One must also live in a manner consistent with such esteem. Being the CEO of a major company also has its creature comforts. Dan was accustomed to a certain style of living. How much will that suffer after the salary, bonuses, and stock options are no more? Arriving at the office by 7:30 a.m., he left a note for his secretary that he was not to be disturbed until 9 a.m. He pulled out the compensation file and examined the incentive clauses in his own contract. The contract was created by the compensation committee of the Board of Directors. All of the committee members were outsiders; that is, not a part of the company’s management. This lends the appearance of independence, but most were CEOs of their own companies, and Dan knew that, by and large, CEOs take care of their own. His suspicions were confirmed. If the company’s financial results were the best ever this year, then so too would be his own personal compensation. Yet what if there were uncontrollable problems? The general economy appeared fairly stable. However, another oil shock, some more bank failures, or a list of other disas ters could turn things into a downward spiral quickly. Economies are easily influenced and consumer and corporate psychology can play a large part in determining outcomes. But even in apparently uncontrollable circumstances, Dan knew he could protect himself and the financial fortunes of his company during the short term, which after all, was the only thing that mattered. Upon further review of his compensation contract, Dan saw that a large portion of his bonus and stock options was a function of operating income levels, earnings per share, and return on assets. So the trick was to maximize those items. If he did, the company would appear vibrant and posed for future growth at the time of his forced retirement, he reminded himself. Furthermore, his total compensation in the last year of his employment would reach record proportions. Additionally, since his pension is based on the average of his last three years’ compensation, Dan will continue to reap the benefits of this year’s results for hopefully a long time to come. And who says CEOs don’t think long term? Two remaining issues needed to be addressed. Those were (1) how to ensure a record breaking year and (2) how to overcome any objections raised in attaining those results? Actually, the former was a relatively simple goal to achieve. Since accounting allows so many alternatives in the way financial events are measured, Dan could just select a package of alternatives which would maximize the company’s earnings and return on assets. Some alternatives may result in changing an accounting method, but since the new auditing standards were issued, his company could still receive an unqualified opinion from his auditors, with only a passing reference to any accounting changes in the auditor’s opinion and its effects disclosed in the footnotes. As long as the alternative was allowed by generally accepted accounting principles, and the justification for the change was reasonable, the auditors should not object. If there were objections, Dan could always threaten to change auditors. But still the best avenue to pursue would be a change in accounting estimates, since those changes did not even need to be explicitly disclosed. So Dan began to mull over what changes in estimates or methods he could employ in order to maximize his firm’s financial appearance. In the area of accounting estimates, Dan could lower the rate of estimated default on his accounts receivable, thus lowering bad debt expense. The estimated useful lives of his plant and equipment could be extended, thus lowering depreciation expense. In arguing that quality improvements have been implemented in the manufacturing process, the warranty expense on the products sold could also be lowered. In examining pension expense, he noted that the assumed rate of return on pension assets was at a modest 6.5%, so if that rate could be increased, the corresponding pension expense could be reduced. Other possibilities occurred to Murphy. Perhaps items normally expensed, such as repairs, could be capitalized. Those repairs that could not be capitalized could simply be deferred. The company could also defer short term expenses for the training of staff. Since research and development costs must now be fully expensed as incurred, a reduction in those expenditures would increase net income. Return on assets would be increased by not acquiring any new fixed assets. Production levels for inventory could be increased, thus spreading fixed costs over a greater number of units and reducing the total average cost per unit. Therefore, gross profit per unit will increase. Inventory levels would be a little bloated, but that should be easily handled by Dan’s successor. The prior examples are subtle changes that could be made. As a last resort, a change in accounting methods could be employed. This would require explicit footnote disclosure and a comment in the auditor’s report, but if it came to that, it would still be tolerable. Examples of such changes would be to switch from accelerated to straight line depreciation or to change from LIFO to FIFO. How to make changes to the financial results of the company appeared easier than he first thought. Now back to the other potential problem of “getting away with it.” At first thought, Dan considered the degree of resistance by the other members of top manage ment. Mike Harrington, Dan’s chief financial officer, would have to review any accounting changes that he suggested. Since Dan had brought Mike up the organization with him, Dan didn’t foresee any strong resistance from Mike. As for the others, Dan believed he had two things going for him. One was their ambition. Dan knew that they all coveted his job, and a clear successor to Dan had yet to be chosen. Dan would only make a recommendation to the promotion committee of the Board of Directors, but everyone knew his recommendation carried a great deal of weight. Therefore, resistance to any accounting changes by any individual would surely end his or her hope to succeed him as CEO. Secondly, although not as lucrative as Dan’s, their bonus package is tied to the exact same accounting numbers. So any actions taken by Dan to increase his compensation will also increase theirs. Dan was actually beginning to enjoy this situation, even considering it one of his final challenges. Dan realized that any changes he implemented would have the tendency to reverse themselves over time. That would undoubtedly hurt the company’s performance down the road, but all of his potential successors were in their mid to late 50s, so there would be plenty of time for them to turn things around in the years ahead. Besides, any near term reversals would merely enhance his reputation as an excellent corporate leader, as problems would arise after his departure. At that moment, his secretary called to inform him that Mike Harrington wanted to see him. Mike was just the man Dan wanted to see.
What are the ethical issues?
What should Mike do?
Required a. Determine the facts—what, who, where, when, how.
b. Define the ethical issues.
c. Identify major principles, rules, and values.
d. Specify the alternatives.
e. Compare norms, principles, and values with alternatives to see if a clear decision can be reached.
f. Assess the consequences.
g. Make your decision.
The Dangerous Morality of Managing Earnings*
The Majority of Managers Surveyed Say It’s Not Wrong to Manage Earnings
Actions for Concerned Managers We believe most corporations would benefit if they established clearer accounting and operating standards for all employees to follow. The standard setting process should involve managers in discussions of the practices related to short term earnings measurements. Until these standards are in place, different managers will use widely varying criteria in assessing the acceptability of various earnings management practices. These variations will have an adverse effect on the quality of the firm’s financial information. Companies can use a questionnaire similar to the one in our study to encourage discussion and to communicate corporate standards and the reason for them. Standards also enable internal and external auditors and management to judge whether or not the desired quality of earnings is being maintained. In most companies, auditors can depend on good standards to identify and judge the acceptability of the operating manipulations. Ultimately, the line management chain of command, not auditors or financial staff, bears the primary responsibility for controlling operating manipulations. Often managers must rely on their prior experience and good judgment to distinguish between a decision that will have positive long term benefits and one that has a positive short term effect but a deleterious long term effect. Finally, it is important to manage the corporate culture. A culture that promotes openness and cooperative problem solving among managers is likely to result in less short term earnings management than one that is more competitive and where annual, and even quarterly, performance shortfalls are punished. A corporate culture that is more concerned with managing for excellence rather than for reporting short term profits will be less likely to support the widespread use of immoral earnings management practices.
Required a. Time, laws, regulation, and professional standards have restricted accounting practices to those that are moral, ethical, fair, and precise Comment.
b. Most managers surveyed had a conservative, strict interpretation of
what is moral or ethical in financial reporting Comment.
c. The managers surveyed exhibited a surprising agreement as to what constitutes an ethical or unethical practice. Comment
d. List the five generalizations from the findings in this study relating to managing earnings.
e. Comment on management’s ability to manage earnings in the long run
by influencing financial accounting.
Frequent Flier Awards—Tick Tick, Tick Tick, Tick Tick
In the early 1980s, airlines introduced frequent flier awards to develop passenger loyalty to a single airline. Free tickets and possibly other awards were made available to passengers when they accumulated a certain number of miles or flights on a particular air carrier. These programs were potentially good for the passenger and the airline as long as the awards were not too generous and the airlines could minimize revenue displacement from a paying passenger. These programs were introduced by American Airlines in 1981. Originally there were no restrictions. Anyone with the necessary miles could take any flight that had an available seat. In the late 1980s, most airlines changed their no restriction programs to programs with restrictions and blackout days. Airlines typically compensated passengers for these changes by cutting mileage requirements. The airlines also added partners in frequent flier programs, such as car rental companies and hotels. These partners handed out frequent flier miles compensating the airlines in some manner for the miles distributed. Airlines also added triple mileage deals. A consequence of these expanding frequent flier programs was a surge in the number of passengers flying free and a surge in unused miles. To get a handle on the cost and the unused miles, airlines increased the frequent flier miles needed for a flight and placed time limits on the award miles. Thus —tick tick, tick tick, tick tick. The increased frequent flier miles needed for a flight and the time limits prompted lawsuits. Many of these lawsuits were filed in state courts. One of the suits filed in the District Court in Chicago in 1989 made its way to the United States Supreme Court. In 1995 the Supreme Court ruled that federal airline deregulation law would not bar the breach of contract claim in the state court. In June of 1995 a District Court in Dallas ruled in favor of the airline in a case involving an increase in miles needed to earn a trip. Airlines interpret this decision as upholding their right to make changes to their frequent flier programs.
Required a. In your opinion, are the outstanding (unused) miles a liability to the airline? (Substantiate your answer.)
b. Comment on the potential problems involved in estimating the dollar amount of any potential liability.
c. 1. What is a contingent liability?
2. In your opinion, are unused miles a contingent liability to the air carrier?
3. Recommend the recognition (if any) for unused miles.
International Accounting—Harmonization in Practice
Dennis R. Beresford, Chairman, Financial Accounting Standards Board, included these comments in the June, 1995 Financial Accounting Series of the Financial Accounting Foundation. This case represents a quote from page 2, Notes from the Chairman. (Permission to reprint obtained from the Financial Accounting Standards Board.)Notes from the Chairman (in Part) Last month Jim Leisenring and I attended what is now becoming more or less an annual meeting of accounting standards setters from more than a dozen countries. The first of those meetings, initiated by the FASB, was held in 1991 in Brussels, and similar get togethers have followed in our offices, London, and now Amsterdam. This year’s meeting was held in conjunction with a regular meeting of the International Accounting Standards Committee and the centenary celebrations of NIVRA, the professional accounting body in the Netherlands. Earlier, this group had devoted its attention mainly to conceptual issues and general communications about what the various countries were working on at the time. For example, the first gathering concentrated on the objectives of external financial reporting and whether individual countries had explicit or implicit conceptual frameworks. In London, most of the time was spent on how future events are considered in accounting recognition and measurement decisions. That discussion was facilitated by a paper prepared by the FASB and our counterparts from Australia, Canada, the United Kingdom, and the IASC. The paper later was jointly published as the Special Report, “Future Events—A Conceptual Study of Their Significance for Recognition and Measurement.” In Amsterdam, we spent most of the time on two specific technical issues that are hot topics here as well as in the rest of the world: accounting for environmental liabilities and derivative financial instruments. Papers were presented by Canada, Denmark, England, and the European Commission, which covered the current state of the art regarding disclosure of and accounting for environmental costs. As in the U.S., the key issues are deciding when an obligation has been incurred, under what circumstances can any resulting debit be considered an asset (e.g., costs incurred to “improve” a productive facility), and when an amount is measurable with sufficient reliability.
Required a. Comment on the trend in harmonization of international accounting as represented by the comments included in this case.
b. Can we expect harmonization of international accounting to be accomplished in the foreseeable future? Comment
Materiality: I
Practice Professional standards require auditors to make a preliminary judgment about materiality levels during the planning of an audit. Statement of Auditing Standards (SAS) No. 47 states that “the auditor plans the audit to obtain reasonable assurance of detecting misstatements that he/she believes could be large enough, individually or in the aggregate, to be quantitatively material to the financial statements.”* SAS No. 47 indicates that materiality judgments involve both quantitative and qualitative considerations. This statement recognizes that it ordinarily is not practical to design procedures to detect misstatements that could be qualitatively material. A number of rule of thumb materiality calculations have emerged, such as percentages of income, total assets, revenues, and equity. These rule of thumb calculations result in differing amounts for audit planning purposes. In fact, sizeable differences can result, depending on the rule of thumb and the industry.
Required a. It would seem prudent for auditors to give careful consideration to planning materiality decisions. Comment.
b. It is difficult to design procedures to detect misstatements that could be qualitatively material. Comment.
c. It is difficult to design procedures to detect misstatements that could be quantitatively material. Comment.
d. In your opinion, would the application of materiality be a frequent issue in court cases involving financial statements? Comment.
Who is Responsible?
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners and Board of Directors The Kroger Co. In our opinion, the accompanying consolidated balance sheet of The Kroger Co. and the related consolidated statements of operations and accumulated deficit, and cash flows present fairly, in all material respects, the financial position of the Kroger Co. as of January 2, 1999 and December 27, 1997, and the consolidated results of its operations and its cash flows for the years ended January 2, 1999, December 27, 1997, and December 28, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the notes to the consolidated financial statements, the Company changed its application of the LIFO method of accounting for store inventories as of December 28, 1997.
Required a. Who has the responsibility for the financial statements?
b. What is the role of the accountant (auditor) as to the financial statements?
c. Accountants (auditors) are often included as defendants in lawsuits that relate to the financial statements. Speculate as to why this is the case.
d. What type of auditor’s opinion is represented in this case?
e. Would we expect these audited financial statements to be free of misstatement? Comment.
Safe Harbor In 1995, Congress passed the Private Securities Litigation Reform Act (the Act). The principal provisions of the Act are intended to curb abusive litigation, and improve the quality of information available to investors through the creation of a safe harbor for forward looking statements. Forward looking statements were defined to include statements relating to projections of revenues and other financial items, plans and objectives, future economic performance, assumptions, reports issued by outside reviewers, or other projections or estimates specified by rule of the SEC. The safe harbor applies to both oral and written statements. Management frequently uses signals as “we estimate,” “we project,” and the like, where forward looking statements are not otherwise identified as such. The forwardlooking statements must be accompanied by meaningful cautionary statements. The cautionary statement may be contained in a separate risk section elsewhere in the disclosure document. Osmonics included statements that would likely be construed as forward looking in their 1998 second quarter report to shareholders. This included a statement by D. Dean Spatz, Chairman & Chief Executive Officer. “I am gratified to see our employees enthusiastically embrace the Company’s restructuring and re engineering. Their dedication and ideas will have even greater impact on our business as we implement streamlined systems and new management practices. We believe our revitalized organization, integrated products, and rationalized manufacturing operations will enable Osmonics to be a dominant supplier of high technology water purification and filtration products and cost effective components in the years ahead.” The Osmonics report included this cautionary statement: “The Private Securities Litigation Reform Act of 1995 provides a ‘safe harbor’ for forward looking statements. Certain information included in this document and other materials filed or to be filed with the Securities and Exchange Commission (as well as information included in oral or other written statements made or to be made by the Company) contains statements that are forward looking. Such statements may relate to plans for future expansion, business development activities capital spending, financing, the effects of regulation and competition, or anticipated sales or earnings results. Such information involves risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to product development activities, computer systems implementation, dependence on existing management, global economic and market conditions, and changes to federal or state laws.”
Required a. Demand for financial reports exists because users believe that the reports help them in decision making. In your opinion, will forward looking statements as provided by the Private Securities Litigation Reform Act aid users of financial reports in decision making?
b. To some extent, investors rights are limited by the curb of abusive litigation. In your opinion, is there a net benefit to investors from a safe harbor for forward looking statements?
Insight on Liabilities and Shareholders’ Equity
The December 31, 1998 and 1997 liabilities and stockholders’ equity of Motorola follow:
CONSOLIDATED BALANCE SHEETS (In Part)
|
(In millions, except per share amounts) |
Motorola, Inc. and Subsidiaries |
|
|
December 31 |
1998 |
1997 |
|
Liabilities and Stockholders’ Equity |
||
|
Current liabilities |
||
|
Notes payable and current portion of long term debt |
$ 2,909 |
$ 1,282 |
|
Accounts payable |
2,305 |
2,297 |
|
Accrued liabilities |
6,226 |
5,476 |
|
Total current liabilities |
11,440 |
9,055 |
|
Long term debt |
2,633 |
2,144 |
|
Deferred income taxes |
1,188 |
1,522 |
|
Other liabilities |
1,245 |
1,285 |
|
Stockholders’ equity |
||
|
Preferred stock, $100 par value issuable in series |
||
|
Authorized shares: 0.5 (none issued) |
||
|
Common stock, $3 par value |
||
|
Authorized shares: 1998 and 1997, 1,400 |
||
|
Issued and outstanding: 1998, 601.1; 1997, 597.4 |
1,804 |
1,793 |
|
Additional paid in capital |
1,894 |
1,720 |
|
Retained earnings |
8,254 |
9,504 |
|
Non owner changes to equity |
270 |
255 |
|
Total stockholders’ equity |
12,222 |
13,272 |
|
Total liabilities and stockholders’ equity |
$28,728 |
$27,278 |
Required
a 1. The statement is entitled “Consolidated Balance Sheets.” What does it mean to have a consolidated balance sheet?
2. Does it appear that the subsidiaries are wholly owned? Explain.
b. Describe deferred income taxes.
c. 1. Describe long term debt.
2. Why is the current part of long term debt disclosed under current liabilities?
d. Describe retained earnings.
e. 1. How many shares of common stock have been issued at December 31, 1998?
2. How many shares of common stock have been authorized at December 31, 1998?
f. 1. What are the total liabilities at December 31, 1998?
2. What is the total stockholders’ equity at December 31, 1998?
3. What is the total asset amount at December 31, 1998?
Insight on Shareholders’ Investment
The 1999 annual report of Lands’ End, Inc. included the shareholders’ investment as follows:
CONSOLIDATED BALANCE SHEETS (In Part)
|
(In thousands) |
January 29, 1999 |
January 30, 1998 |
|
Shareholders’ investment: |
||
|
Common stock, 40,221 shares issued |
402 |
402 |
|
Donated capital |
8,400 |
8,400 |
|
Additional paid in capital |
26,994 |
26,457 |
|
Deferred compensation |
(394) |
(1,047) |
|
Accumulated other comprehensive income |
2,003 |
875 |
|
Retained earnings |
406,396 |
375,211 |
|
Treasury stock, 10,317 and 9,281 shares at cost, |
||
|
respectively |
(201,298) |
167,586) |
|
Total shareholders’ investment |
242,503 |
242,712 |
|
Total liabilities and shareholders’ investment |
$455,919 |
433,472 |
Required a. Describe the following accounts:
1. shareholders’ investment
2. deferred compensation
3. donated capital
4. accumulated other comprehensive income
5. retained earnings
6. treasury stock
b. Determine the number of shares:
1. common stock issued at January 29, 1999
2. common stock outstanding at January 29, 1999
c. 1. What is the dollar amount of shareholders’ investment at January 29, 1999?
2. Would the dollar amount of shareholders’ investment at January 29, 1999, equal the market value of the common stock at January 29, 1999? Explain.
Our Principal Asset Is Our People
Foote, Cone & Belding Communications, Inc. included the following in its 1992 financial report:
BUSINESS PROFILE
FCB is a global marketing communications company that provides advertising, direct marketing, sales promotion, and other specialized services to clients worldwide. The Company’s activities are conducted through an organization of 180 offices in 46 countries on six continents, including the combined Publicis FCB group in Europe.
In 1992, the Company ranked as one of the largest marketing communications companies in the world. On a combined basis, FCB and Publicis had revenues of $884 million and billings of more than $6.1 billion.
PERSONNEL
Our principal asset is our people. Our success depends in large part on our ability to attract and retain personnel who are competent in the various aspects of our business. As of December 31, 1992, FCB employed 3,631 persons in its majority owned offices: 2,411 were employed in the domestic offices and 1,220 were employed in the international offices. Of the 3,631 total employees, 1,100 were engaged in the creation and production of advertising, 1,176 in account management, 505 in media and research activities, and 850 in administrative and clerical functions.
We believe that it is important for the success of FCB that our people own a significant portion of FCB’s outstanding Common Stock. Our employees owned approximately 20% of the outstanding Common Stock of the Company at December 31, 1992, either directly or through various employee benefit plans.
Required a. Foote, Cone & Belding states that “Our principal asset is our people.” Currently, generally accepted principles do not recognize people as an asset. Speculate on why people are not considered to be an asset.
b. Speculate on what concept of an asset Foote, Cone & Belding is considering when they state “Our principal asset is our people.”
Electronic Solutions
Motorola presented these consolidated statements of operations for the years 1996, 1997, and 1998.
|
Consolidated Statements of Operations (In millions, except per share amounts) |
Motorola, Inc. and Subsidiaries |
||
|
Years ended December 31 |
1998 |
1997 |
1996 |
|
Net sales |
$29,398 |
$29,794 |
$27,973 |
|
Costs and expenses |
|||
|
Manufacturing and other costs of sales |
20,886 |
20,003 |
18,990 |
|
Selling, general and administrative expenses |
5,493 |
5,188 |
4,715 |
|
Restructuring and other charges |
1,980 |
327 |
— |
|
Depreciation expense |
2,197 |
2,329 |
2,308 |
|
Interest expense, net |
216 |
131 |
185 |
|
Total costs and expenses |
30,772 |
27,978 |
26,198 |
|
Earnings (loss) before income taxes |
(1,374) |
1,816 |
1,775 |
|
Income tax provision (benefit) |
(412) |
636 |
621 |
|
Net earnings (loss) |
$ (962) |
$1,180 |
$1,154 |
Required a.Does it appear that there is 100% ownership in all consolidated subsidiaries? Discuss.
b. If a subsidiary were not consolidated but rather accounted for using the equity method, would this change net income? Explain.
c. Present a multiple step income statement.
d. Determine the net income for each year with the nonrecurring items excluded.
Convenience
Kellogg Company presented these consolidated statements of earnings shown on the following page for the years 1995, 1996, and 1997.
Required a.What does it mean that the statement is titled “Consolidated Statement of Earnings”?
b.Does it appear that Kellogg Company has consolidated subsidiaries in which it has less than 100% ownership? Explain.
c.Does it appear that Kellogg Company has investments in subsidiaries in which it does not have control? Explain.
d. Determine the net income for each year with the nonrecurring items excluded.
e.Determine the amount to remove for each year if the “nonrecurring charges” were removed.
f.The cumulative effect of accounting change (net of tax) in 1997 is $18,000,000.
1.For the years 1997, 1996, and 1995, were the accounting principles used consistent? Explain.
2.Determine the net earnings for 1997, 1996, and 1995, using consistent accounting principles.
3.Does it appear that the change in accounting principle in 1997 was so material that earnings in 1997 should not be compared with prior years? Explain.
The Big Order
On October 15, 1990, United Airlines (UAL Corporation) placed the largest wide body aircraft order in commercial aviation history—60 Boeing 747 400s and 68 Boeing 777s—with an estimated value of $22 billion. With this order, United became the launch customer for the B777. This order was equally split between firm orders and options.
Required a.Comment on when United Airlines should record the purchase of these planes.
b.Comment on when Boeing should record the revenue from selling these planes.
c.Speculate on how firm the commitment was on the part of United Airlines to accept delivery of these planes.
d.1. Speculate on the disclosure for this order in the 1990 financial statements and footnotes of United Airlines.
2.Speculate on the disclosure for this order in the 1990 annual report of United Airlines. (Exclude the financial statements and footnotes.)
e. 1. Speculate on the disclosure for this order in the 1990 financial statements and footnotes of Boeing.
2. Speculate on the disclosure for this order in the 1990 annual report of Boeing (exclude the financial statements and footnotes).
Rising Prices, a Time to Switch Off LIFO?
The following information was taken directly from an annual report of a firm that wishes to remain anonymous. (The dates have been changed.)
Financial Summary
Effects of LIFO Accounting
For a number of years, the corporation has used the last in, first out (LIFO) method of accounting for its steel inventories. In periods of extended inflation, coupled with uncertain supplies of raw materials from foreign sources, and rapid increases and fluctuations in prices of raw materials such as nickel and chrome nickel scrap, earnings can be affected unrealistically for any given year. Because of these factors, the corporation will apply to the Internal Revenue Service for permission to discontinue using the LIFO method of accounting for valuing those inventories for which this method has been used. If such application is granted, the LIFO reserve at December 31, 1999, of $12,300,000 would be eliminated, which would require a provision for income taxes of approximately $6,150,000. The corporation will also seek permission to pay the increased taxes over a ten year period. If the corporation had not used the LIFO method of accounting during 1998, net earnings for the year would have been increased by approximately $1,500,000.
The 1999 annual report also disclosed the following:
|
1999 |
1998 |
|
|
1. Sales and revenues |
$536,467,782 |
$487,886,449 |
|
2. Earnings per common share |
$3.44 |
$3.58 |
Required a. The corporation indicates that earnings can be affected unrealistically by rapid increases and fluctuations in prices when using LIFO. Comment.
b. How much taxes will need to be paid on past earnings from the switch from LIFO? How will the switch from LIFO influence taxes in the future?
c. How will a switch from LIFO affect 1999 profits?
d. How will a switch from LIFO affect future profits?
e. How will a switch from LIFO affect 1999 cash flow?
f. How will a switch from LIFO affect future cash flow?
g. Speculate on the real reason that the corporation wishes to switch from LIFO.
Booming Retail
The Grand retail firm reported the following financial data for the past several years:
|
Year |
|||||
|
5 |
4 |
3 |
2 |
1 |
|
|
(amounts in 000s) |
|||||
|
Sales |
$1,254,131 |
$1,210,918 |
$1,096,152 |
$979,458 |
$920,797 |
|
Net accounts receivable |
419,731 |
368,267 |
312,776 |
72,450 |
230,427 |
The Grand retail firm had a decentralized credit operation allowing each store to administer its credit operation. Many stores provided installment plans allowing the customer up to 36 months to pay. Gross profits on installment sales were reflected in the financial statements in the period when the sales were made.
Required a. Using Year 1 as the base, prepare horizontal common size analysis for sales and net accounts receivable.
b. Compute the accounts receivable turnover for Years 2 5. (Use net accounts receivable.)
c. Would financial control of accounts receivable be more important with installment sales than with sales on 30 day credit? Comment.
d. Comment on what is apparently happening at The Grand retail firm.
Expensing Interest Now and Later
Johnson & Johnson reported the following in its 1998 annual report:
Consolidated Statement of Earnings
|
(Dollars in Millions Except Per Share Figures) (Note 1) |
1998 |
1997 |
1996 |
|
Sales to customers |
$23,657 |
$22,629 |
$21,620 |
|
Cost of products sold (1998 includes $60 of inventory |
|||
|
write offs for restructuring) |
7,496 |
7,152 |
7,018 |
|
Gross profit |
16,161 |
15,477 |
14,602 |
|
Selling, marketing and administrative expenses |
8,907 |
8,715 |
8,394 |
|
Research expense |
2,269 |
2,140 |
1,905 |
|
Purchased in process research and development |
|||
|
(Notes 15 and 17) |
164 |
— |
— |
|
Interest income |
(262) |
(203) |
(139) |
|
Interest expense, net of portion capitalized (Note 3) |
110 |
120 |
125 |
|
Other expense, net |
151 |
129 |
284 |
|
Restructuring charge (Note 15) |
553 |
— |
— |
|
11,892 |
10,901 |
10,569 |
|
|
Earnings before provision for taxes on income |
4,269 |
4,576 |
4,033 |
|
Provision for taxes on income (Note 6) |
1,210 |
1,273 |
1,146 |
|
Net earnings |
$ 3,059 |
$3,303 |
$ 2,887 |
|
Basic net earnings per share (Notes 1 and 19) |
$ 2.27 |
2.47 |
2.17 |
|
Diluted net earnings per share (Notes 1 and 19) |
$ 2.23 |
2.41 |
2.12 |
Notes to consolidated financial statements (In Part)
The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 1998, 1997, and 1996 was $71, $40, and $55 million, respectively.
Required a. What is the amount of gross interest expense for 1998, 1997, and 1996?
b. What is the interest reported on the income statement for 1998, 1997, and 1996?
c. What was the interest added to the cost of property, plant, and equipment during 1998, 1997, and 1996?
d. When is capitalized interest recognized as an expense? Describe.
e. What was the effect on income from capitalizing interest? Describe.
Determine the Liability
Safeway Inc. presented the following as part of a footnote in its 1998 annual report: Multi Employer Pension Plans Safeway participates in various multi employer pension plans, covering virtually all Company employees not covered under the Company’s non contributory pension plans, pursuant to agreements between the Company and employee bargaining units which are members of such plans. These plans are generally defined benefit plans; however, in many cases, specific benefit levels are not negotiated with or known by the employer contributors. Contributions of $119 million in 1998, $130 million in 1997 and $112 million in 1996 were made and charged to expense. Under U.S. legislation regrading such pension plans, a company is required to continue funding its proportionate share of a plan’s unfunded vested benefits in the event of withdrawal (as defined by the legislation) from a plan or plan termination. Safeway participates in a number of these pension plans, and the potential obligation as a participant in these plans may be significant. The information required to determine the total amount of this contingent obligation, as well as the total amount of accumulated benefits and net assets of such plans, is not readily available. During 1988 and 1987, the Company sold certain operations. In most cases the party acquiring the operation agreed to continue making contributions to the plans. Safeway is relieved of the obligations related to these sold operations to the extent the acquiring parties continue to make contributions. Whether such sales could result in withdrawal under ERISA and, if so, whether such withdrawals could result in liability to the Company, is not determinable at this time.
Required a. What were the contributions to multi employer pension plans for 1998, 1997, and 1996 Comment.
b. Determine the total liability for multi employer pension plans at the end of 1998.
Fair Value of Financial Instruments
Fluor Corporation included the following footnote in its 1995 annual report:
Fair Value of Financial Instruments
The estimated fair value of the company’s financial instruments is as follows:
|
Dollars in thousands/ At October 31 |
Carrying Amount |
1995 Fair Value |
Carrying Amount |
1994 Fair Value |
|
Assets |
||||
|
Cash and cash equivalents |
$292,934 |
$292,934 |
$374,468 |
$374,468 |
|
Marketable securities |
137,758 |
137,758 |
117,618 |
19,555 |
|
Notes receivable including |
||||
|
noncurrent portion |
83,515 |
86,769 |
104,117 |
105,088 |
|
Long term investments |
30,990 |
32,127 |
15,811 |
16,616 |
|
Liabilities |
||||
|
Commercial paper and |
||||
|
notes payable |
29,937 |
29,937 |
19,957 |
19,957 |
|
Long term debt including |
||||
|
current portion |
27,248 |
28,420 |
62,367 |
64,405 |
|
Other noncurrent |
||||
|
financial liabilities |
2,572 |
2,572 |
2,691 |
2,691 |
|
Off balance sheet financial |
||||
|
instruments |
||||
|
Foreign currency contract |
||||
|
obligations |
— |
(2,146) |
— |
219 |
|
Letters of credit |
— |
572 |
— |
740 |
|
Line of credit |
— |
997 |
— |
1,384 |
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, short term notes receivable, commercial paper and notes payable approximates fair value because of the short term maturity of these instruments.
Marketable securities and long term investments are based on quoted market prices for these or similar instruments. Long term notes receivable are estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.
The fair value of long term debt, including current portion, is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the company for debt of the same maturities.
Other noncurrent financial liabilities consist primarily of deferred payments, for which cost approximates fair value.
Foreign currency contract obligations are estimated by obtaining quotes from brokers.
Letters of credit and line of credit amounts are based on fees currently charged for similar agreements or on the estimated cost to terminate or settle the obligations. Additional information:
|
(Absolute dollars) |
|||
|
Total assets |
October 31, 1995 |
October 31, 1994 |
|
|
$3,228,906,000 |
$2,824,768,000 |
||
|
Year Ended October 31 |
|||
|
Earnings before taxes |
1995 |
1994 |
1993 |
|
$362,214,000 |
$303,299,000 |
$242,200,000 |
|
Required Give your opinion as to the fair value of financial instruments in relation to carrying amount. Develop data to support your opinion.
Johnny’s Self Service Station
John Dearden and his wife, Patricia, have been taking an annual vacation to Stowe, Vermont, each summer. They like the area very much and would like to retire someday in this vicinity. While in Stowe during the summer, they notice a “for sale” sign in front of a self service station. John is 55 and is no longer satisfied with commuting to work in New York City. He decides to inquire about the asking price of the station. He is aware that Stowe is considered a good vacation area during the entire year, especially when the ski season is in progress.
On inquiry, John determines that the asking price of the station is $70,000, which includes two pumps, a small building, and 1/8 acre of land.
John asks to see some financial statements and is shown profit and loss statements for 2001 and 2000 that have been prepared for tax purposes by a local accountant.
JOHNNY’S SELF SERVICE STATION
Statement of Earnings
|
For the Years Ended December 31, 2001 and 2000 |
2001 |
2000 |
|
Revenue |
$185,060 |
$175,180 |
|
Expenses: |
||
|
Cost of goods sold |
160,180 |
153,280 |
|
Depreciation (a) |
1,000 |
1,000 |
|
Real estate and property taxes |
1,100 |
1,050 |
|
Repairs and maintenance |
1,470 |
1,200 |
|
Other expenses |
680 |
725 |
|
Total expenses |
164,430 |
157,255 |
|
Profit |
$ 20,630 |
$ 17,925 |
|
(a) Building and equipment cost |
$30,000 |
|
|
Original estimated life |
30 years |
|
|
Depreciation per year |
$1,000 |
John is also given an appraiser’s report on the property. The land is appraised at $50,000, and the equipment and building are valued at $20,000. The equipment and building are estimated to have a useful life of ten years.
The station has been operated by Jeff Szabo without additional help. He estimates that if help were hired to operate the station, it would cost $10,000 per year. John anticipates that he will be able to operate the station without additional help. John intends to incorporate. The anticipated tax rate is 50%.
Required a. Determine the indicated return on investment if John Dearden purchases the station. Include only financial data that will be recorded on the books. Consider 2001 and 2000 to be representative years for revenue and expenses.
b. Determine the indicated return on investment if help were hired to operate the station.
c. Why is there a difference between the rates of return in part (a) and part (b)? Discuss.
d. Determine the cash flow for 2002 if John serves as the manager and 2002 turns out to be the same as 2001. Do not include the cost of the hired help. No inventory is on hand at the date of purchase, but an inventory of $10,000 is on hand at the end of the year. There are no receivables or liabilities.
e. Indicate some other considerations that should be analyzed.
f. Should John purchase the station?
Recognizing Revenue and Related Costs—
Consider These Situations (Part I)
A. General Motors Corporation
General Motors Corporation included the following in its 1998 annual report:
Revenue Recognition (In Part)
Sales are generally recorded when products are shipped or when services are rendered to independent dealers or other third parties. Provisions for normal dealer sales incentives, returns and allowances, and GM Card rebates are made at the time of vehicle sales. Costs related to special sales incentive programs are recognized as reductions to sales when determinable.
Required a. Sales are generally recorded by the Corporation when products are shipped to independent dealers. Apparently when does the title pass to the independent dealers? Does this method resemble point of sale?
b. Provisions for normal dealer sales incentives, returns and allowances, and GM Card rebates are made at the time of vehicle sale. Speculate on the time lag between recognizing sales and the reduction for these items. Would this time lag represent a problem when matching these related costs to revenue?
c. Costs related to special sales incentive programs are recognized as reductions to sales when determinable. Comment on any matching problem that this may represent.
B. Kodak
Kodak included the following in its 1998 annual report:
Revenue (In Part)
Revenue is recognized from the sale of film, paper, supplies and equipment including sales type leases for equipment when the product is shipped; from maintenance and the service contracts over the contractual period, or as the services are performed.
Required a. Revenue is recognized from the sale of film, paper, supplies and equipment when the product is shipped. Apparently when does title pass for these items?
b. Revenue is recognized from maintenance and service contracts over the contractual period, or as services are performed. Apparently maintenance and service is performed under contractional situations and noncontractional situations. Comment on the reasonableness of recognizing revenue from contractional situations over the contractual period. Comment on the reasonableness of recognizing revenue from noncontractional situations as services are performed.
C. Compaq
Compaq included the following in its 1998 annual report:
Revenue Recognition. Compaq recognizes products revenue at the time products are shipped to its customers. Provision is made at the time the related revenue is recognized for estimated product returns and price protection which may occur under programs Compaq has with its customers. Compaq provides for the estimated cost of post sales support and product warranties upon shipment. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Services revenue is recognized ratably over the contractual period or as the services are performed.
Required a. Compaq recognizes product revenue at the time products are shipped to its customers. What revenue recognition method does this represent?
b. Provision is made at the time the related revenue is recognized for estimated product returns and price protection which may occur under programs Compaq has with its customers. What concept is Compaq using in order to recognize these costs when the revenue is recognized?
c. Compaq provides for the estimated cost of post sales support and product warranties upon shipment. Comment on the appropriateness of this policy.
d. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Comment on the appropriateness of this policy.
Recognizing Revenue and Related Costs—
Consider These Situations (Part II)
A. UAL Corporation
UAL Corporation (UAL) is a holding company whose principal subsidiary is United Air Lines, Inc. (United).
The UAL 1998 annual report included a description of airline revenues as follows:
Airline Revenues
Passenger fares and cargo revenues are recorded as operating revenues when the transportation is furnished. The value of unused passenger tickets is included in current liabilities.
Required a. Passenger fares and cargo revenues are recorded as operating revenues when the transportation is furnished. Comment on the appropriateness of this procedure.
b. The value of unused passenger tickets is included in current liabilities. Comment on the appropriateness of this procedure.
B. Peco Energy
Peco Energy described revenue recognition in its 1998 annual report as follows:
Revenues
Electric and gas revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, the Company accrues an estimate for the unbilled amount of energy delivered or services provided to customers.
Required a. Comment on the difficulty in determining when service is rendered or energy is delivered to customers.
b. The Company accrues an estimate for the unbilled amount of energy delivered or services provided to customers. Comment on the difficulty in determining the amount to accrue.
C. Osmonics
In February 1993, Autotrol, prior to acquisition by Osmonics, discovered that a former employee of its French subsidiary had been embezzling funds for several years. The funds were embezzled through the issuing of fraudulent checks by the former employee and the falsifying of value added tax (VAT) returns and diverting the funds received from the French government.
Autotrol’s investigation of the embezzlement revealed that approximately $4,750,000 was embezzled from 1988 to 1992. Of this total, $2,342,000 related to 1992. The prior years’ financial statements reflected embezzlement losses in the year the embezzlement initially occurred. The Company had net recoveries of $562,000 in 1993 from insurance and reductions in VAT payable.
Required a. How much embezzlement losses were recorded in 1988 to 1991?
b. In what year were the recoveries recorded?
c. Comment on the embezzlement losses and recoveries in terms of revenue recognition and recording of embezzlement losses.
Going Concern?
1994 Annual Report—Fountain Powerboard Industries Inc.
Note 12—Financial Condition (in Part)
. . . The Company’s financial statements have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to recoverability and classification of assets, or the amounts and clas sification of liabilities that might be necessary in the event the company cannot continue in existence.
The Company reported a net loss of $2,993,344 for Fiscal 1994 and its current liabilities exceeded its current assets by $9,340,951. The Company’s continual existence is dependent upon its ability to achieve profitable operations. The Company’s Fiscal 1995 operating plan includes a substantial increase in sales and a restructuring of its operations to reduce its operating costs.
If management cannot achieve the Fiscal 1995 operating plan because of sales shortfalls or greater than anticipated costs and expenses, then the Company may not be able to meet its obligations on a timely basis, its operations may be significantly restricted, and it may not be able to continue on in business as a going concern . . .
Required a. What is the going concern assumption?
b. Has Fountain Power board Industries Inc. prepared financial statements using the going concern assumption? What appears to be the potential problem with using the going concern assumption in this case?
c. What is the significance of the disclosure that this company may not be able to continue as a going concern?
Economics and Accounting: The Uncongenial Twins*
“Economics and accountancy are two disciplines which draw their raw material from much the same mines. From these raw materials, however, they seem to fashion remarkably different products. They both study the operations of firms; they both are concerned with such concepts as income, expenditure, profits, capital, value, and prices. In spite of an apparently common subject matter, however, they often seem to inhabit totally different worlds, between which there is remarkably little communication.” “It is not surprising that the economist regards much accounting procedure as in the nature of ritual. To call these procedures ritualistic is in no way to deny or decry their validity. Ritual is always the proper response when a man has to give an answer to a question, the answer to which he cannot really know. Ritual under these circumstances has two functions. It is comforting (and in the face of the great uncertainties of the future, comfort is not to be despised), and it is also an answer sufficient for action. It is the sufficient answer rather than the right answer which the accountant really seeks. Under these circumstances, however, it is important that we should know what the accountant’s answer means, which means that we should know what procedure he has employed. The wise businessman will not believe his accountant although he takes what his accountant tells him as important evidence. The quality of that evidence, however, depends in considerable degree on the simplicity of the procedures and the awareness which we have of them. What the accountant tells us may not be true, but, if we know what he has done, we have a fair idea of what it means. For this reason, I am somewhat suspicious of many current efforts to reform accounting in the direction of making it more ‘accurate’.” “If accounts are bound to be untruths anyhow, as I have argued, there is much to be said for the simple untruth as against a complicated untruth, for if the untruth is simple, it seems to me that we have a fair chance of knowing what kind of an untruth it is. A known untruth is much better than a lie, and provided that the accounting rituals are well known and understood, accounting may be untrue but it is not lies; it does not deceive because we know that it does not tell the truth, and we are able to make our own adjustment in each individual case, using the results of the accountant as evidence rather than as definitive information.”
Required a. Assume that accounting procedures are in the form of ritual. Does this imply that the accountant’s product does not serve a useful function? Discuss.
b. Does it appear that Kenneth Boulding would support complicated procedures and a complicated end product for the accountant? Discuss.
c. Accounting reports must be accurate in order to serve a useful function. Discuss.
Three Methods of Calculating Depreciation Expense
A firm purchased computer aided drafting and machining equipment at the beginning of the year for $420,000. The machine has an expected useful life of six years and a $38,000 residual value.
Required
a. Calculate the annual depreciation expense for the first four years of the equipment’s life using the straight line method.
b. Calculate the annual depreciation expense for the first four years of the equipment’s life using the double declining balance method.
c. Calculate the annual depreciation expense for the first four years of the equipment’s life, using the sum of the years’ digits method.
d. Comment on the differences in your results. Which method would managers prefer if they are trying to maximize their net income? Which method is preferred if the objective is to minimize income taxes? Why?
e. Using double declining balance depreciation, calculate depreciation expense through the sixth year. What adjustment to depreciation should be made in the sixth year?
Transaction Analysis: Double Declining Balance Depreciation
A firm acquired a $20,000 computer, along with $14,000 of related ancillary equipment that can only be used on this machine. The computer and the related equipment have an estimated life of five years and a residual value of $2,000.
Required
a. Using the balance sheet equation, record the computer’s purchase and depreciation using the double declining balance method. Show the effects in each year, and be sure to include separate columns for accumulated depreciation and retained earnings in your equation.
b. Show the effects on the balance sheet equation of disposing of the computer and the related equipment under each of the following separate circumstances:
i. At the end of the fifth year, sold for $2,000.
ii. At the end of the fifth year, sold for $6,000.
iii. At the end of the fourth year, sold for $8,000.
Financial Statement Effects: Depletion
A firm acquired a $4.5 million gold mine that is expected to yield 500,000 ounces of gold. During each of the first two years, 100,000 ounces of gold are mined and sold.
Required
a. Show the effects on the balance sheet equation from the mine acquisition and depletion for each of these two years.
b. Discuss the impact on the income statement and balance sheet at acquisition and at the end of each year.
c. What would the depletion be during each of the first two years if the firm estimated it would cost $200,000 to clean up the mine at the end of its productive life? (Note that the mine has a negative residual value.)
d. Assume that the mine is sold for $5 million at the end of the second year. Show the effects on the firm’s income statement and the balance sheet.
e. Assume that the mine is fully exhausted and declared worthless at the end of the third year. Show the effects on the firm’s income statement and the balance sheet.
Balance Sheet Effects of Alternative Depreciation Methods
A firm purchased a computer controlled drill press at the beginning of 2000 for $360,000. The drill press has an expected useful life of 10 years and a $40,000 residual value. Assume that the firm begins the year prior to the purchase of the drill press with the following balance sheet totals:
|
Plant and equipment |
$3,500,000 |
|
Less: Accumulated depreciation |
(1,235,000) |
|
Plant and equipment, net |
$2,265,000 |
Required
a. Determine the ending balances in each of these balance sheet accounts, after including the annual straight line depreciation for the first three years of the drill press’s life. Ignore depreciation on the existing plant and equipment.
b. Determine the ending balances in each of these accounts, after including the annual double declining balance depreciation for the first three years of the drill press’s life. Ignore depreciation on the existing plant and equipment.
c. Calculate the effects on net income if the firm used double declining balance depreciation, instead of straight line depreciation. Calculate these differences for each of the first three years for the drill press and for the same three years combined. Ignore depreciation on the existing plant and equipment.
d. Comment on the net income differences. Do they seem significant each year or in total?
e. After the firm has owned the drill press for 10 years, what effects will any of these depreciation methods have on the firm’s net income? Why?
f. Using double declining balance depreciation, calculate depreciation expense through the tenth year. What adjustment to depreciation is necessary in the tenth year?
Calculating Depreciation Expense Using The Double
Declining Balance Method
A firm purchased computer aided drafting and machining (CAD CAM) equipment at the beginning of 1998 for $420,000. The machine has an expected useful life of six years and a $38,000 residual value. Assume that the firm begins the year (before purchasing the CAD CAM equipment) with the following balance sheet totals:
|
Plant and equipment |
$6,250,000 |
|
Less: Accumulated depreciation |
(1,145,000) |
|
Plant and equipment, net |
$5,105,000 |
Required
a. Calculate the ending balances in each of these accounts after including the annual double declining balance depreciation for the first four years of the equipment’s life. Ignore depreciation on the existing plant and equipment.
b. After the firm has owned the CAD CAM machine for six years, what effects would the use of straight line depreciation versus double declining balance depreciation have on the firm’s net income? Why?
Two Methods of Calculating Depreciation Expense
A firm purchased a computer controlled drill press for $480,000 at the beginning of 2000. The drill press has an expected useful life of 10 years and zero residual value. Assume that the firm begins the year with the following balance sheet accounts, ignoring depreciation on the existing plant and equipment:
|
Cash and other assets |
$8,115,000 |
|
Plant and equipment |
$3,500,000 |
|
Less: Accumulated depreciation |
(1,040,000) |
|
Plant and equipment, net |
$2,460,000 |
|
Liabilities |
$1,000,000 |
|
Shareholders’ equity |
$9,575,000 |
Required
a. Show the effects of the drill press purchase on the firm’s balance sheet equation. Assume that the firm borrowed money to purchase the drill press.
b. Show the effects of straight line depreciation on the balance sheet equation for the first two years of the drill press’s life.
c. Show the effects of double declining balance depreciation on the balance sheet equation for the first two years of the drill press’s life.
d. Comment on these differences. Is the firm’s balance sheet stronger under either method? Why?
Gain or Loss on Disposal of Fixed Assets
Swen and Jerry are twins who each own an ice cream company. Four years ago, they each purchased an ice cream mixer. Each mixer was identical in all respects, including the cost of $35,000. Each had an estimated useful life of five years and an estimated residual value of $5,000. The only difference between the two mixers was in the depreciation method chosen. Swen chose the straight line method, whereas Jerry chose the double declining balance method.
Because of the intense competition in the ice cream business and the resulting rapid changes in technology and mixing methods, Swen and Jerry each decided to replace their mixers on the same day at the end of the fourth year. They sold their old mixers to twins Haskin and Dobbins for exactly the same price, $10,000.
Later, at a family reunion, Swen mentioned that he had sold his mixer at a loss of $1,000. Jerry, while smiling under his beard, said that he had done better than that, and that Swen should check with his accountant because Jerry had realized a gain on the sale of his mixer.
Required
Explain how Swen could have had a loss on the sale of the same mixer on which Jerry had a gain. Show the relevant calculations that will convince Swen and Jerry of the accuracy of your analysis.
Gain or Loss on Disposal of Fixed Assets
Johns Inc. purchased a canvas stretcher at a cost of $16,000 at the beginning of 1999. Johns estimated that the canvas stretcher would last four years and have no residual value. Johns decided to use straight line depreciation. Three years later, at the end of 2001, Johns sold the canvas stretcher for $10,000.
Required
a. Calculate the book value of the canvas stretcher at the end of 1999 and the end of 2001, prior to its sale.
b. Calculate the gain or loss on the sale of the canvas stretcher.
c. Calculate the income statement effects, assuming that Johns decided to give the canvas stretcher to a charitable foundation.
d. Calculate the gain or loss on the sale of the canvas stretcher, if Johns had originally decided to use the sum of the years’ digits depreciation method.
e. Assume that Johns originally thought that the stretcher would have only a three year life, but that its residual value would be $10,000. In other words, Johns made perfect predictions in 1999 about the life and value of the canvas stretcher at the end of 2001. Compute the gain or loss and compare it with your answer in part d.
f. Assume an alternate scenario for the donation of the canvas stretcher to a charitable foundation. What if, through this gift, Johns would realize significant tax benefits, especially by claiming that the market value of the canvas stretcher was actually $50,000? This high value could presumably be justified because of its collectible value, having been used by such a popular artist. Comment on the ethical implications of the disposal decision and of the valuation decision.
Property, Plant, and Equipment Ratio Analysis
The following financial statement information is from BRN, Inc. BRN is a global company specializing in high tech components for the automotive, space, and computer industries.
|
Property, plant, and equipment on the basis of cost (in millions) |
||
|
1999 |
1998 |
|
|
Land |
$ 104 |
$ 104 |
|
Buildings |
1,527 |
1,461 |
|
Machinery and equipment |
3,925 |
3,555 |
|
Less: Accumulated depreciation |
5,556 |
5,120 |
|
Total property, plant, and equipment |
3,067 |
2,793 |
|
2,489 |
2,327 |
|
|
Other Information |
||
|
Sales revenue |
$9,087 |
$7,948 |
Required
a. Comment on the changes in the property, plant, and equipment accounts.
b. Calculate fixed asset turnover (1999 only) and the percentage of PPE depreciated (both years).
c. Comment on these results. Identify any managerial implications associated with these results.
Amortization of Intangibles
Bishop Corporation had the following intangible assets on December 31, 1999:
1. A patent was acquired from another company on January 1, 1999, for $25,000. The patent had been registered with the U.S. Patent Office on January 1, 1993. Assume that the legal life is the useful life.
2. On April 2, 1999, the company was successful in obtaining a patent. The legal fees paid to an outside law firm were $8,400. The development costs paid to engineers who were employees of Bishop were $75,000. The patent’s estimated useful life is its legal life.
3. On July 1, 1999, Bishop acquired all the assets net of the liabilities of Fargo Company. The identifiable net assets’ market values at the time of purchase totaled $100,000. Bishop acknowledged the superior earnings and loyal customer following of Fargo Company. Therefore, Bishop and Fargo agreed on a total purchase price of $145,000. Any goodwill arising from the purchase is to be amortized over 40 years.
4. On December 31, 1999, Bishop paid a consulting firm $17,000 to develop a trademark. In addition, legal fees paid in connection with the trademark were $3,000. Assume a useful life of 20 years.
Required
a. Determine the amortization expense for 1999.
b. Determine the book value of each of the intangible assets listed above.
Interpreting Financial Statements: Fixed Assets
Review the balance sheet to determine how and where fixed assets and the associated accumulated depreciation were reported.
Required
a. Read Notes 1 and 4. Identify and discuss any unusual terms. Trace any numerical disclosures of fixed asset costs in the notes to corresponding disclosures in the financial statements.
b. Determine whether Reebok has any unusual fixed assets. If so, discuss how they might be interpreted by financial analysts. Discuss how Reebok’s managers might view such assets.
c. Identify Reebok’s accumulated depreciation balances at the end of each year. If these items are not disclosed, what effects will this have on your analysis of the financial statements?
d. Calculate the following ratios for Reebok:
• Fixed asset turnover
• Percentage of PPE depreciated
e. Based on your answers above, how effectively is Reebok managing its long term assets?
Financial Statement Effects: Amortizing Intangible Assets
Assume that you are the manager of a small firm that has an intangible asset valued at $10 million. You believe that the firm’s earnings prospects are quite favorable during the next five years. You also learn that you have a choice in selecting the amortization period for this intangible, which can range from five years to 40 years in length.
Required
a. Choose an amortization period of either five or 40 years, and defend your choice.
b. Suppose that the firm’s earnings prospects for the next five years are very unfavorable. In fact, you discover that the amortization period of five years for this intangible will certainly result in a net loss (negative net income) over the next five years. Again choose an amortization period of either five or 40 years and defend your choice.
c. Discuss any other viable options. What option might be preferable? Why?
Conceptual Discussion: Choosing a Depreciation Method
A firm acquired a $26,000 computer, including software, with an estimated useful life of four years and an estimated residual value of $6,000. The firm’s financial vice president (CFO) is trying to choose between using straight line depreciation and double declining balance depreciation. It is rumored that the computer will be obsolete at the end of the second year. She also believes that the firm will have relatively high profits during the next two years.
Required
a. Provide advice to the CFO regarding your recommendation about the preferred depreciation method.
b. Calculate the effects on the balance sheet equation for the first two years, using each depreciation method. Be sure to include separate accounts for accumulated depreciation and retained earnings in your balance sheet equation.
c. Assume that the computer is sold on the first day of the third year for $4,000 because it is obsolete and no longer useful for any purpose in this firm.
i. Calculate the effect on net income from the computer’s disposal, using each depreciation method.
ii. Assuming that these experiences are typical for most computers, what advice would you now give the CFO regarding depreciation methods that should be used for computers?
iii. Under what circumstances might the controller still want to use straight line depreciation for computer equipment?
Comprehensive Analysis: Fixed Assets
Pfizzel Inc. reported the following information in its property, plant, and equipment note to the 1999 financial statements (dollars in millions):
|
1999 |
1998 |
1997 |
|
|
Land |
$ 85.2 |
$ 81.8 |
$ 71.7 |
|
Buildings |
1,218.6 |
1,093.8 |
953.9 |
|
Machinery and equipment |
2,108.4 |
1,897.8 |
1,706.9 |
|
Furniture, fixtures, and other |
940.2 |
812.8 |
698.3 |
|
Construction in progress |
640.5 |
414.5 |
385.6 |
|
Total PPE |
4,992.9 |
4,300.7 |
3,816.4 |
|
Less accumulated depreciation |
1,919.7 |
1,668.2 |
1,511.3 |
|
Book value PPE |
$3,073.2 |
$2,632.5 |
$2,305.1 |
Required
Part I
a. Identify and describe each term in this note.
b. During which year(s) did Pfizzel acquire substantial fixed assets? How can you tell?
c. During which year(s) did Pfizzel sell some fixed assets? How can you tell?
d. Did Pfizzel’s construction change markedly during these three years? What evidence supports your conclusion?
e. Calculate the percentage of PPE depreciated for each year. Discuss the meaning and implications of your results.
Part II
Given the following additional information from Pfizzel’s 1999 annual report (dollars in millions):
|
1999 |
1998 |
1997 |
|
|
Net sales |
$8,281.3 |
$7,477.7 |
$7,230.2 |
|
Income from operations |
1,972.5 |
913.3 |
1,553.9 |
f. Calculate fixed asset turnover for 1999 and 1998.
g. Evaluate and discuss your results.
Part III
h. If you now learn that the average fixed asset turnover is 1.4 for firms similar to Pfizzel, reevaluate and discuss your earlier results.
Part IV
Pfizzel Inc. reported the following summary of significant accounting policies in its 1999 annual report:
Property, plant, and equipment are recorded at cost. Significant improvements are capitalized. In general, the straight line method of depreciation is used for financial reporting purposes and accelerated methods are used for U.S. and certain foreign tax reporting purposes.
i. Discuss each part of this note, indicating how it relates to the concepts described in this chapter.
j. Identify and discuss areas where managers have some discretion to choose between alternative accounting policies or methods.
k. Similarly, identify areas where substantial judgment and subjectivity may be used.
l. What opportunities may Pfizzel use to adjust or to manipulate net income? Are they significant? Why?
Comprehensive Analysis: Fixed Assets
Spelling Entertainment, which produces films and videos and other entertainment media, lists the following items in its 1994 annual report (dollars in thousands):
|
1994 |
1993 |
1992 |
1991 |
|
|
Property, plant, and equipment |
||||
|
net |
$ 16,161 |
$ 4,770 |
$ 4,834 |
$ 6,331 |
|
Other assets |
19,678 |
4,562 |
6,512 |
13,879 |
|
Net assets held for disposition |
0 |
0 |
0 |
16,475 |
|
Intangibles, net of accumulated |
||||
|
amortization of $17,671, |
||||
|
$10,527, $6,713 and |
||||
|
$2,626 |
400,751 |
1,549,983 |
159,291 |
154,946 |
|
Revenues |
$599,839 |
$ 274,899 |
$257,546 |
$122,748 |
|
Operating income |
50,743 |
39,727 |
25,315 |
13,987 |
Required
Part I
a. Describe each of Spelling’s non current assets.
b. Identify any unusual trends or unusual terms.
c. Calculate fixed asset turnover for 1993 and 1994. Use property, plant, and equipment, net.
Part II
d. How does Spelling seem to be managing its fixed assets? What evidence supports your conclusion?
e. Why are intangibles Spelling’s largest noncurrent asset? What problems might this create, especially if these intangibles represent copyrights and trademarks that are no longer fashionable?
Part III
f. What additional information is needed before you can calculate Spelling’s percentage of PPE depreciated?
g. Where might you find such information?
h. Upon carefully reading the notes to Spelling’s 1994 financial statements, you do not find the requisite information. What would you do next to find this information?
Standard Setting: “By the Way of the United States Congress”
In the summer of 1993, the Senate and the House introduced identical bills to amend the Internal Revenue Code of 1986. Section 4 of these bills addressed stock option compensation and financial reporting.
SEC. 4 STOCK OPTION COMPENSATION.
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following new subsection:
“(h) STOCK OPTION COMPENSATION—The Commission shall not require or permit an issuer to recognize any expense or other charge in financial statements furnished to its security holders resulting from, or attributable to, either the grant, vesting, or exercise of any option or other right to acquire any equity security of such issuer (even if the right to exercise such option or right is subject to any conditions, contingencies or other criteria including, without limitation, the continued performance of services, achievement of performance objectives, or the occurrence of any event) which is granted to its directors, officers, employees, or other persons in connection with the performance of services, where the exercise price of such option or right is not less than the fair market value of the underlying security at the time such option or right is granted.”
Required a. The United States Congress is well qualified to debate and set generally accepted accounting principles Comment.
b. Speculate on why these bills were directed to amend the Securities Exchange Act of 1934.
Potential LIFO Liquidation: Effect on Profits
El Puerto Company uses LIFO for its inventories. Information regarding 2000’s beginning inventory and purchases up until December 15,2000 is shown below:
|
Beginning inventory (January 1, 2000) 500,000 units @ $10 |
$5 million |
|
Purchases during 2000: 1,200,000 units @ an average cost of $20 |
$24 million |
El Puerto sold 1,500,000 units up to December 15 and expects that very few, if any, additional sales will occur before year end. Inventory purchase costs are $25 per unit at December 15, and prices are not expected to change over the remainder of 2000.The company’s income tax rate is 40%.
Required
a. Determine El Puerto Company’s ending inventory value and cost of goods sold for 2000, assuming that (1) no additional purchases are made during 2000 and (2) an additional 400,000 units are purchased at $25 per unit before year end.
b. Based on these calculations, would you advise the company to purchase additional inventory before year end? Explain.
Comprehensive Marketable Securities, Accounts Receivable, Inventory Pratsky, Inc., had the following account balances:
|
December 31, 1999 |
|||
|
Assets |
Liabilities |
||
|
Cash |
$12,500 |
Accounts payable |
$10,000 |
|
Accounts Receivable |
22,400 |
Stockholders’ Equity: |
|
|
Allowance for |
Invested capital |
20,000 |
|
|
uncollectible accounts |
(3,400) |
Retained earnings |
19,000 |
|
Inventory |
17,500 |
Total stockholders’ equity |
39,000 |
|
$49,000 |
$49,000 |
||
During 2000, the corporation had the following transactions:
1. Issued common stock for $40,000 cash.
2. Purchased inventory on account; 200 units @ $38, then 150 units @ $39.
Note: Beginning inventory was comprised of 500 units @ $35.
3. Purchased 200 shares of IBM for $45/share and purchased 100 shares of Microsoft for $90/share.
4. Sales at retail during 2000 were $75,000 (half received in cash, and the balance on account).
5. Write offs of uncollectible accounts totaled $2,600.
6. Received $38,000 from receivable customers.
7. Paid creditors on account, $18,000.Paid operating expenses for the current period of $51,000.
8. At year end, a physical inventory equaled 225 units.The company uses the LIFO inventory costing method.
9. Assume that marketable securities are “available for sale,” and the market price at December 31, 2000, for IBM is $42/share, and for Microsoft $102/share.
10. Based on the accounts receivable aging, management feels that the allowance for uncollectible accounts should have a balance of $5,700 at yearend.
Required
a. Set up the beginning balances in the balance sheet equation. Leave enough room to add new columns as necessary.
b. Record transactions 1 through 10 using the balance sheet equation.
c. Calculate the following ratios for 1999 and 2000 and evaluate the company’s management of its accounts receivable:
• Accounts receivable/sales (assume that sales in 1999 were $125,786)
• Sales/day
• Collection period
• Allowance as a percentage of accounts receivable
Ratio Calculations: Comprehensive Problem Including LIFO and FIFO
Two similar companies use different inventory valuation methods. In fact, the companies are identical except for their inventory methods. L Co. uses the LIFO inventory valuation method, and F Co. uses FIFO.
|
Income Statements |
L Co. |
F Co. |
|
Sales |
$ 30,000 |
$30,000 |
|
Cost of goods sold |
(21,280) |
(19,200) |
|
Gross profit |
8,720 |
10,800 |
|
Selling, general, and administrative |
(6,000) |
(6,000) |
|
Income before interest expense |
2,720 |
4,800 |
|
Interest expense (12%) |
(960) |
(960) |
|
Income before taxes |
$ 1,760 |
$ 3,840 |
|
Balance Sheets |
||
|
Assets |
||
|
Cash |
$ 4,000 |
$ 4,000 |
|
Accounts receivable |
5,000 |
5,000 |
|
Inventory |
2,720 |
4,800 |
|
Total current assets |
11,720 |
13,800 |
|
Fixed assets (net) |
30,000 |
30,000 |
|
Total assets |
$ 41,720 |
$43,800 |
|
Equities |
||
|
Current liabilities |
$ 3,200 |
$ 3,200 |
|
Long term liabilities |
8,000 |
8,000 |
|
Total liabilities |
11,200 |
11,200 |
|
Shareholders’ equity |
30,520 |
32,600 |
|
Total equities |
$ 41,720 |
$43,800 |
Required
Using the financial statements from LCo. And F Co. Calculate the following ratios (assume an income tax rate of 20%):
a. Current ratio
b. Accounts receivable as a percentage of sales
c. Average sales per day
d. Collection period
e. Gross profit percentage
f. Cost of goods sold per day
g. Number of days sales’ in ending inventory
h. Operating income ratio
i. Return on equity (assume that average shareholders’ equity for L and F Co. are $30,000 and $32,000, respectively)
j. Return on assets (assume that average total assets for L and F Co. Are $41,000 and $43,000, respectively) Based on these results (a through j, above), which company represents
k. The best lending alternative? Why?
l. The best investment alternative? Why?
m. The best acquisition alternative? Why?
Ratio Calculations: Effects of FIFO and LIFO
Two similar companies use different inventory valuation methods. LL Co. uses the LIFO inventory valuation method, and FF Co. uses FIFO. Ignore the effect of income taxes on each company.
|
Income Statements |
LL Co. |
FF Co. |
|
Sales |
$ 35,000 |
$35,000 |
|
Cost of goods sold |
(20,350) |
(18,200) |
|
Gross profit |
14,650 |
16,800 |
|
Selling, general, and administrative |
(6,000) |
(6,000) |
|
Income before interest expense |
8,650 |
10,800 |
|
Interest expense (12%) |
(960) |
(960) |
|
Income before taxes |
$ 7,690 |
$ 9,840 |
|
Balance Sheets |
||
|
Total current assets |
10,320 |
12,870 |
|
Fixed assets (net) |
29,000 |
31,000 |
|
Total assets |
$ 39,320 |
$43,870 |
|
Equities |
||
|
Current liabilities |
$ 3,120 |
$ 3,270 |
|
Long term liabilities |
8,000 |
8,000 |
|
Total liabilities |
11,120 |
11,270 |
|
Shareholders’ equity |
28,200 |
32,600 |
|
Total equities |
$ 39,320 |
$43,870 |
Required
Using the financial statements from LL Co. And FF Co., calculate the following ratios:
a. Current ratio
b. Average sales per day
c. Gross profit percentage
d. Cost of goods sold per day
e. Operating income ratio
f. Return on equity (use ending shareholders’ equity in the denominator)
g. Return on assets (use ending total assets in the denominator)
h. Based on these results (above),which company seems to be better managed? In which company would you prefer to make an equity investment? Explain.
Accounts Receivable: Effects on Allowance for Un collectibles
Becca’s Finance and Collection Company has had a lot of trouble collecting its receivables recently. Discuss how each of the following circumstances might be reflected in the Allowance for Uncollectible Accounts:
1. Dagwood Bumpstead has an “open”account that is always overdue.Dagwood makes regular payments of $500 each month, but the balance in his account is always about $4,000.
2. Blondie purchased a car using $4,000 borrowed from Becca’s. Blondie has not made any payments for six months, and her overdue balance exceeds $1,200.
3. Sad Sack has just borrowed $4,000 from Becca’s, has excellent credit references, and after borrowing the money has sent Becca’s a change of address notification showing a new address in Brazil.
4. Blondie paid her overdue balance.
5. Dagwood’s son purchased a car using $4,000 borrowed from Becca’s.He has no credit references, other than the family connections and circumstances discussed earlier. Becca’s is unable to get Dagwood to cosign the note!
6. Blondie’s daughter purchased a new sound system for her house and car, using $4,000 borrowed from Becca’s.She has an excellent credit history, but after purchasing the sound system, it failed; she informed Becca’s that because the seller provided no warranty, she was not going to make any payments on the defective sound system.
Transaction Analysis: Accounts Receivable
S. Claus Company ended the 2000 season with an accounts receivable balance of $375,000, less allowance for uncollectible accounts of $37,500. Use the accounting equation to reflect each of the following situations and calculate the
2001 season’s ending balance in accounts receivable and the allowance account.
1. Revenues in 2001 were $4,500,000, half of which were collected in cash, with the balance on account.
2. Cash collections of accounts receivable in 2001 were $2,375,000.
3. Write offs of delinquent accounts in 2001 were $2,000.(Most people are not willing to offend S. Claus!)
4. S. Claus wants its allowance account, at the end of 2001, to have the same proportionate relationship reflected at the end of 2000.
Analyzing Accounts Receivable
The Atlas Tile Company has an accounts receivable balance at December 31 of $376,000. Its allowance for uncollectible accounts, before adjustment, has a balance of $37,000. Credit sales for Atlas, for the year just ended, were $2,700,000. Using its credit history, Atlas decides to increase its allowance account by 3% of credit sales.
Required
a. Calculate the allowance for uncollectible accounts as a percentage of the accounts receivable ratio, both before and after the 3% adjustment was made.
b. Now assume that the firm’s auditors have conducted an aging analysis and recommend that the allowance account balance be increased to $96,000.Recalculate the allowance for uncollectible accounts as a percentage of accounts receivable ratio after this alternative adjustment has been made.
c. Compare and contrast these results.
Calculating Ending Inventory: FIFO, LIFO, and Average Cost Method
S.Claus Company makes toys and gifts. At the beginning of July, it owned 200 gallons of red paint, which were recorded on the balance sheet at $4.00 per gallon. The following events occurred in the next quarter.
1. Purchased 300 gallons on July 1 at $4.25 each.
2. Purchased 500 gallons on August 1 at $4.50 each.
3. Purchased 800 gallons during September at $4.75 each.
4. Used 1,450 gallons during July through September.
Required
a. Calculate the inventory balance at the end of September and the cost of goods sold (given away!) during these three months, using FIFO accounting.
b. Calculate the inventory balance at the end of September and the cost of goods sold (given away!) during these three months, using LIFO accounting.
c. Calculate the inventory balance at the end of September and the cost of goods sold (given away!) during these three months, using the average cost method to determine inventory balances.
d. Explain and discuss the differences shown under each method. Explain why the total costs of goods available for sale (delivery!) must be identical under all methods.
e. Under what circumstances would S. Claus prefer one method to the others? Under what circumstances would S.Claus prefer one result to the others? Discuss how S. Claus might make a choice between inventory costing methods.
Interpreting Financial Statements: Current Assets
Review the financial statements to determine how and where current assets have been reported.
Required
a. Calculate the following accounts receivable ratios:
• Accounts receivable as a percentage of sales
• Average sales per day
• Collection period
• Allowance for uncollectible accounts as a percentage of accounts receivable
b. Based on these results, what conclusions can be drawn regarding Reebok’s accounts receivable?
c. Calculate the following inventory ratios:
• Gross profit percentage
• Cost of goods sold per day
• Number of days sales’ in ending inventory (NDS)
d. Based on these results, what conclusions can be drawn regarding Reebok’s inventories and cost of goods sold?
e. Discuss any other unusual concerns regarding Reebok’s current assets. What other related information might an external analyst require or prefer?
Interpreting Financial Statements: Current Assets
Review the financial statements to determine how and where current assets have been reported.
Required
a. Did Wendy’s disclose how it calculated the allowance for uncollectible accounts? Is it essential for a financial analyst to know which method has been used? What reliance can an analyst place on the firm’s disclosure of its allowances?
b. If the allowance amounts were not separately disclosed, discuss how they have been included in the firm’s balance sheet.
c. Calculate the following accounts receivable ratios (assume that the doubtful account amounts pertaining to royalties are netted in the accounts receivable):
• Accounts receivable as a percentage of sales
• Average sales per day
• Collection period (Note: Wendy’s uses a 52/53 week year.)
• Allowance for uncollectible accounts as a percentage of accounts receivable
d. Based on these results, what conclusions can be drawn regarding Wendy’s accounts receivable?
e. Calculate the following inventory ratios:
• Gross profit percentage
• Cost of goods sold per day
• Number of days’ sales in ending inventory (NDS) (use the caption “inventory and other” line item for inventory)
f. Based on these results, what conclusions can be drawn regarding Wendy’s inventories and cost of goods sold?
g. Discuss any other unusual concerns regarding Wendy’s current assets. What other related information might an external analyst require or prefer?
Conceptual Discussion: Credit Management
The manager of Rob’s Shoe Store has been congratulated by her division manager for almost completely eliminating all bad debts. She instituted a policy of conducting extensive credit checks on all prospective credit customers and, consequently, rejects most applications.The cost of each credit report is $50 and the store’s profits have declined significantly since she adopted this policy.
Required
a. Identify the circumstances under which this might be an acceptable policy. Under what circumstances might this be an unwise or unacceptable policy?
b. The manager of Rob’s Shoe Store is considering conducting her own credit checks and preparing her own credit reports in order to avoid the $50 cost of credit reports on each prospective credit customer. Why might this not be a cost effective practice?
c. Why would the manager of Rob’s Shoe Store want to have large inventories on hand? Why would her division manager want to curtail these desires? Could a firm ever have too much inventory? If so, what undesirable consequences might occur?
Interpreting Financial Statements: Liquidity
Kesler Inc. is a research based health care company whose objectives include the application of scientific knowledge to help people enjoy longer, healthier, and more productive lives. Its balance sheets for 2000 and 1999 show the following amounts (dollars in millions):
|
2000 |
1999 |
|
|
Cash and cash equivalents |
$1,295.0 |
$1,384.7 |
|
Short term investments |
502.4 |
307.6 |
In the Summary of Significant Accounting Policies in its Notes to Consolidated Financial Statements, Kesler reported:
The Company considers demand deposits, certificates of deposit, and certain time deposits with maturities of three months or less at the date of purchase to be cash equivalents. Certain items that meet the definition of cash equivalents but are part of a larger pool of investments are included in Short term investments.
Required
a. Describe, in your own words, what Kesler may have done with some of its cash equivalents between 1999 and 2000.
b. Is Kesler’s reporting of cash and cash equivalents consistent with most company’s use of the balance sheet category “Cash and cash equivalents”? Why?
c. How do your conclusions change if you later learn that Kesler’s second category of cash equivalents, described as “Certain items…included in Short term investments,” was only about $2.5 (million) each year? What if it were more than $200 (million) each year?
d. Evaluate Kesler’s treatment of cash and cash equivalents if the following amounts had been reported?
|
2000 |
1999 |
|
|
Cash and cash equivalents |
$880 |
$ 165 |
|
Short term investments, at cost |
$445 |
$1,257 |
e. Based on this hypothetical situation, what actions did Kesler probably take in 2000 to improve its cash position?
f. Given Kesler’s inclusion of some cash and cash equivalents on two separate lines of its balance sheet, how should an external analyst use these data in analyzing Kesler’s liquidity? In other words, what should an analyst do to comprehensively interpret Kesler’s liquidity?
Interpreting Financial Statements: Inventory Methods
Pioneer Resource, Inc., reported the following in its Notes to Consolidated Financial Statements for 1999. Material and Supplies: Inventories of new and reusable material and supplies are stated at the lower of cost or market with cost determined on a FIFO or average cost basis. For certain large individual items, however, cost is determined on a specific identification basis.
Required
a. Identify and explain,in your own words, all of the inventory costing methods used by Pioneer Resource.
b. Why might Pioneer Resource use these different methods? Do these various inventory methods enhance the internal consistency and usability of Pioneer Resource’s financial data? Why?
c. If inventories comprised only 1% of Pioneer Resource’s assets, how would that change your views on Pioneer’s use of these different inventory costing methods? What if inventories were 15% of Pioneer Resource’s assets?
d. If the inventory balances reported by Pioneer Resource in 1999 and 1998 were $212.3 and $212.2 million, respectively, how would that change your view of Pioneer Resource’s choice of reporting methods? Note that Pioneer Resource’s 1999 total assets exceeded $22.4 billion. If in subsequent years you found that Pioneer Resource’s inventories had increased by 300%, how would that change your views of these diverse inventory costing methods?
Interpreting Financial Statements: Current Assets
Entertainment Office Group is a leading producer of film (and video) entertainment. Its 1999 and 1998 consolidated balance sheets reported the following assets (dollars in thousands):
|
1999 |
1998 |
|
|
Cash and short term investments |
$ 37,015 |
$ 38,402 |
|
Accounts receivable, net |
66,241 |
32,659 |
|
Film costs and program rights, net |
180,501 |
130,204 |
|
Property, plant, and equipment, net |
5,231 |
7,124 |
|
Other assets |
— |
14,050 |
|
Current liabilities |
120,507 |
156,419 |
Required
a. Evaluate Entertainment’s liquidity on the basis of the above information.
b. Assume that Entertainment’s revenues doubled between 1998 and 1999. Reevaluate the change in accounts receivable. If Entertainment’s revenues were constant, reconsider your conclusions about accounts receivable.
c. What does the term “net” mean in each of the cases shown above?
d. Why might “Other assets” disappear in 1999?
e. What is meant by the term “Film costs and program rights”? Could this be viewed as a type of inventory? If these were stocks of films and scripts, how would the fickle nature of public opinion and personal tastes affect your evaluation of Entertainment’s assets and its liquidity? Why?
f. Entertainment’s Notes to Consolidated Financial Statements contained the following item: Program Rights Advance payments to producers are recorded as program rights in the balance sheet and are stated at the lower of cost or estimated net realizable value.
i. How does this knowledge of how program rights are created affect your prior conclusions? Can its program rights still be viewed as inventory? Why?
ii. If these advance payments will not be refunded by the producers, under any circumstances, how does that change your opinion concerning the program rights?
iii. What other information about the producers, the films, and the scripts would you need to have before coming to a final conclusion about the program rights?
iv. How does the relative proportion of program rights to other assets affect your conclusions? Note that Entertainment’s total assets were between $450 million and $475 million, each year.
v. If the program rights were less than $10,000,000 each year, would that change your conclusions about Entertainment’s assets?
g. Assume that a further note in Entertainment’s annual report includes the following information:
Film Costs and Program Rights:
Film costs and program rights, net of amortization, comprised the following at December 31 (dollars in thousands):
|
1999 |
1998 |
|
|
Film costs: |
||
|
Released |
$ 68,304 |
$ 60,028 |
|
In process and other |
8,863 |
13,723 |
|
Program rights |
103,334 |
56,453 |
|
$180,501 |
$130,204 |
|
It is estimated that approximately half of the film cost associated with the released product will be amortized in the next three years. In October 1999, Entertainment purchased domestic television rights from Oroco Television, Inc. to their film library of more than 142 feature films and related receivables for approximately $45 million, plus the assumption of approximately $10 million in liabilities.
i. How does this new information about program rights affect your conclusions? Does the fact that a substantial portion of these amounts relates to released films affect your conclusions? How?
ii. Explain, in your own words, what happened in October 1999. Indicate how the Oroco purchase was recorded in Entertainment’s assets?
iii. Given this new knowledge about the Oroco purchase, what final conclusions can be drawn about Entertainment’s film costs and program rights?
Disclosure of Compensating Balances
Discuss the implications of the following note. How will it affect the company’s liquidity? How will it affect the company’s overall asset management policies?
Conry Publishing Company
1999 Annual Report
Note 5 (Partial)
At December 31, 1999, the Company has a $10,000,000 Line of Credit Agreement (“Credit Agreement”) with a bank. The Credit Agreement provides for a short term, variable rate line of credit under which the Company may borrow and repay from time to time until maturity on May 31, 2002. The Credit Agreement requires the Company to maintain compensating balances of $200,000 with the bank in lieu of annual commitment fees. No borrowings were outstanding under the Credit Agreement as of December 31, 1999.
Accounts Receivable Management
Sheila Glow sells advertising for KBOL, a local radio station. She receives a small monthly salary plus a commission of 20% of all advertising contracts that she negotiates and that are billed by KBOL. KBOL conducts an informal credit review on all new clients, but relies extensively on the salesperson’s recommendations.
Because Sheila interviews the owner and chief financial officer (CFO) of all her new clients, she feels that her credit screening should be an adequate basis on which KBOL could reliably determine whether to accept or reject a potential client’s credit request.
One potential new client, Atlas Tile Company, has been experiencing financial difficulties and several letters to the editors from disgruntled customers have recently appeared in the local newspaper.Although Sheila knows that Atlas needs many new customers, her commissions have not been strong this month compared to prior months.
KBOL always has the right to reject Atlas’s credit application. Sheila knows that if the credit application contains favorable information, it is likely to be accepted. In the process of helping Atlas’ CFO complete the application, she suggests that City Bank’s rejection of Atlas’ loan application for $5,000 worth of working capital not be shown on the current application for KBOL’s credit. She reasons that Atlas needs her help, and it is not her job to collect the bills; it is only her job to sell radio advertising.
Required
a. What are the ethical ramifications of Sheila’s actions?
b. What are the likely business results of Sheila’s actions?
c. How does KBOL’s commission policy affect Sheila’s incentives?
d. How might the commission policy be changed to more closely align Sheila’s incentives with KBOL’s goals?
e. If the radio station’s managers find that Sheila helped falsify the credit report, what should they do? Why?
Evaluating Accounts Receivable
In the HMO industry, accounts receivable represent one of the major assets. HMOs provide medical services to patients and then bill insurance companies and Medicare/Medicaid agencies. Timely collection is important to maintaining adequate liquidity. Locate the latest 10 K filings for Columbia/HCA Healthcare and FHP International, using the EDGAR archives.
Required
a. What is the value of net accounts receivable? What percent of total assets and current assets do they represent for each company?
b. What is the value of allowance for uncollectible accounts and what percentage of gross accounts receivable does it represent?
c. What are the net revenues for each HMO? Which HMO is larger?
d. Calculate the accounts receivable collection period for both companies.
e. Which company is doing a better job with its accounts receivable?
Bank Statement Reconciliation
Theraux Corporation received its bank statement for the month ended October 31, 1999. Contained in the bank statement were the following items:
|
Check # |
$ Amount |
|
|
Checks cleared: |
1140 |
$100 |
|
1156 |
400 |
|
|
1159 |
250 |
|
|
1161 |
500 |
|
|
1162 |
183 |
|
|
1163 |
175 |
|
|
1165 |
194 |
|
|
Date |
$ Amount |
|
|
Deposits cleared: |
10/3/99 |
$1,250 |
|
10/5/99 |
480 |
|
|
10/16/99 |
1,595 |
|
|
10/25/99 |
942 |
|
|
10/28/99 |
2,106 |
|
|
Other Items: |
||
|
(NSF) from J. Strauss |
$ 275 |
|
|
Bank charges |
80 |
|
|
Note receivable collected |
640 |
|
|
Interest on note receivable |
15 |
|
|
Beginning bank balance |
5,300 |
|
|
Ending bank balance |
10,171 |
Theraux’s check register showed the following during October:
|
Check # |
$ Amount |
|
|
Checks written: |
1140 |
$100 |
|
1155 |
65 |
|
|
1156 |
400 |
|
|
1157 |
320 |
|
|
1158 |
82 |
|
|
1159 |
520 |
|
|
1160 |
125 |
|
|
1161 |
500 |
|
|
1162 |
183 |
|
|
1163 |
175 |
|
|
1164 |
104 |
|
|
1165 |
194 |
|
|
1166 |
220 |
|
|
Deposits: |
Date |
$ Amount |
|
10/3 |
1,250 |
|
|
10/5 |
480 |
|
|
10/12 |
1,190 |
|
|
10/16 |
1,595 |
|
|
10/20 |
1,800 |
|
|
10/25 |
942 |
|
|
10/28 |
2,106 |
|
|
10/31 |
745 |
Other Items:
• Outstanding check from September’s bank reconciliation: #1142 for $195.
• Beginning checking balance: $5,105
• Ending checking balance: $12,225
Required
a. Prepare a bank reconciliation for October, 1999. (Be aware of transposition errors.)
b. What adjustment to the accounting equation is necessary for October?
Storage Tek capitalizes certain software development costs. Because firms outside of the computer industry expense all their research and development costs, Storage Tek’s financial statements may not be comparable to those of firms in other industries. In 1997, Storage Tek reported the following results (dollars in thousands):
|
Income before taxes |
$316,117 |
|
Provision for income taxes |
84,300 |
|
Net income |
$231,817 |
Required
Recalculate Storage Tek’s net income to reflect the immediate expensing of all software development costs.
Newmont Mining Corporation
Excerpt from Financial Statement Notes
Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed, the costs incurred to develop such property are capitalized, including costs to further delineate the ore body and remove overburden to initially expose the ore body. Such costs, and estimated future development costs, are amortized using a units of production method over the estimated life of the ore body. Ongoing development expenditures to maintain production are generally charged to operations as incurred.
Significant payments related to the acquisition of exploration interests are also capitalized. If a mineable ore body is discovered, such costs are amortized using a units of production method. If no mineable ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value.
Required
Does Newmont use the full cost or the successful efforts method? Why?
To explain and illustrate the direct method, we will use the transactions of Juarez Company for 2010, to prepare a statement of cash flows. Illustration presents information related to 2010 for Juarez Company.
|
JUAREZ COMPANY |
|||
|
Assets |
2010 |
2009 |
Change Increase/Decrease |
|
Cash |
$191,000 |
$159,000 |
$ 32,000 Increase |
|
Accounts receivable |
12,000 |
15,000 |
3,000 Decrease |
|
Inventory |
170,000 |
160,000 |
10,000 Increase |
|
Prepaid expenses |
6,000 |
8,000 |
2,000 Decrease |
|
Land |
140,000 |
80,000 |
60,000 Increase |
|
Equipment |
160,000 |
–0– |
160,000 Increase |
|
Accumulated depreciation—equipment |
(16,000) |
–0– |
16,000 Increase |
|
Total |
$663,000 |
$422,000 |
|
|
Liabilities and Stockholders’ Equity |
|||
|
Accounts payable |
$ 52,000 |
$ 60,000 |
$ 8,000 Decrease |
|
Accrued expenses payable |
15,000 |
20,000 |
5,000 Decrease |
|
Income taxes payable |
12,000 |
–0– |
12,000 Increase |
|
Bonds payable |
130,000 |
–0– |
130,000 Increase |
|
Common stock |
360,000 |
300,000 |
60,000 Increase |
|
Retained earnings |
94,000 |
42,000 |
52,000 Increase |
|
Total |
$663,000 |
$422,000 |
|
|
JUAREZ COMPANY |
||
|
Revenues |
$975,000 |
|
|
Cost of goods sold |
$660,000 |
|
|
Operating expenses (excluding depreciation) |
176,000 |
|
|
Depreciation expense |
18,000 |
|
|
Loss on sale of store equipment |
1,000 |
855,000 |
|
Income before income taxes |
120,000 |
|
|
Income tax expense |
36,000 |
|
|
Net income |
$ 84,000 |
|
Additional information:
1. In 2010, the company declared and paid a $32,000 cash dividend.
2. Bonds were issued at face value for $130,000 in cash.
3. Equipment costing $180,000 was purchased for cash.
4. Equipment costing $20,000 was sold for $17,000 cash when the book value of the equipment was $18,000.
5. Common stock of $60,000 was issued to acquire land.
The income statement for Kosinski Manufacturing Company contains the following condensed information.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Revenues |
$6,583,000 |
|
|
Operating expenses, excluding depreciation |
$4,920,000 |
|
|
Depreciation expense |
880,000 |
5,800,000 |
|
Income before income taxes |
783,000 |
|
|
Income tax expense |
353,000 |
|
|
Net income |
$ 430,000 |
|
Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. Machinery was purchased at a cost of $750,000.The following balances are reported on Kosinski’s comparative balance sheet at December 31.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
2010 |
2009 |
|
|
Cash |
$672,000 |
$130,000 |
|
Accounts receivable |
775,000 |
610,000 |
|
Inventories |
834,000 |
867,000 |
|
Accounts payable |
521,000 |
501,000 |
Income tax expense of $353,000 represents the amount paid in 2010. Dividends declared and paid in 2010 totaled $200,000.
Instructions
Prepare the statement of cash flows using the direct method.
The following T account is a summary of the cash account of Edmonds Company.
|
Cash (Summary Form) |
|||
|
Balance, Jan. 1 |
8,000 |
||
|
Receipts from customers |
364,000 |
Payments for goods |
200,000 |
|
Dividends on stock investments |
6,000 |
Payments for operating expenses |
140,000 |
|
Proceeds from sale of equipment |
36,000 |
Interest paid |
10,000 |
|
Proceeds from issuance of |
Taxes paid |
8,000 |
|
|
bonds payable |
300,000 |
Dividends paid |
50,000 |
|
Balance, Dec. 31 |
306,000 |
||
What amount of net cash provided (used) by financing activities should be reported in the statement of cash flows?
The T accounts for Equipment and the related Accumulated Depreciation for Pettengill Company at the end of 2010 are shown here.
|
Equipment |
Accumulated Depreciation |
||||||
|
Beg. bal. |
80,000 |
Disposals |
22,000 |
Disposals |
5,500 |
Beg. bal. |
44,500 |
|
Acquisitions |
41,600 |
Depr. exp. |
12,000 |
||||
|
End. bal. |
99,600 |
End. bal. |
51,000 |
||||
In addition, Pettengill Company’s income statement reported a loss on the sale of equipment of $5,500.What amount was reported on the statement of cash flows as “cash flow from sale of equipment?
Using Direct Method to Calculate Cash Flow from Operating Activities
The following financial statements for Lucy Enterprises are provided:
Income Statement for Year Ending December 31, 1999
|
Sales revenues |
$550,000 |
|
|
Cost of goods sold |
210,000 |
|
|
Gross margin |
$340,000 |
|
|
Salary expenses |
(115,000) |
|
|
Interest expense |
(15,000) |
|
|
Interest revenue |
20,000 |
110,000 |
|
Net income before taxes |
230,000 |
|
|
Tax expense |
92,000 |
|
|
Net income |
$138,000 |
|
Balance Sheet at Year End |
|||||
|
1999 |
1998 |
1999 |
1998 |
||
|
Cash |
$225,000 |
$100,000 |
Accounts payable |
$ 30,000 |
$ 20,000 |
|
Accounts receivable |
124,000 |
135,000 |
Salaries payable |
5,000 |
4,000 |
|
Inventory |
35,000 |
21,000 |
Interest payable |
3,000 |
12,000 |
|
384,000 |
256,000 |
Taxes payable |
2,500 |
3,500 |
|
|
Property, plant, |
40,500 |
39,500 |
|||
|
and equipment |
101,000 |
134,000 |
Shareholders’ |
||
|
Totals |
$485,000 |
$390,000 |
equity |
444,500 |
350,500 |
|
$485,000 |
$390,000 |
||||
Required
Prepare the cash flow from operating activities section of the statement of cash flows, using the direct method and the indirect method. The following amounts must first be calculated when using the direct method:
• Cash collections from customers
• Cash payments to suppliers
• Cash payments to employees
• Taxes paid
• Interest paid
• Interest collected
• Purchases
Using Direct Method to Calculate Cash Flow from Operating Activities
The following condensed information (dollars in thousands) is available from Mary’s Muffins.Assume that all sales are credit sales (accounts receivable) and all purchases are also on credit (accounts payable).
|
December 31 |
||
|
Year 1 |
Year 2 |
|
|
Balance Sheet Data: |
||
|
Accounts receivable |
$55 |
$ 53 |
|
Prepaid expenses |
13 |
15 |
|
Salaries payable |
22 |
25 |
|
Taxes payable |
17 |
13 |
|
Inventory |
32 |
26 |
|
Accounts payable |
27 |
21 |
|
Income Statement Data: |
||
|
Sales revenues |
$550 |
|
|
Cost of goods sold |
210 |
|
|
Salaries expense |
112 |
|
|
Tax expense |
57 |
|
|
Depreciation expense |
29 |
|
|
Other expense |
$ 21 |
|
Required
Prepare the operating activities section of Year 2’s statement of cash flows,using the direct method.
Preparing a Statement of Cash Flows
The following are comparative balance sheets for the Paulino Corporation for 2000 and 1999 and the income statement for the year ended December 31, 2000:
|
Paulino Corporation Comparative Balance Sheets December 31 |
||
|
Assets |
2000 |
1999 |
|
Cash |
$ 89,000 |
$ 60,000 |
|
Accounts receivable |
65,000 |
50,000 |
|
Inventory |
200,000 |
90,000 |
|
Land |
100,000 |
225,000 |
|
Equipment, net |
371,000 |
380,000 |
|
$825,000 |
$805,000 |
|
|
Liabilities and Shareholders’ Equity |
||
|
Accounts payable |
54,000 |
32,000 |
|
Dividends payable |
15,000 |
0 |
|
Interest payable |
6,000 |
8,000 |
|
Mortgage payable |
130,000 |
305,000 |
|
Invested Capital |
capital280,000 |
280,000 |
|
Retained earnings |
340,000 |
180,000 |
|
$825,000 |
$805,000 |
|
|
Paulino Corporation Income Statement For the Year Ended December 31, 2000 |
||
|
Sales |
$1,200,000 |
|
|
Cost of goods sold |
(720,000) |
|
|
Gross profit |
480,000 |
|
|
Operating and other expenses |
||
|
Depreciation |
(9,000) |
|
|
Other operating expenses |
(275,000) |
|
|
Gain on sale of land |
15,000 |
|
|
Interest expense |
(10,000) |
(279,000) |
|
Net income |
$ 201,000 |
|
Additional Information:
1. Dividends declared during the year were $41,000.
2. Land at a cost of $125,000 was sold for $140,000.
3. The only change in equipment was the depreciation expense.
4. All other balance sheet account changes are from normal transactions.
Required
Use the direct method to prepare a statement of cash flows for Paulino Corporation.
Preparing a Statement of Cash Flows
The following financial statements for Swale, LTD are provided:
|
Swale Limited Income Statement For the Year Ended December 31, 2000 |
||
|
Revenues: |
||
|
Sales |
$97,800 |
|
|
Interest revenue |
1,300 |
|
|
$99,100 |
||
|
Expenses: |
||
|
Cost of goods sold |
56,500 |
|
|
Salary expense |
19,000 |
|
|
Depreciation expense |
3,000 |
|
|
Interest expense |
1,500 |
|
|
Tax expense |
2,500 |
82,500 |
|
Net Income |
$ 16,600 |
|
|
Swale Limited Balance Sheet December 31 |
||
|
2000 |
1999 |
|
|
Cash |
$35,600 |
$24,000 |
|
Accounts receivable |
5,500 |
3,000 |
|
Inventory |
21,000 |
11,000 |
|
Property, plant, and equipment (net) |
21,500 |
20,000 |
|
Investments |
12,000 |
0 |
|
Total assets |
$95,600 |
$58,000 |
|
Accounts payable |
$5,000 |
$2,000 |
|
Salaries payable |
600 |
500 |
|
Short term debt |
0 |
12,000 |
|
Long term debt |
25,000 |
6,000 |
|
Common stock |
36,000 |
25,100 |
|
Retained earnings |
29,000 |
12,400 |
|
Total liabilities and shareholders’ equity |
$95,600 |
$58,000 |
Required
Prepare a statement of cash flows.
Preparing a Cash Flow Statement Using Comparative Balance Sheets
The Limpid Pool Company reports net income of $25 million for 2000. Balance sheets at the beginning and end of the year are shown below.
|
December 31 |
||
|
1999 |
2000 |
|
|
(Dollars in millions) |
||
|
Cash |
$ 50 |
$ 70 |
|
Other current assets |
80 |
145 |
|
Property, plant, and equipment (net) |
170 |
135 |
|
Total assets |
$300 |
$350 |
|
Current liabilities |
$20 |
$15 |
|
Noncurrent liabilities |
180 |
195 |
|
Common stock |
80 |
110 |
|
Retained earnings |
20 |
30 |
|
Total liabilities and shareholders’ equity |
$300 |
$350 |
The firm did not acquire any noncurrent assets during 2000.
Required
Determine the following amounts for 2000:
a. Dividends paid
b. Cash flow from operating activities
c. Cash flow from investing activities
d. Cash flow from financing activities
Identify the best answer to each of the following multiple choice questions,and explain why it is the best answer:
1. To help achieve internal control over the assets of a company:
a. Segregate authorization and execution
b. Segregate authorization and review
c. Segregate custody and record keeping
d. Segregate custody and payment
2. Which of the following internal control statements is correct?
a. Internal control does not ensure that collusion will be detected.
b. Internal control design is the responsibility of the outside auditors.
c. The costs of internal control often exceed the benefits.
d. A strong system of internal control should be enough to show that the financial statements “present fairly.”
Analysis: Marketable Securities
The Amber Corporation purchased three different stocks during the year as follows:
• 100 shares of Fancy Corporation, cost $23 per share
• 250 shares of Traylor Corporation, cost $15 per share
• 180 shares of Sensor Corporation, cost $7 per share
Amber Corporation intends to sell these soon when its cash flow gets low. On the balance sheet date, these securities had a market price as follows:
|
1. Fancy Corporation: |
$24 per share |
|
2. Traylor Corporation: |
$12 per share |
|
3. Sensor Corporation: |
$9 per share |
Required
a. Assuming that these securities are considered available for sale, what would be the effect on the financial statements of holding these securities?
b. Assuming that these securities are considered trading securities, what would be the effect on the financial statements?
c. What if, after the balance sheet date, Amber decides to sell Traylor Corporation stock for a market price of $14 per share? What would be the effect on the financial statements if the security is (1) available for sale or (2) trading?
Cash, Cash Equivalents, and Short Term Investment Classifications
The Simmons Corporation had the following investments at December 31: 1. 1000 shares of Hollings, Inc., purchased early in the year at $40 per share and held as available for sale and with a year end fair market value of $38 per share
2. $25,000 in U.S. three month Treasury Bills
3. $15,000 commercial deposit with a maturity date of April 30 of the next year
4. $2,500 in postage stamps
5. $1,600 petty cash fund
6. $3,000 IOU from the president of Simmons Corporation
7. $12,000 money market account
Required
a. Describe where each item would be classified on the balance sheet.
b. At what amount should cash, cash equivalents, and short term investments be reported?
Transactions Related to Accounts Receivable: Effects on Selected Financial Statement Items
Spit Spot Cleaners, Inc., recognized the following events related to customer accounts receivable during the firm’s first year of operation:
1. Sales on credit totaled $4,000,000 for the year.
2. The firm estimated that 2% of its credit sales would ultimately prove to be uncollectible.
3. Cash collections of accounts receivable totaled $3,480,000 during the year.
4. The firm wrote off uncollectible accounts of $75,000.
Required
a. Determine the effects of each of these events on the following financial statement items:
• Accounts receivable (net of allowance)
• Total assets
• Revenues
• Expenses
b.Determine the firm’s balance of accounts receivable (net) at December 31 (year end).
Transactions Related to Accounts Receivable:
Effects on Selected Financial Statement Items
Shard Crockery Co. recognized the following events related to customer accounts receivable during 2000.At the start of the year, the firm reported gross accounts receivable of $22,000,000 and an allowance for uncollectible accounts of $2,000,000.
1. Sales on credit totaled $60,000,000 for the year.
2. The company factored $18,000,000 of its receivables to a financial institution and paid a fee of $700,000.
3. Uncollectible customer accounts totaling $3,200,000 were written off during the year.
4. Based on an aging of its remaining accounts receivable at year end, the company estimates that 10% of its remaining receivables will ultimately be uncollectible.
Required
a. Determine the balance of accounts receivable (net of allowance) to be reported in Shard Crockery’s balance sheet at the end of 2000.
b. Determine the effects of each of the events described above on the company’s accounts receivable (net), total assets, revenues, and expenses.
c. How would the factoring of accounts receivable during the year affect your calculation or interpretation of the company’s accounts receivable collection period (if at all)? Discuss.
Interpreting Financial Statements: Accounts Receivable
DSE is a world leader in the application of information technology. Excerpts from its financial statements disclosed the following information (dollars in millions):
|
Years Ended December 31 |
|||
|
1999 |
1998 |
1997 |
|
|
Total revenues |
$8,463.9 |
$8,154.3 |
$6,998.2 |
|
Accounts receivable |
$1,325.6 |
$1,200.5 |
— |
Required
a. Because DSE did not separately disclose its allowance account balances,what interpretation must be given to the reported balances in accounts receivable?
b. What conclusions, based on the information available, can be drawn regarding DSE’s management of accounts receivable?
Ratio Calculations: Accounts Receivable
Frosty King, Inc., reported the following information in its 2000 financial statements:
|
Years Ended November 30 |
||
|
2000 |
1999 |
|
|
Net sales |
$228,542,157 |
$231,845,632 |
|
Accounts receivable, net |
21,402,613 |
19,280,407 |
|
Allowance for uncollectible accounts |
650,811 |
1,018,416 |
Required
a. Calculate the adequacy of Frosty King’s allowance account for each year.
b. Calculate its average sales per day for each year.
c. Calculate its collection period for each year.
d. Calculate its accounts receivable as a percentage of sales for each year.
e. Based on your analyses, discuss Frosty King’s management of accounts receivable.
Turnover Ratios for Accounts Receivable and Inventory
Ken’s and Den’s Recreational Products,Inc., reports the following information in its 2000 financial statements:
|
Balance (dollars in millions) |
||
|
January 1, 2000 |
December 31, 2000 |
|
|
Accounts receivable (gross) |
$14 |
$12 |
|
Allowance for uncollectible accounts |
1 |
2 |
|
Inventory |
20 |
26 |
|
During 2000: |
||
|
Sales |
80 |
|
|
Cost of goods sold |
55 |
|
Required
Determine Ken’s and Den’s accounts receivable collection period ratio and the number of days’ sales in ending inventory during 2000.
Footnote Disclosures: Convert from LIFO to FIFO Based Measures of Cost of Goods Sold
Dolo’s Building Block Company uses LIFO costing and reports the following information in a footnote to its financial statements:“ If Do lo had used FIFO costing during 2000, the beginning and ending inventories would have been higher by $50 million and $70 million, respectively.”
Required
a. Determine how much higher or lower Dolo’s cost of goods sold would be during 2000 if the firm had used FIFO in costing its inventories.
b. Assume that all of Dolo’s income is taxed at 40%.How much higher or lower would Dolo’s income tax expense be during 2000 if the firm had used FIFO?
c. What was Dolo’s tax savings for the year due to the use of LIFO?
d. What was Dolo’s cumulative tax savings through the end of the year 2000?
Financial Statement Effects of Inventory Costing Methods, First Year of Operations
Tom Hanky, a financial analyst specializing in the toy industry, has provided the following comments concerning the 1999 financial statements of Toys U Must: Toys U Must began operations in 1999 and uses the LIFO method in costing inventories. Because the typical firm in the industry uses FIFO costing, it is desirable to adjust the company’s financial statements “as if”FIFO costing had been used. Footnotes to the financial statements reveal that the use of FIFO would increase the company’s inventory valuation by $150 million, and that the company’s income is taxed at 40%.
Required
Based on Hanky’s comments, explain how each of the following items would be adjusted in Toys U Must’s 1999 financial statements:
a. Inventory
b. Working capital (current assets less current liabilities)
c. Gross margin
d. Income tax expense
e. Net income
f. Retained earnings
g. At the end of 2000,Toys U Must’s financial statement footnotes reveal that the use of FIFO costing would increase the company’s ending inventory valuation by $200 million (the effects on the beginning inventory were described above). Explain how each of the following items would be adjusted in order to convert the company’s reported accounts “as if” the firm had used FIFO costing during 2000:
1. Inventory
2. Working capital
3. Gross margin
4. Income tax expense
5. Net income
6. Retained earnings
Ratio Calculations: LIFO and FIFO
Teddie Bower, Inc., reported the following data in its annual financial statements (dollars in thousands):
|
1999 |
2000 |
|
|
Sales |
$333,667 |
$313,456 |
|
Cost of goods sold—LIFO |
32,587 |
44,690 |
|
Cost of goods sold—FIFO |
30,198 |
45,833 |
|
Ending inventory—LIFO |
11,189 |
10,567 |
|
Ending inventory—FIFO |
15,999 |
14,234 |
|
Net income—LIFO |
34,000 |
33,500 |
|
Net income—FIFO |
38,980 |
37,765 |
Required
a. Calculate the number of days’ sales in ending inventory (NDS) under both LIFO and FIFO.
b. Calculate the gross profit percentage under both LIFO and FIFO.
c. Discuss the differences in inventory levels, income, and gross profit under both LIFO and FIFO.
d. Discuss why a firm might prefer LIFO under these circumstances.
On December 31, 2010, Ramey Associates owned the following securities, held as a long term investment. The securities are not held for influence or control of the investee.
|
Common Stock |
Shares |
Cost |
|
Hurst Co. |
2,000 |
$60,000 |
|
Pine Co. |
5,000 |
45,000 |
|
Scott Co. |
1,500 |
30,000 |
On December 31, 2010, the total fair value of the securities was equal to its cost. In 2011, the following transactions occurred.
|
July 1 |
Received $1 per share semiannual cash dividend on Pine Co. common stock. |
|
Aug. 1 |
Received $0.50 per share cash dividend on Hurst Co. common stock. |
|
Sept. 1 |
Sold 1,500 shares of Pine Co. common stock for cash at $8 per share, less brokerage fees of $300. |
|
Oct. 1 |
Sold 800 shares of Hurst Co. common stock for cash at $33 per share, less brokerage fees of $500. |
|
Nov. 1 |
Received $1 per share cash dividend on Scott Co. common stock. |
|
Dec. 15 |
Received $0.50 per share cash dividend on Hurst Co. common stock. |
|
31 |
Received $1 per share semiannual cash dividend on Pine Co. common stock. |
At December 31, the fair values per share of the common stocks were: Hurst Co. $32, Pine Co. $8, and Scott Co. $18.
Instructions
(a) Journalize the 2011 transactions and post to the account Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2011, to show the securities at fair value. The stock should be classified as available for sale securities.
(c) Show the balance sheet presentation of the investments at December 31, 2011. At this date, Ramey Associates has common stock $1,500,000 and retained earnings $1,000,000.
Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2010, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2010. Nickels reported net income of $320,000 for the year. At December 31, 2010, the market price of Nickels common stock was $24 per share.
Instructions
(a) Prepare the journal entries for Glaser Services for 2010 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
(b) Prepare the journal entries for Glaser Services for 2010, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
(c) Indicate the balance sheet and income statement account balances at December 31, 2010, under each method of accounting.
The following securities are in Pascual Company’s portfolio of long term available for sale securities at December 31, 2010.
|
Cost |
|
|
1,000 shares of Abel Corporation common stock |
$52,000 |
|
1,400 shares of Frey Corporation common stock |
84,000 |
|
1,200 shares of Weiss Corporation preferred stock |
33,600 |
On December 31, 2010, the total cost of the portfolio equaled total fair value. Pascual had the following transactions related to the securities during 2011.
|
Jan. 20 |
Sold 1,000 shares of Abel Corporation common stock at $55 per share less brokerage fees of $600. |
|
28 |
Purchased 400 shares of $70 par value common stock of Rosen Corporation at $78 per share, plus brokerage fees of $480. |
|
30 |
Received a cash dividend of $1.15 per share on Frey Corp. common stock. |
|
Feb. 8 |
Received cash dividends of $0.40 per share on Weiss Corp. preferred stock. |
|
18 |
Sold all 1,200 shares of Weiss Corp. preferred stock at $27 per share less brokerage fees of $360. |
|
July 30 |
Received a cash dividend of $1.00 per share on Frey Corp. common stock. |
|
Sept. 6 |
Purchased an additional 900 shares of $10 par value common stock of Rosen Corporation at $82 per share, plus brokerage fees of $1,200. |
|
Dec. 1 |
Received a cash dividend of $1.50 per share on Rosen Corporation common stock. |
At December 31, 2011, the fair values of the securities were:
|
Frey Corporation common stock |
$64 per share |
|
Rosen Corporation common stock |
$72 per share |
Pascual Company uses separate account titles for each investment, such as “Investment in Frey Corporation Common Stock.”
Instructions
(a) Prepare journal entries to record the transactions.
(b) Post to the investment accounts. (Use T accounts.)
(c) Prepare the adjusting entry at December 31, 2011 to report the portfolio at fair value.
(d) Show the balance sheet presentation at December 31, 2011, for the investment related accounts.
The following data, presented in alphabetical order, are taken from the records of Urbina Corporation.
|
Accounts payable |
$ 240,000 |
|
Accounts receivable |
140,000 |
|
Accumulated depreciation—building |
180,000 |
|
Accumulated depreciation—equipment |
52,000 |
|
Allowance for doubtful accounts |
6,000 |
|
Bonds payable (10%, due 2018) |
500,000 |
|
Buildings |
950,000 |
|
Cash |
42,000 |
|
Common stock ($10 par value; 500,000 shares authorized, |
|
|
150,000 shares issued) |
1,500,000 |
|
Dividends payable |
80,000 |
|
Equipment |
275,000 |
|
Goodwill |
200,000 |
|
Income taxes payable |
120,000 |
|
Investment in Flott common stock (10% ownership), at cost |
278,000 |
|
Investment in Portico common stock (30% ownership), at equity |
380,000 |
|
Land |
390,000 |
|
Market adjustment—available for sale securities (Dr) |
8,000 |
|
Merchandise inventory |
170,000 |
|
Notes payable (due 2011) |
70,000 |
|
Paid in capital in excess of par value |
130,000 |
|
Premium on bonds payable |
40,000 |
|
Prepaid insurance |
16,000 |
|
Retained earnings |
103,000 |
|
Short term stock investment, at fair value (and cost) |
180,000 |
|
Unrealized gain—available for sale securities |
8,000 |
The investment in Flott common stock is considered to be a long term available for sale security.
Instructions
Prepare a classified balance sheet at December 31, 2010.
Groneman Farms is a grower of hybrid seed corn for Ogleby Genetics Corporation. It has had two exceptionally good years and has elected to invest its excess funds in bonds.The following selected transactions relate to bonds acquired as an investment by Groneman Farms, whose fiscal year ends on December 31.
|
2010 |
|
|
Purchased at face value $400,000 of Ziemer Corporation 10 year, 9% bonds dated January 1, 2010, directly from the issuing corporation. |
|
|
July 1 |
Received the semiannual interest on the Ziemer bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Ziemer bonds. |
(Assume that all intervening transactions and adjustments have been properly recorded and the number of bonds owned has not changed from December 31, 2010, to December 31, 2012.)
|
2013 |
|
|
Jan. 1 |
Received the semiannual interest on the Ziemer bonds. |
|
Jan. 1 |
Sold $200,000 of Ziemer bonds at 114. The broker deducted $7,000 for commissions and fees on the sale. |
|
July 1 |
Received the semiannual interest on the Ziemer bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Ziemer bonds. |
Instructions
(a) Journalize the listed transactions for the years 2010 and 2013.
(b) Assume that the fair value of the bonds at December 31, 2010, was $385,000.These bonds are classified as available for sale securities. Prepare the adjusting entry to record these bonds at fair value.
(c) Based on your analysis in part (b) show the balance sheet presentation of the bonds and interest receivable at December 31, 2010. Assume the investments are considered long term. Indicate where any unrealized gain or loss is reported in the financial statements.
In January 2010, the management of Prasad Company concludes that it has sufficient cash to purchase some short term investments in debt and stock securities. During the year, the following transactions occurred.
|
Feb. 1 |
Purchased 500 shares of DET common stock for $30,000, plus brokerage fees of $800. |
|
Mar. 1 |
Purchased 600 shares of STL common stock for $20,000, plus brokerage fees of $300. |
|
Apr. 1 |
Purchased 40 $1,000, 9% CIN bonds for $40,000, plus $1,200 brokerage fees. Interest is payable semiannually on April 1 and October 1. |
|
July 1 |
Received a cash dividend of $0.60 per share on the DET common stock. |
|
Aug. 1 |
Sold 300 shares of DET common stock at $69 per share, less brokerage fees of $350. |
|
Sept. 1 |
Received a $1 per share cash dividend on the STL common stock. |
|
Oct. 1 |
Received the semiannual interest on the CIN bonds. |
|
Oct. 1 |
Sold the CIN bonds for $45,000, less $1,000 brokerage fees. |
At December 31, the fair value of the DET common stock was $66 per share. The fair value of the STL common stock was $29 per share.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2010, to report the investments at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2010.
(d) Identify the income statement accounts and give the statement classification of each account.
On December 31, 2010, Sauder Associates owned the following securities, held as long term investments.
|
Common Stock |
Shares |
Cost |
|
Adel Co. |
4,000 |
$100,000 |
|
Beran Co. |
5,000 |
30,000 |
|
Caren Co. |
3,000 |
60,000 |
On this date, the total fair value of the securities was equal to its cost. The securities are not held for influence or control over the investees. In 2011, the following transactions occurred.
|
July 1 |
Received $1 per share semiannual cash dividend on Beran Co. common stock. |
|
Aug. 1 |
Received $0.50 per share cash dividend on Adel Co. common stock. |
|
Sept. 1 |
Sold 1,500 shares of Beran Co. common stock for cash at $8 per share, less brokerage fees of $300. |
|
Oct. 1 |
Sold 600 shares of Adel Co. common stock for cash at $30 per share, less brokerage fees of $600. |
|
Nov. 1 |
Received $1 per share cash dividend on Caren Co. common stock. |
|
Dec. 15 |
Received $0.50 per share cash dividend on Adel Co. common stock. |
|
31 |
Received $1 per share semiannual cash dividend on Beran Co. common stock. |
At December 31, the fair values per share of the common stocks were: Adel Co. $23, Beran Co. $7, and Caren Co. $19.
Instructions
(a) Journalize the 2011 transactions and post to the account Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2011, to show the securities at fair value. The stock should be classified as available for sale securities.
(c) Show the balance sheet presentation of the investment related accounts at December 31, 2011. At this date, Sauder Associates has common stock $2,000,000 and retained earnings $1,200,000.
Terry’s Concrete acquired 20% of the outstanding common stock of Blakeley, Inc. on January 1, 2010, by paying $1,100,000 for 40,000 shares. Blakeley declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2010. Blakeley reported net income of $600,000 for the year.At December 31, 2010, the market price of Blakeley’s common stock was $30 per share.
Instructions
(a) Prepare the journal entries for Terry’s Concrete for 2010 assuming Terry’s cannot exercise significant influence over Blakeley. (Use the cost method and assume Blakeley common stock should be classified as available for sale.)
(b) Prepare the journal entries for Terry’s Concrete for 2010, assuming Terry’s can exercise significant influence over Blakeley. (Use the equity method.)
(c) Indicate the balance sheet and income statement account balances at December 31, 2010, under each method of accounting.
The following are in Jamison Company’s portfolio of long term available for sale securities at December 31, 2010.
|
Cost |
|
|
700 shares of Adler Corporation common stock |
$35,000 |
|
900 shares of Lynn Corporation common stock |
42,000 |
|
800 shares of Swanson Corporation preferred stock |
22,400 |
On December 31, the total cost of the portfolio equaled total fair value. Jamison Company had the following transactions related to the securities during 2011.
|
Jan. 7 |
Sold 700 shares of Adler Corporation common stock at $56 per share, less brokerage fees of $700. |
|
10 |
Purchased 300 shares, $70 par value common stock of Pesavento Corporation at $78 per share, plus brokerage fees of $240. |
|
26 |
Received a cash dividend of $1.15 per share on Lynn Corporation common stock. |
|
Feb. 2 |
Received cash dividends of $0.40 per share on Swanson Corporation preferred stock. |
|
10 |
Sold all 800 shares of Swanson Corporation preferred stock at $26 per share less brokerage fees of $180. |
|
July 1 |
Received a cash dividend of $1.00 per share on Lynn Corporation common stock. |
|
Sept. 1 |
Purchased an additional 800 shares of the $70 par value common stock of Pesavento Corporation at $75 per share, plus brokerage fees of $900. |
|
Dec. 15 |
Received a cash dividend of $1.50 per share on Pesavento Corporation common stock. |
At December 31, 2011, the fair values of the securities were:
|
Lynn Corporation common stock |
$48 per share |
|
Pesavento Corporation common stock |
$72 per share |
Jamison uses separate account titles for each investment, such as Investment in Lynn Corporation Common Stock.
Instructions
(a) Prepare journal entries to record the transactions.
(b) Post to the investment accounts. (Use T accounts.)
(c) Prepare the adjusting entry at December 31, 2011, to report the portfolio at fair value.
(d) Show the balance sheet presentation at December 31, 2011, for the investment related accounts.
Mindy Feldkamp and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 50_ age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Oscar believes there are more advantages to the corporate form than a partnership, but he hasn’t yet convinced Mindy and Lori. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.
Instructions
(a) Prepare a memo (dated May 26, 2009) that describes the advantages and disadvantages of both partnerships and corporations. Advise Mindy, Oscar, and Lori regarding which organizational form you believe would better serve their purposes. Make sure to include reasons supporting your advice.
After deciding to incorporate, each of the three investors receives 20,000 shares of $2 par common stock on June 12, 2009, in exchange for their co owned building ($200,000 market value) and $100,000 total cash they contributed to the business. The next decision that Mindy, Oscar, and Lori need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understand the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business. Instructions
(b) Prepare notes for a discussion with the three entrepreneurs in which you will compare the consequences of using equity versus debt financing. As part of your notes, show the differences in interest and tax expense assuming $1,400,000 is financed with common stock, and then alternatively with debt. Assume that when common stock is used, 140,000 shares will be issued. When debt is used, assume the interest rate on debt is 9%, the tax rate is 32%, and income before interest and taxes is $300,000. (You may want to use an electronic spreadsheet.)
During the discussion about financing, Lori mentions that one of her clients, Roberto Marino, has approached her about buying a significant interest in the new club. Having an interested investor sways the three to issue equity securities to provide the financing they need. On July 21, 2009, Mr. Marino buys 90,000 shares at a price of $10 per share.
The club, LifePath Fitness, opens on January 12, 2010, and after a slow start, begins to produce the revenue desired by the owners. The owners decide to pay themselves a stock dividend, since cash has been less than abundant since they opened their doors. The 10% stock dividend is declared by the owners on July 27, 2010.The market value of the stock is $3 on the declaration date. The date of record is July 31, 2010 (there have been no changes in stock ownership since the initial issuance), and the issue date is August 15, 2010. By the middle of the fourth quarter of 2010, the cash flow of LifePath Fitness has improved to the point that the owners feel ready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2010. The record date is December 14, 2010, and the payment date is December 24, 2010.
Instructions
(c) (1) Record all of the transactions related to the common stock of LifePath Fitness during the years 2009 and 2010. (2) Indicate how many shares are issued and outstanding after the stock dividend is issued.
Mr. Marino’s purchase of LifePath Fitness was done through his business. The investment has always been accounted for using the cost method on his firm’s books. However, early in 2012 he decided to take his company public. He is preparing an IPO (initial public offering), and he needs to have the firm’s financial statements audited. One of the issues to be resolved is to restate the investment in LifePath Fitness using the equity method, since Mr. Marino’s ownership percentage is greater than 20%.
Instructions
(e) (1) Give the entries that would have been made on Marino’s books if the equity method of accounting for investments had been used since the initial investment. Assume the following data for LifePath.
|
2009 |
2010 |
2011 |
|
|
Net income |
$30,000 |
$70,000 |
$105,000 |
|
Total cash dividends |
$ 2,100 |
$20,000 |
$ 50,000 |
(2) Compute the balance in the LifePath Investment account at the end of 2011.
Natalie has been approached by Ken Thornton, a shareholder of The Beanery Coffee Inc.Ken wants to retire and would like to sell his 1,000 shares in The Beanery Coffee, which represents 20% of all shares issued.The Beanery is currently operated by Ken’s twin daughters, who each own 40% of the common shares. The Beanery not only operates a coffee shop but also roasts and sells beans to retailers, under the name “Rocky Mountain Beanery.” Ken has met with Curtis and Natalie to discuss the business operation. All have concluded that there would be many advantages for Cookie & Coffee Creations Inc. to acquire an interest in The Beanery Coffee. Despite the apparent advantages, Natalie and Curtis are still not convinced that they should participate in this business venture.
At the beginning of the question and answer portion of the annual stockholders’ meeting of Kemper Corporation, stockholder Mike Kerwin asks, “Why did management sell the holdings in UMW Company at a loss when this company has been very profitable during the period its stock was held by Kemper?” Since president Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, “I remember we paid $1,300,000 for that stock some years ago, and I am sure we sold that stock at a much higher price. You must be mistaken.” Kerwin retorts, “Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned $520,000 this year and paid out $160,000 in cash dividends. Further, a summary statement indicates that in past years, while Kemper held UMW stock, UMW earned $1,240,000 and paid out $440,000 in dividends. Finally, the income statement for this year shows a loss on the sale of UMW stock of $180,000. So, I doubt that I am mistaken.” Red faced, president Chavez turns to you.
Instructions
With the class divided into groups, answer the following.
(a) What dollar amount did Kemper receive upon the sale of the UMW stock?
(b) Explain why both stockholder Kerwin and president Chavez are correct.
Bunge Corporation has purchased two securities for its portfolio.The first is a stock investment in Longley Corporation, one of its suppliers. Bunge purchased 10% of Longley with the intention of holding it for a number of years, but has no intention of purchasing more shares.
The second investment was a purchase of debt securities. Bunge purchased the debt securities because its analysts believe that changes in market interest rates will cause these securities to increase in value in a short period of time. Bunge intends to sell the securities as soon as they have increased in value.
Instructions
Write a memo to Max Scholes, the chief financial officer, explaining how to account for each of these investments. Explain what the implications for reported income are from this accounting treatment.
Bartlet Financial Services Company holds a large portfolio of debt and stock securities as an investment. The total fair value of the portfolio at December 31, 2010, is greater than total cost. Some securities have increased in value and others have decreased. Deb Faust, the financial vice president, and Jan McCabe, the controller, are in the process of classifying for the first time the securities in the portfolio.
Faust suggests classifying the securities that have increased in value as trading securities in order to increase net income for the year. She wants to classify the securities that have decreased in value as long term available for sale securities, so that the decreases in value will not affect 2010 net income.
McCabe disagrees. She recommends classifying the securities that have decreased in value as trading securities and those that have increased in value as long term available for sale securities. McCabe argues that the company is having a good earnings year and that recognizing the losses now will help to smooth income for this year. Moreover, for future years, when the company may not be as profitable, the company will have built in gains.
Instructions
(a) Will classifying the securities as Faust and McCabe suggest actually affect earnings as each says it will?
(b) Is there anything unethical in what Faust and McCabe propose? Who are the stakeholders affected by their proposals?
(c) Assume that Faust and McCabe properly classify the portfolio. Assume, at year end, that Faust proposes to sell the securities that will increase 2010 net income, and that McCabe proposes to sell the securities that will decrease 2010 net income. Is this unethical?
Use the information below and on page to prepare a statement of cash flows using the indirect method.
|
REYNOLDS COMPANY |
|||
|
Assets |
2010 |
2009 |
Change Increase/Decrease |
|
Cash |
$ 54,000 |
$ 37,000 |
$ 17,000 Increase |
|
Accounts receivable |
68,000 |
26,000 |
42,000 Increase |
|
Inventories |
54,000 |
–0– |
54,000 Increase |
|
Prepaid expenses |
4,000 |
6,000 |
2,000 Decrease |
|
Land |
45,000 |
70,000 |
25,000 Decrease |
|
Buildings |
200,000 |
200,000 |
–0– |
|
Accumulated depreciation—buildings |
(21,000) |
(11,000) |
10,000 Increase |
|
Equipment |
193,000 |
68,000 |
125,000 Increase |
|
Accumulated depreciation—equipment |
(28,000) |
(10,000) |
18,000 Increase |
|
Totals |
$569,000 |
$386,000 |
|
|
Liabilities and Stockholders’ Equity |
|||
|
Accounts payable |
$ 23,000 |
$ 40,000 |
$ 17,000 Decrease |
|
Accrued expenses payable |
10,000 |
–0– |
10,000 Increase |
|
Bonds payable |
110,000 |
150,000 |
40,000 Decrease |
|
Common stock ($1 par) |
220,000 |
60,000 |
160,000 Increase |
|
Retained earnings |
206,000 |
136,000 |
70,000 Increase |
|
Totals |
$569,000 |
$386,000 |
|
|
REYNOLDS COMPANY |
||
|
Revenues |
$890,000 |
|
|
Cost of goods sold |
$465,000 |
|
|
Operating expenses |
221,000 |
|
|
Interest expense |
12,000 |
|
|
Loss on sale of equipment |
2,000 |
700,000 |
|
Income before income taxes |
190,000 |
|
|
Income tax expense |
65,000 |
|
|
Net income |
$125,000 |
|
Additional information:
1. Operating expenses include depreciation expense of $33,000 and charges from prepaid expenses of $2,000.
2. Land was sold at its book value for cash.
3. Cash dividends of $55,000 were declared and paid in 2010.
4. Interest expense of $12,000 was paid in cash.
5. Equipment with a cost of $166,000 was purchased for cash. Equipment with a cost of $41,000 and a book value of $36,000 was sold for $34,000 cash.
6. Bonds of $10,000 were redeemed at their face value for cash. Bonds of $30,000 were converted into common stock.
7. Common stock ($1 par) of $130,000 was issued for cash.
8. Accounts payable pertain to merchandise suppliers.
Chicago Corporation issued the following statement of cash flows for 2010.
|
CHICAGO CORPORATION |
||
|
Cash flows from operating activities |
||
|
Net income |
$19,000 |
|
|
Adjustments to reconcile net income to net cash |
||
|
provided by operating activities: |
||
|
Depreciation expense |
$ 8,100 |
|
|
Loss on sale of equipment |
1,300 |
|
|
Decrease in accounts receivable |
6,900 |
|
|
Increase in inventory |
(4,000) |
|
|
Decrease in accounts payable |
(2,000) |
10,300 |
|
Net cash provided by operating activities |
29,300 |
|
|
Cash flows from investing activities |
||
|
Sale of investments |
1,100 |
|
|
Purchase of equipment |
(19,000) |
|
|
Net cash used by investing activities |
(17,900) |
|
|
Cash flows from financing activities |
||
|
Issuance of stock |
10,000 |
|
|
Payment on long term note payable |
(5,000) |
|
|
Payment for dividends |
(9,000) |
|
|
Net cash used by financing activities |
(4,000) |
|
|
Net increase in cash |
7,400 |
|
|
Cash at beginning of year |
10,000 |
|
|
Cash at end of year |
$17,400 |
|
(a) Compute free cash flow for Chicago Corporation. (b) Explain why free cash flow often provides better information than “Net cash provided by operating activities.
The income statement for the year ended December 31, 2010, for Kosinski Manufacturing Company contains the following condensed information.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Revenues |
$6,583,000 |
|
|
Operating expenses (excluding depreciation) |
$4,920,000 |
|
|
Depreciation expense |
880,000 |
5,800,000 |
|
Income before income taxes |
783,000 |
|
|
Income tax expense |
353,000 |
|
|
Net income |
$ 430,000 |
|
Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. Machinery was purchased at a cost of $750,000. The following balances are reported on Kosinski’s comparative balance sheets at December 31.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
2010 |
2009 |
|
|
Cash |
$672,000 |
$130,000 |
|
Accounts receivable |
775,000 |
610,000 |
|
Inventories |
834,000 |
867,000 |
|
Accounts payable |
521,000 |
501,000 |
Income tax expense of $353,000 represents the amount paid in 2010. Dividends declared and paid in 2010 totaled $200,000.
Instructions
Prepare the statement of cash flows using the indirect method.
On July 1, 2010, Atwater Corporation issued $2,000,000 face value, 10%, 10 year bonds at $2,271,813.This price resulted in an effective interest rate of 8% on the bonds. Atwater uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2010.
(b) Prepare an amortization table through December 31, 2011 (3 interest periods) for this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2010.
(d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2011, assuming no accrual of interest on June 30.
(e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2011.
On July 1, 2010, Rossillon Company issued $4,000,000 face value, 8%, 10 year bonds at $3,501,514.This price resulted in an effective interest rate of 10% on the bonds. Rossillon uses the effective interest method to amortize bond premium or discount.The bonds pay semiannual interest July 1 and January 1.
Instructions (Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2010.
(2) The accrual of interest and the amortization of the discount on December 31, 2010.
(3) The payment of interest and the amortization of the discount on July 1, 2011, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the discount on December 31, 2011.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2011, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2011?
(2) Would the bond interest expense reported in 2011 be the same as, greater than, or less than the amount that would be reported if the straight line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense that would be reported if the straight line method of amortization were used?
The following is taken from the Pinkston Company balance sheet.
|
PINKSTON COMPANY |
||
|
Current liabilities |
||
|
Bond interest payable (for 6 months |
||
|
from July 1 to December 31) |
$ 105,000 |
|
|
Long term liabilities |
||
|
Bonds payable, 7% due January 1, 2021 |
$3,000,000 |
|
|
Add: Premium on bonds payable |
200,000 |
$3,200,000 |
Interest is payable semiannually on January 1 and July 1.The bonds are callable on any semiannual interest date. Pinkston uses straight line amortization for any bond premium or discount. From December 31, 2010, the bonds will be outstanding for an additional 10 years (120 months).
Instructions
(a) Journalize the payment of bond interest on January 1, 2011.
(b) Prepare the entry to amortize bond premium and to pay the interest due on July 1, 2011, assuming no accrual of interest on June 30.
(c) Assume that on July 1, 2011, after paying interest, Pinkston Company calls bonds having a face value of $1,200,000. The call price is 101. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2011, to amortize bond premium and to accrue interest on the remaining bonds.
On June 1, 2010, Mordica Corp. issued $2,000,000, 9%, 5 year bonds at face value.The bonds were dated June 1, 2010, and pay interest semiannually on June 1 and December 1. Financial statements are prepared annually on December 31.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2010.
(c) Show the balance sheet presentation on December 31, 2010.
(d) Prepare the journal entry to record payment of interest on June 1, 2011, assuming no accrual of interest from January 1, 2011, to June 1, 2011.
(e) Prepare the journal entry to record payment of interest on December 1, 2011.
(f) Assume that on December 1, 2011, Mordica calls the bonds at 102. Record the redemption of the bonds.
Presented below are three different lease transactions in which Ortiz Enterprises engaged in 2010.Assume that all lease transactions start on January 1, 2010. In no case does Ortiz receive title to the properties leased during or at the end of the lease term.
|
Lessor |
|||
|
Renner Co. |
Flynn Co. |
Miley Inc. |
|
|
Type of property |
Bulldozer |
Truck |
Furniture |
|
Bargain purchase option |
None |
None |
None |
|
Lease term |
4 years |
6 years |
3 years |
|
Estimated economic life |
8 years |
7 years |
5 years |
|
Yearly rental |
$13,000 |
$20,000 |
$ 3,000 |
|
Fair market value of leased |
|||
|
asset |
$80,000 |
$96,000 |
$20,500 |
|
Present value of the lease |
|||
|
rental payments |
$48,000 |
$82,000 |
$ 9,000 |
Instructions
(a) Identify the leases above as operating or capital leases. Explain.
(b) How should the lease transaction for Flynn Co. be recorded on January 1, 2010?
(c) How should the lease transaction for Miley Inc. be recorded in 2010?
On July 1, 2010,Wheeler Satellites issued $4,500,000 face value, 9%, 10 year bonds at $4,219,600.This price resulted in an effective interest rate of 10% on the bonds. Wheeler uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2010.
(b) Prepare an amortization table through December 31, 2011 (3 interest periods) for this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2010.
(d) Prepare the journal entry to record the payment of interest and the amortization of the discount on July 1, 2011, assuming that interest was not accrued on June 30.
(e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2011.
On July 1, 2010, Remington Chemical Company issued $4,000,000 face value,10%,10 year bonds at $4,543,627.This price resulted in an 8% effective interest rate on the bonds. Remington uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest on each July 1 and January 1.
Instructions (Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2010.
(2) The accrual of interest and the amortization of the premium on December 31, 2010.
(3) The payment of interest and the amortization of the premium on July 1, 2011, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the premium on December 31, 2011.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2011, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2011?
(2) Would the bond interest expense reported in 2011 be the same as, greater than, or less than the amount that would be reported if the straight line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense if the straight line method of amortization were used?
The following is taken from the Nilson Corp. balance sheet.
|
NILSON CORPORATION |
||
|
Current liabilities |
||
|
Bond interest payable (for 6 months |
||
|
from July 1 to December 31) |
$ 108,000 |
|
|
Long term liabilities |
||
|
Bonds payable, 9%, due |
||
|
January 1, 2021 |
$2,400,000 |
|
|
Less: Discount on bonds payable |
90,000 |
2,310,000 |
Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual interest date. Nilson uses straight line amortization for any bond premium or discount.
From December 31, 2010, the bonds will be outstanding for an additional 10 years (120 months).
Instructions (Round all computations to the nearest dollar).
(a) Journalize the payment of bond interest on January 1, 2011.
(b) Prepare the entry to amortize bond discount and to pay the interest due on July 1, 2011, assuming that interest was not accrued on June 30.
(c) Assume that on July 1, 2011, after paying interest, Nilson Corp. calls bonds having a face value of $800,000.The call price is 102. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2011, to amortize bond discount and to accrue interest on the remaining bonds.
Nordham Corporation’s trial balance at December 31, 2010, is presented below. All 2010 transactions have been recorded except for the items described below and on the .
|
Debit |
Credit |
|
|
Cash |
$ 23,000 |
|
|
Accounts Receivable |
51,000 |
|
|
Merchandise Inventory |
22,700 |
|
|
Land |
65,000 |
|
|
Building |
95,000 |
|
|
Equipment |
40,000 |
|
|
Allowance for Doubtful Accounts |
$ 450 |
|
|
Accumulated Depreciation—Building |
30,000 |
|
|
Accumulated Depreciation—Equipment |
14,400 |
|
|
Accounts Payable |
19,300 |
|
|
Bond Interest Payable |
–0– |
|
|
Dividends Payable |
–0– |
|
|
Unearned Rent Revenue |
8,000 |
|
|
Bonds Payable (10%) |
50,000 |
|
|
Common Stock ($10 par) |
30,000 |
|
|
Paid in Capital in Excess of Par—Common Stock |
6,000 |
|
|
Preferred Stock ($20 par) |
–0– |
|
|
Paid in Capital in Excess of Par—Preferred Stock |
–0– |
|
|
Retained Earnings |
75,050 |
|
|
Treasury Stock |
–0– |
|
|
Dividends |
–0– |
|
|
Sales |
570,000 |
|
|
Rent Revenue |
–0– |
|
|
Bad Debts Expense |
–0– |
|
|
Bond Interest Expense |
2,500 |
|
|
Cost of Goods Sold |
400,000 |
|
|
Depreciation Expense—Buildings |
–0– |
|
|
Depreciation Expense—Equipment |
–0– |
|
|
Other Operating Expenses |
39,000 |
|
|
Salaries Expense |
65,000 |
|
|
Total |
$803,200 |
$803,200 |
Unrecorded transactions
1. On January 1, 2010, Nordham issued 1,000 shares of $20 par, 6% preferred stock for $22,000.
2. On January 1, 2010, Nordham also issued 1,000 shares of common stock for $23,000.
3. Nordham reacquired 300 shares of its common stock on July 1, 2010, for $49 per share.
4. On December 31, 2010, Nordham declared the annual preferred stock dividend and a $1.50 per share dividend on the outstanding common stock, all payable on January 15, 2011.
5. Nordham estimates that uncollectible accounts receivable at year end is $5,100.
6. The building is being depreciated using the straight line method over 30 years. The salvage value is $5,000.
7. The equipment is being depreciated using the straight line method over 10 years. The salvage value is $4,000.
8. The unearned rent was collected on October 1, 2010. It was receipt of 4 months’ rent in advance (October 1, 2010 through January 31, 2011).
9. The 10% bonds payable pay interest every January 1 and July 1.The interest for the 6 months ended December 31, 2010, has not been paid or recorded.
Instructions (Ignore income taxes.)
(a) Prepare journal entries for the transactions listed above.
(b) Prepare an updated December 31, 2010, trial balance, reflecting the unrecorded transactions.
(c) Prepare a multiple step income statement for the year ending December 31, 2010.
(d) Prepare a statement of retained earnings for the year ending December 31, 2010.
(e) Prepare a classified balance sheet as of December 31, 2010.
On January 1, 2008, Carlin Corporation issued $2,400,000 of 5 year, 8% bonds at 95; the bonds pay interest semiannually on July 1 and January 1. By January 1, 2010, the market rate of interest for bonds of risk similar to those of Carlin Corporation had risen. As a result the market value of these bonds was $2,000,000 on January 1, 2010—below their carrying value. Andrea Carlin, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so the company will have to issue $2,000,000 (face value) of new 10 year, 11% bonds at par. The president asks you, as controller, “What is the feasibility of my proposed repurchase plan?”
Instructions
With the class divided into groups, answer the following.
(a) What is the carrying value of the outstanding Carlin Corporation 5 year bonds on January 1, 2010? (Assume straight line amortization.)
(b) Prepare the journal entry to retire the 5 year bonds on January 1, 2010. Prepare the journal entry to issue the new 10 year bonds.
(c) Prepare a short memo to the president in response to her request for advice. List the economic factors that you believe should be considered for her repurchase proposal.
Sam Farr is the president, founder, and majority owner of Galena Medical Corporation, an emerging medical technology products company. Galena is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Sam, as owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on research and development and on long term growth. The other principal stockholder is Jill Hutton who, as a nonemployee investor, owns 40% of the stock. Jill would like to deemphasize the R&D functions and emphasize the marketing function, to maximize short run sales and profits from existing products. She believes this strategy would raise the market price of Galena’s stock. All of Sam’s personal capital and borrowing power is tied up in his 51% stock ownership.
He knows that any offering of additional shares of stock will dilute his controlling interest because he won’t be able to participate in such an issuance. But, Jill has money and would likely buy enough shares to gain control of Galena. She then would dictate the company’s future direction, even if it meant replacing Sam as president and CEO.
The company already has considerable debt. Raising additional debt will be costly, will adversely affect Galena’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Jill and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Sam is doing everything to avoid a stock issuance. He is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective interest rate.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this case?
(c) What would you do if you were Sam?
Some of Powderhorn Corporation’s investment securities are classified as trading securities and some are classified as available for sale. The cost and market value of each category at December 31, 2010, are
|
Cost |
Fair Value |
Unrealized Gain (Loss) |
|
|
Trading securities |
$93,600 |
$94,900 |
$1,300 |
|
Available for sale securities |
$48,800 |
$51,400 |
$2,600 |
At December 31, 2009, the Market Adjustment—Trading account had a debit balance of $9,200, and the Market Adjustment—Available for Sale account had a credit balance of $5,750. Prepare the required journal entries for each group of securities for December 31, 2010.
In its first year of operations, DeMarco Company had the following selected transactions in stock investments that are considered trading securities.
|
June 1 |
Purchased for cash 600 shares of Sanburg common stock at $24 per share, plus $300 brokerage fees. |
|
July 1 |
Purchased for cash 800 shares of Cey common stock at $33 per share, plus $600 brokerage fees. |
|
Sept. 1 |
Received a $1 per share cash dividend from Cey Corporation. |
|
Nov. 1 |
Sold 200 shares of Sanburg common stock for cash at $27 per share, less $150 brokerage fees. |
|
Dec. 15 |
Received a $0.50 per share cash dividend on Sanburg common stock. |
At December 31, the fair values per share were: Sanburg $25 and Cey $30.
Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry at December 31 to report the securities at fair value.
Some of Grand Junction Corporation’s investment securities are classified as trading securities and some are classified as available for sale.The cost and market value of each category at December 31, 2010, was as follows.
|
Cost |
Fair Value |
Unrealized Gain (Loss) |
|
|
Trading securities |
$96,300 |
$84,900 |
$(11,400) |
|
Available for sale securities |
$59,000 |
$63,200 |
$ 4,200 |
At December 31, 2009, the Market Adjustment—Trading account had a debit balance of $2,200, and the Market Adjustment—Available for Sale account had a credit balance of $7,750. Prepare the required journal entries for each group of securities for December 31, 2010.
Identify where each of the following items would be reported in the financial statements.
1. Loss on sale of investments in stock.
2. Unrealized gain on available for sale securities.
3. Market adjustment—trading.
4. Interest earned on investments in bonds.
5. Unrealized loss on trading securities.
Use the following possible categories:
|
Balance sheet: |
|
|
Current assets |
Current liabilities |
|
Investments |
Long term liabilities |
|
Property, plant, and equipment |
Stockholders’ equity |
|
Intangible assets |
|
|
Income statement: |
|
|
Other revenues and gains |
Other expenses and losses |
Dossett Company had the following transactions pertaining to stock investments.
|
Feb. 1 |
Purchased 600 shares of Goetz common stock (2%) for $6,000 cash, plus brokerage fees of $200. |
|
July 1 |
Received cash dividends of $1 per share on Goetz common stock. |
|
Sept. 1 |
Sold 300 shares of Goetz common stock for $4,400, less brokerage fees of $100. |
|
Dec. 1 |
Received cash dividends of $1 per share on Goetz common stock. |
Instructions
(a) Journalize the transactions.
(b) Explain how dividend revenue and the gain (loss) on sale should be reported in the income statement.
Presented below are two independent situations.
1. Heath Cosmetics acquired 15% of the 200,000 shares of common stock of Van Fashion at a total cost of $13 per share on March 18, 2010. On June 30,Van declared and paid a $60,000 dividend. On December 31,Van reported net income of $122,000 for the year. At December 31, the market price of Van Fashion was $15 per share. The stock is classified as available for sale.
2. Yoder, Inc., obtained significant influence over Parks Corporation by buying 30% of Parks 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2010.
On June 15, Parks declared and paid a cash dividend of $30,000. On December 31, Parks reported a net income of $80,000 for the year.
Instructions
Prepare all the necessary journal entries for 2010 for (1) Heath Cosmetics and (2) Yoder, Inc.
At December 31, 2010, the trading securities for Natoli, Inc. are as follows.
|
Security |
Cost |
Fair Value |
|
A |
$17,500 |
$16,000 |
|
B |
12,500 |
14,000 |
|
C |
23,000 |
19,000 |
|
$53,000 |
$49,000 |
Instructions
(a) Prepare the adjusting entry at December 31, 2010, to report the securities at fair value.
(b) Show the balance sheet and income statement presentation at December 31, 2010, after adjustment to fair value.
Davison Carecenters Inc. provides financing and capital to the health care industry, with a particular focus on nursing homes for the elderly. The following selected transactions relate to bonds acquired as an investment by Davison, whose fiscal year ends on December 31.
|
2010 |
|
|
Jan. 1 |
Purchased at face value $2,000,000 of Hannon Nursing Centers, Inc., 10 year, 8% bonds dated January 1, 2010, directly from Hannon. |
|
July 1 |
Received the semiannual interest on the Hannon bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Hannon bonds. |
(Assume that all intervening transactions and adjustments have been properly recorded and that the number of bonds owned has not changed from December 31, 2010, to December 31, 2012.)
|
2013 |
|
|
Jan. 1 |
Received the semiannual interest on the Hannon bonds. |
|
Jan. 1 |
Sold $1,000,000 Hannon bonds at 106. The broker deducted $6,000 for commissions and fees on the sale. |
|
July 1 |
Received the semiannual interest on the Hannon bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Hannon bonds. |
Instructions
(a) Journalize the listed transactions for the years 2010 and 2013.
(b) Assume that the fair value of the bonds at December 31, 2010, was $2,200,000.These bonds are classified as available for sale securities. Prepare the adjusting entry to record these bonds at fair value.
(c) Based on your analysis in part (b), show the balance sheet presentation of the bonds and interest receivable at December 31, 2010. Assume the investments are considered long term.
Indicate where any unrealized gain or loss is reported in the financial statements.
In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short term investments in debt and stock securities. During the year, the following transactions occurred.
|
Feb. 1 |
Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600. |
|
Mar. 1 |
Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400. |
|
Apr. 1 |
Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannually on April 1 and October 1. |
|
July 1 |
Received a cash dividend of $0.60 per share on the Hiens common stock. |
|
Aug. 1 |
Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200. |
|
Sept. 1 |
Received a $1 per share cash dividend on the Pryce common stock. |
|
Oct. 1 |
Received the semiannual interest on the Roy bonds. |
|
Oct. 1 |
Sold the Roy bonds for $50,000 less $1,000 brokerage fees. |
At December 31, the fair value of the Hiens common stock was $55 per share.The fair value of the Pryce common stock was $24 per share.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments.
(Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2010, to report the investment securities at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2010.
(d) Identify the income statement accounts and give the statement classification of each account.
Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box.
|
Receipt |
|||
|
Date |
No. |
For |
Amount |
|
3/5 |
1 |
Stamp Inventory |
$39 |
|
7 |
2 |
Freight out |
21 |
|
9 |
3 |
Miscellaneous Expense |
6 |
|
11 |
4 |
Travel Expense |
24 |
|
14 |
5 |
Miscellaneous Expense |
5 |
The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150.
Instructions
Journalize the entries in March that pertain to the operation of the petty cash fund.
Anna Pelo is unable to reconcile the bank balance at January 31.Anna’s reconciliation is as follows.
|
Cash balance per bank |
$3,560.20 |
|
Add: NSF check |
690.00 |
|
Less: Bank service charge |
25.00 |
|
Adjusted balance per bank |
$4,225.20 |
|
Cash balance per books |
$3,875.20 |
|
Less: Deposits in transit |
530.00 |
|
Add: Outstanding checks |
930.00 |
|
Adjusted balance per books |
$4,275.20 |
Instructions
(a) Prepare a correct bank reconciliation.
(b) Journalize the entries required by the reconciliation.
On April 30, the bank reconciliation of Galena Company shows three outstanding checks: no. 254, $650, no. 255, $820, and no. 257, $410.The May bank statement and the May cash payments journal show the following.
|
Bank Statement Checks Paid |
Cash Payments Journal Checks Issued |
||||
|
Date |
Check No. |
Amount |
Date |
Check No. |
Amount |
|
5/4 |
254 |
650 |
5/2 |
258 |
159 |
|
5/2 |
257 |
410 |
5/5 |
259 |
275 |
|
5/17 |
258 |
159 |
5/10 |
260 |
890 |
|
5/12 |
259 |
275 |
5/15 |
261 |
500 |
|
5/20 |
261 |
500 |
5/22 |
262 |
750 |
|
5/29 |
263 |
480 |
5/24 |
263 |
480 |
|
5/30 |
262 |
750 |
5/29 |
264 |
560 |
Instructions
Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.
The information below relates to the Cash account in the ledger of Robertson Company. Balance September 1—$17,150; Cash deposited—$64,000. Balance September 30—$17,404; Checks written—$63,746. The September bank statement shows a balance of $16,422 on September 30 and the following memoranda.
|
Credits |
Debits |
||
|
Collection of $1,500 note plus interest $30 |
$1,530 |
NSF check: J. E. Hoover |
$425 |
|
Interest earned on checking account |
$45 |
Safety deposit box rent |
$65 |
At September 30, deposits in transit were $4,450, and outstanding checks totaled $2,383.
Instructions
(a) Prepare the bank reconciliation at September 30.
(b) Prepare the adjusting entries at September 30, assuming (1) the NSF check was from a customer on account, and (2) no interest had been accrued on the note.
Lipkus Company has recorded the following items in its financial records.
|
Cash in bank |
$ 47,000 |
|
Cash in plant expansion fund |
100,000 |
|
Cash on hand |
12,000 |
|
Highly liquid investments |
34,000 |
|
Petty cash |
500 |
|
Receivables from customers |
89,000 |
|
Stock investments |
61,000 |
The cash in bank is subject to a compensating balance of $5,000. The highly liquid investments had maturities of 3 months or less when they were purchased.The stock investments will be sold in the next 6 to 12 months.The plant expansion project will begin in 3 years.
Instructions
(a) What amount should Lipkus report as “Cash and cash equivalents” on its balance sheet?
(b) Where should the items not included in part (a) be reported on the balance sheet?
(c) What disclosures should Lipkus make in its financial statements concerning “cash and cash equivalents”?
Luby Office Supply Company recently changed its system of internal control over cash disbursements. The system includes the following features. Instead of being unnumbered and manually prepared, all checks must now be pre numbered and written by using the new checkwriting machine purchased by the company. Before a check can be issued, each invoice must have the approval of Sally Morgan, the purchasing agent, and John Countryman, the receiving department supervisor. Checks must be signed by either Ann Lynn, the treasurer, or Bob Skabo, the assistant treasurer. Before signing a check, the signer is expected to compare the amount of the check with the amount on the invoice. After signing a check, the signer stamps the invoice PAID and inserts within the stamp, the date, check number, and amount of the check. The “paid” invoice is then sent to the accounting department for recording. Blank checks are stored in a safe in the treasurer”s office. The combination to the safe is known only by the treasurer and assistant treasurer. Each month, the bank statement is reconciled with the bank balance per books by the assistant chief accountant.All employees who handle or account for cash are bonded. Instructions Identify the internal control principles and their application to cash disbursements of Luby Office Supply Company.
Winningham Company maintains a petty cash fund for small expenditures. The following transactions occurred over a 2 month period. July 1 Established petty cash fund by writing a check on Cubs Bank for $200. 15 Replenished the petty cash fund by writing a check for $196.00. On this date the fund consisted of $4.00 in cash and the following petty cash receipts: freight out $94.00, postage expense $42.40, entertainment expense $46.60, and miscellaneous expense $11.20. 31 Replenished the petty cash fund by writing a check for $192.00. At this date, the fund consisted of $8.00 in cash and the following petty cash receipts: freight out $82.10, charitable contributions expense $45.00, postage expense $25.50, and miscellaneous expense $39.40. Aug. 15 Replenished the petty cash fund by writing a check for $187.00. On this date, the fund consisted of $13.00 in cash and the following petty cash receipts: freight out $75.60,entertainment expense $43.00, postage expense $33.00, and miscellaneous expense $37.00. 16 Increased the amount of the petty cash fund to $300 by writing a check for $100. 31 Replenished petty cash fund by writing a check for $284.00. On this date, the fund consisted of $16 in cash and the following petty cash receipts: postage expense $140.00, travel expense $95.60, and freight out $47.10.
Instructions
(a) Journalize the petty cash transactions.
(b) Post to the Petty Cash account.
(c) What internal control features exist in a petty cash fund?
On May 31, 2011, James Logan Company had a cash balance per books of $6,781.50. The bank statement from Farmers State Bank on that date showed a balance of $6,404.60. A comparison of the statement with the cash account revealed the following facts.
1. The statement included a debit memo of $40 for the printing of additional company checks.
2. Cash sales of $836.15 on May 12 were deposited in the bank .The cash receipts journal entry and the deposit slip were incorrectly made for $886.15. The bank credited Logan Company for the correct amount.
3. Outstanding checks at May 31 totaled $576.25. Deposits in transit were $1,916.15.
4. On May 18, the company issued check No. 1181 for $685 to Barry Trest, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Logan Company for $658.
5. A $2,500 note receivable was collected by the bank for Logan Company on May 31 plus $80 interest.The bank charged a collection fee of $20. No interest has been accrued on the note.
6. Included with the cancelled checks was a check issued by Bridgetown Company to Tom Lujak for $800 that was incorrectly charged to Logan Company by the bank.
7. On May 31, the bank statement showed an NSF charge of $680 for a check issued by Sandy Grifton, a customer, to Logan Company on account.
Instructions
(a) Prepare the bank reconciliation at May 31, 2011.
(b) Prepare the necessary adjusting entries for Logan Company at May 31, 2011.
Haverman Company maintains a checking account at the Commerce Bank.At July 31, selected data from the ledger balance and the bank statement are shown below.
|
Per Books |
Per Bank |
|
|
Balance, July 1 |
$17,600 |
$16,800 |
|
July receipts |
81,400 |
|
|
July credits |
82,470 |
|
|
July disbursements |
77,150 |
|
|
July debits |
74,756 |
|
|
Balance, July 31 |
$21,850 |
$24,514 |
Analysis of the bank data reveals that the credits consist of $79,000 of July deposits and a credit memorandum of $3,470 for the collection of a $3,400 note plus interest revenue of $70.The July debits per bank consist of checks cleared $74,700 and a debit memorandum of $56 for printing additional company checks. You also discover the following errors involving July checks: (1) A check for $230 to a creditor on account that cleared the bank in July was journalized and posted as $320. (2) A salary check to an employee for $255 was recorded by the bank for $155. The June 30 bank reconciliation contained only two reconciling items: deposits in transit $7,000 and outstanding checks of $6,200.
Instructions
(a) Prepare a bank reconciliation at July 31, 2011.
(b) Journalize the adjusting entries to be made by Haverman Company at July 31, 2011.Assume that interest on the note has not been accrued.
Emporia Middle School wants to raise money for a new sound system for its auditorium. The primary fund raising event is a dance at which the famous disc jockey Obnoxious Ed will play classic and not so classic dance tunes. Tom Wick man, the music and theater instructor, has been given the responsibility for coordinating the fund raising efforts .This is Tom”s first experience with fund raising. He decides to put the eighth grade choir in charge of the event; he will be a relatively passive observer. Tom had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $5 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Tom, and he would put it in a locked box in his desk drawer. Some of the students were responsible for decorating the gymnasium for the dance. Tom gave each of them a key to the money box and told them that if they took money out to purchase materials, they should put a note in the box saying how much they took and what it was used for. After 2 weeks the money box appeared to be getting full, so Tom asked Luke Gilmor to count the money, prepare a deposit slip, and deposit the money in a bank account Tom had opened. The day of the dance, Tom wrote a check from the account to pay the DJ. Obnoxious Ed, however, said that he accepted only cash and did not give receipts. So Tom took $200 out of the cash box and gave it to Ed .At the dance Tom had Mel Harris working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not pre purchased them .Tom estimated that 400 students attended the dance. The following day Tom closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Foran. Principal Foran seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Tom did not know how to respond. Instructions Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed.
Discount Theater is located in the Mishawaka Mall. A cashier’s booth is located near the entrance to the theater. Three cashiers are employed. One works from 1–5 P.M., another from 5–9 P.M. The shifts are rotated among the three cashiers. The cashiers receive cash from customers and operate a machine that ejects serially numbered tickets. The rolls of tickets are inserted and locked into the machine by the theater manager at the beginning of each cashier’s shift. After purchasing a ticket, the customer takes the ticket to an usher stationed at the entrance of the theater lobby some 60 feet from the cashier’s booth. The usher tears the ticket in half, admits the customer, and returns the ticket stub to the customer. The other half of the ticket is dropped into a locked box by the usher. At the end of each cashier’s shift, the theater manager removes the ticket rolls from the machine and makes a cash count .The cash count sheet is initialed by the cashier. At the end of the day, the manager deposits the receipts in total in a bank night deposit vault located in the mall. The manager also sends copies of the deposit slip and the initialed cash count sheets to the theater company treasurer for verification and to the company’s accounting department. Receipts from the first shift are stored in a safe located in the manager’s office.
Instructions
(a) Identify the internal control principles and their application to the cash receipts transactions of the Discount Theater.
(b) If the usher and cashier decide to collaborate to misappropriate cash, what actions might they take?
Loganberry Company maintains a petty cash fund for small expenditures. The following transactions occurred over a 2 month period. July 1 Established petty cash fund by writing a check on Rock Point Bank for $100. 15 Replenished the petty cash fund by writing a check for $96.90. On this date the fund consisted of $3.10 in cash and the following petty cash receipts: freight out $51.00, postage expense $20.50, entertainment expense $23.10, and miscellaneous expense $4.10. 31 Replenished the petty cash fund by writing a check for $95.90. At this date, the fund consisted of $4.10 in cash and the following petty cash receipts: freight out $43.50, charitable contributions expense $20.00, postage expense $20.10, and miscellaneous expense $12.30. Aug. 15 Replenished the petty cash fund by writing a check for $98.00. On this date, the fund consisted of $2.00 in cash and the following petty cash receipts: freight out $40.20, entertainment expense $21.00, postage expense $14.00, and miscellaneous expense $19.80. 16 Increased the amount of the petty cash fund to $150 by writing a check for $50. 31 Replenished petty cash fund by writing a check for $137.00. On this date, the fund consisted of $13 in cash and the following petty cash receipts: freight out $74.00, entertainment expense $43.20, and postage expense $17.70.
Instructions
(a) Journalize the petty cash transactions.
(b) Post to the Petty Cash account.
(c) What internal control features exist in a petty cash fund?
Mareska Inc. is considering two alternatives to finance its construction of a new $2 million plant.
(a) Issuance of 200,000 shares of common stock at the market price of $10 per share.
(b) Issuance of $2 million, 8% bonds at face value.
Complete the following table, and indicate which alternative is preferable.
|
Issue Stock |
Issue Bond |
|
|
Income before interest and taxes |
$700,000 |
$700,000 |
|
Interest expense from bonds |
||
|
Income before income taxes |
$ |
|
|
Income tax expense (30%) |
||
|
Net income |
$ |
|
|
Outstanding shares |
500,000 |
|
|
Earnings per share |
Presented below is the partial bond discount amortization schedule for Morales Corp. Morales uses the effective interest method of amortization.
|
Semiannual |
Interest to |
Interest |
Discount |
Unamortized |
Bond Carrying |
|
Issue date |
$62,311 |
$937,689 |
|||
|
1 |
$45,000 |
$46,884 |
$1,884 |
60,427 |
939,573 |
|
2 |
45,000 |
46,979 |
1,979 |
58,448 |
941,552 |
Instructions
(a) Prepare the journal entry to record the payment of interest and the discount amortization at the end of period 1.
(b) Explain why interest expense is greater than interest paid.
(c) Explain why interest expense will increase each period.
Jim Thome has prepared the following list of statements about bonds.
1. Bonds are a form of interest bearing notes payable.
2. When seeking long term financing, an advantage of issuing bonds over issuing common stock is that stockholder control is not affected.
3. When seeking long term financing, an advantage of issuing common stock over issuing bonds is that tax savings result.
4. Secured bonds have specific assets of the issuer pledged as collateral for the bonds.
5. Secured bonds are also known as debenture bonds.
6. Bonds that mature in installments are called term bonds.
7. A conversion feature may be added to bonds to make them more attractive to bond buyers.
8. The rate used to determine the amount of cash interest the borrower pays is called the stated rate.
9. Bond prices are usually quoted as a percentage of the face value of the bond.
10. The present value of a bond is the value at which it should sell in the marketplace.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
The following section is taken from Budke Corp.’s balance sheet at December 31, 2009.
|
Current liabilities |
|
|
Bond interest payable |
$ 72,000 |
|
Long term liabilities |
|
|
Bonds payable, 9%, due January 1, 2014 |
1,600,000 |
Interest is payable semiannually on January 1 and July 1.The bonds are callable on any interest date.
Instructions
(a) Journalize the payment of the bond interest on January 1, 2010.
(b) Assume that on January 1, 2010, after paying interest, Budke calls bonds having a face value of $600,000.The all price is 104. Record the redemption of the bonds.
(c) Prepare the entry to record the payment of interest on July 1, 2010, assuming no previous accrual of interest on the remaining bonds.
Presented below are three independent situations.
1. Sigel Corporation retired $130,000 face value, 12% bonds on June 30, 2010, at 102.The carrying value of the bonds at the redemption date was $117,500.The bonds pay semiannual interest, and the interest payment due on June 30, 2010, has been made and recorded.
2. Diaz Inc. retired $150,000 face value, 12.5% bonds on June 30, 2010, at 98.The carrying value of the bonds at the redemption date was $151,000.The bonds pay semiannual interest, and the interest payment due on June 30, 2010, has been made and recorded.
3. Haas Company has $80,000, 8%, 12 year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 30 shares of Haas $5 par value common stock for each $1,000 worth of bonds. On December 31, 2010, after the bond interest has been paid, $20,000 face value bonds were converted. The market value of Haas common stock was $44 per share on December 31, 2010.
Instructions
For each independent situation above, prepare the appropriate journal entry for the redemption or conversion of the bonds.
Presented below are two independent situations.
1. Speedy Car Rental leased a car to Mayfield Company for one year. Terms of the operating lease agreement call for monthly payments of $500.
2. On January 1, 2010, Olsen Inc. entered into an agreement to lease 20 computers from Gage Electronics. The terms of the lease agreement require three annual rental payments of $30,000 (including 10% interest) beginning December 31, 2010.The present value of the three rental payments is $74,606. Olsen considers this a capital lease.
Instructions
(a) Prepare the appropriate journal entry to be made by Mayfield Company for the first lease payment.
(b) Prepare the journal entry to record the lease agreement on the books of Olsen Inc. on January 1, 2010.
Seven Corporation reports the following amounts in their 2010 financial statements:
|
At December 31, 2010 |
For the Year 2010 |
|
|
Total assets |
$1,000,000 |
|
|
Total liabilities |
620,000 |
|
|
Total stockholders’ equity |
? |
|
|
Interest expense |
$ 7,000 |
|
|
Income tax expense |
100,000 |
|
|
Net income |
150,000 |
Instructions
(a) Compute the December 31, 2010, balance in stockholders’ equity.
(b) Compute the debt to total assets ratio at December 31, 2010.
(c) Compute times interest earned for 2010.
On May 1, 2010, Newby Corp. issued $600,000, 9%, 5 year bonds at face value. The bonds were dated May 1, 2010, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2010.
(c) Show the balance sheet presentation on December 31, 2010.
(d) Prepare the journal entry to record payment of interest on May 1, 2011, assuming no accrual of interest from January 1, 2011, to May 1, 2011.
(e) Prepare the journal entry to record payment of interest on November 1, 2011.
(f) Assume that on November 1, 2011, Newby calls the bonds at 102. Record the redemption of the bonds.
You have the following information for Bernelli Diamonds. Bernelli Diamonds uses the periodic method of accounting for its inventory transactions. Bernelli only carries one brand and size of diamonds—all are identical. Each batch of diamonds purchased is carefully coded and marked with its purchase cost.
March 1 Beginning inventory 150 diamonds at a cost of $300 per diamond.
March 3 Purchased 200 diamonds at a cost of $350 each.
March 5 Sold 180 diamonds for $600 each.
March 10 Purchased 350 diamonds at a cost of $375 each.
March 25 Sold 400 diamonds for $650 each.
Instructions
(a) Assume that Bernelli Diamonds uses the specific identification cost flow method.
(1) Demonstrate how Bernelli Diamonds could maximize its gross profit for the month by specifically selecting which diamonds to sell on March 5 and March 25.
(2) Demonstrate how Bernelli Diamonds could minimize its gross profit for the month by selecting which diamonds to sell on March 5 and March 25.
(b) Assume that Bernelli Diamonds uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Bernelli Diamonds report under this cost flow assumption?
(c) Assume that Bernelli Diamonds uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption?
(d) Which cost flow method should Bernelli Diamonds select? Explain.
The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2011 the accounting records show
these data.
|
Inventory, January 1 (10,000 units) |
$ 35,000 |
|
Cost of 120,000 units purchased |
504,500 |
|
Selling price of 100,000 units sold |
665,000 |
|
Operating expenses |
130,000 |
Units purchased consisted of 35,000 units at $4.00 on May 10; 60,000 units at $4.20 on August 15; and 25,000 units at $4.50 on November 20. Income taxes are 28%.
Instructions
(a) Prepare comparative condensed income statements for 2010 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management in the form of a business letter.
(1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?
(4) Howmuchmore cash will be available for management under LIFO than under FIFO? Why?
(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?
Elms Country Limited is trying to determine the value of its ending inventory as ofFebruary 28, 2011, the company’s year end. The following transactions occurred, and the accountant asked your help in determining whether they should be recorded or not.
(a) On February 26, Elms shipped goods costing $800 to a customer and charged the customer $1,000.The goods were shipped with terms FOB shipping point and the receiving report indicates that the customer received the goods on March 2.
(b) On February 26, Brad Inc. shipped goods to Elms under terms FOB shipping point. The invoice price was $450 plus $30 for freight .The receiving report indicates that the goods were received by Elms on March 2.
(c) Elms had $650 of inventory isolated in the warehouse. The inventory is designated for a customer who has requested that the goods be shipped on March 10.
(d) Also included in Elms’s warehouse is $700 of inventory that Art Producers shipped to Elms on consignment.
(e) On February 26, Elms issued a purchase order to acquire goods costing $900. The goods were shipped with terms FOB destination on February 27. Elms received the goods on March 2.
(f) On February 26, Elms shipped goods to a customer under terms FOB destination. The invoice price was $350; the cost of the items was $200.The receiving report indicates that the goods were received by the customer on March 2.
Instructions
For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount.
Soul Patrol Distribution markets CDs of the performing artist Taylor Hicks. At the beginning of October, Soul Patrol had in beginning inventory 2,000 of Hicks’s CDs with a unit cost of $7. During October Soul Patrol made the following purchases of Hicks’s CDs.
|
Oct. 3 |
3,000 @ $8 |
Oct. 19 |
3,000 @ $10 |
|
Oct. 9 |
3,500 @ $9 |
Oct. 25 |
3,500 @ $11 |
During October, 11,400 units were sold. Soul Patrol uses a periodic inventory system.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.
(c) Which cost flow method results in (1) the highest inventory amount for the balance sheet and
(2) the highest cost of goods sold for the income statement?
Lobster Company had a beginning inventory on January 1 of 150 units of Product BU 54 at a cost of $20 per unit. During the year, the following purchases were made.
|
Mar. 15 |
400 units at $23 |
Sept. 4 |
350 units at $26 |
|
July 20 |
250 units at $24 |
Dec. 2 |
100 units at $29 |
1,000 units were sold. Lobster Company uses a periodic inventory system.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory, and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.
(c) Which cost flow method results in (1) the highest inventory amount for the balance sheet, and (2) the highest cost of goods sold for the income statement?
The management of Moner Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average cost.The company requests your help in determining the results of operations for 2011 if either the FIFO or the LIFO method had been used. For 2011 the accounting records show these data:
|
Inventories |
Purchases and Sales |
||
|
Beginning (8,000 units) |
$16,000 |
Total net sales (180,000 units) |
$747,000 |
|
Ending (18,000 units) |
Total cost of goods purchased |
||
|
(190,000 units) |
468,000 |
Purchases were made quarterly as follows.
|
Quarter |
Units |
Unit Cost |
Total Cost |
|
1 |
50,000 |
$2.20 |
$110,000 |
|
2 |
40,000 |
2.40 |
96,000 |
|
3 |
40,000 |
2.50 |
100,000 |
|
4 |
60,000 |
2.70 |
162,000 |
|
190,000 |
$468,000 |
Operating expenses were $130,000, and the company’s income tax rate is 40%.
Instructions
(a) Prepare comparative condensed income statements for 2011 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventoryamount for the balance sheet? Why?
(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? Why?
(4) How much more cash will be available for management under LIFO than under FIFO? Why?
(5) Will gross profit under the average cost method be higher or lower than FIFO? Than LIFO? (Note: It is not necessary to quantify your answer.)
You are provided with the following information for Web Inc. for the month ended June 30, 2011.Web uses the periodic method for inventory.
|
Unit Cost or |
|||
|
Date |
Description |
Quantity |
Selling Price |
|
June 1 |
Beginning inventory |
40 |
$40 |
|
June 4 |
Purchase |
135 |
44 |
|
June 10 |
Sale |
110 |
70 |
|
June 11 |
Sale return |
15 |
70 |
|
June 18 |
Purchase |
55 |
46 |
|
June 18 |
Purchase return |
10 |
46 |
|
June 25 |
Sale |
65 |
75 |
|
June 28 |
Purchase |
30 |
50 |
Instructions
(a) Calculate
(i) ending inventory,
(ii) cost of goods sold,
(iii) gross profit, and
(iv) gross profit
rate under each of the following methods.
(1) LIFO.
(2) FIFO.
(3) Average cost.
(b) Compare results for the three cost flow assumptions.
You are provided with the following information for Mondello Inc. for the month of March 2011. Mondello Inc. uses the periodic method of accounting for its inventory transactions.
March 1 Beginning inventory 2,000 liters at a cost of 60¢ per liter.
March 3 Purchased 2,500 liters at a cost of 65¢ per liter.
March 5 Sold 2,200 liters for $1.05 per liter.
March 10 Purchased 4,000 liters at a cost of 72¢ per liter.
March 20 Purchased 2,500 liters at a cost of 80¢ per liter.
March 30 Sold 5,000 liters for $1.25 per liter.
Instructions
(a) Prepare partial income statements through gross profit, and calculate the value of ending inventory that would be reported on the balance sheet, under each of the following cost flow assumptions. Round ending Inventory and cost of goods sold to the nearest dollar.
(1) Specific identification method assuming:
(i) the March 5 sale consisted of 1,100 liters from the March 1 beginning inventory and 1,100 liters from the March 3 purchase; and
(ii) the March 30 sale consisted of the following number of units sold from beginning inventory and each purchase: 450 liters from March 1; 550 liters from March 3; 2,900 liters from March 10; 1,100 liters from March 20.
(2) FIFO.
(3) LIFO.
(b) How can companies use a cost flow method to justify price increases? Which cost flow method would best support an argument to increase prices?
The management of Clare Co. asks your help in determining the comparative effects of
the FIFO and LIFO inventory cost flow methods. For 2011, the accounting records show the following
data.
|
Inventory, January 1 (10,000 units) |
$ 45,000 |
|
Cost of 100,000 units purchased |
532,000 |
|
Selling price of 80,000 units sold |
700,000 |
|
Operating expenses |
140,000 |
Units purchased consisted of 35,000 units at $5.10 on May 10; 35,000 units at $5.30 on August 15; and 30,000 units at $5.60 on November 20. Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2011 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most likely to approximate actual physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than under FIFO? Why?
(5) How much of the gross profit under FIFO is illusory in comparison with the gross profit under LIFO?
Hector Inc. is a retailer operating in British Columbia. Hector uses the perpetual inventory method. All sales returns from customers result in the goods being returned to inventory; the inventory is not damaged.Assume that there are no credit transactions; all amounts are settled in cash. Information for Hector Inc. for the month of January 2011 is shown on the next page.
|
Unit Cost or |
|||
|
Date |
Description |
Quantity |
Selling Price |
|
January 1 |
Beginning inventory |
100 |
$15 |
|
January 5 |
Purchase |
150 |
18 |
|
January 8 |
Sale |
110 |
28 |
|
January 10 |
Sale return |
10 |
28 |
|
January 15 |
Purchase |
55 |
20 |
|
January 16 |
Purchase return |
5 |
20 |
|
January 20 |
Sale |
80 |
32 |
|
January 25 |
Purchase |
30 |
22 |
Instructions
(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit.
(1) LIFO. (2) FIFO. (3) Moving average cost.
(b) Compare results for the three cost flow assumptions.
Fontana Co. began operations on July 1. It uses a perpetual inventory system. During July the company had the following purchases and sales.
|
Date |
Units |
Units |
Sales Units |
|
July 1 |
5 |
5 |
|
|
July 6 |
4 |
||
|
July 11 |
7 |
$136 |
|
|
July 14 |
3 |
||
|
July 21 |
8 |
$147 |
|
|
July 27 |
6 |
Instructions
(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO,
(2) moving average cost, and (3) LIFO.
(b) Which costing method produces the highest ending inventory valuation?
O’Reilly Company lost all of its inventory in a fire on December 26, 2011. The accounting records showed the following gross profit data for November and December.
|
December |
||
|
November |
(to 12/26) |
|
|
Net sales |
$600,000 |
$700,000 |
|
Beginning inventory |
32,000 |
36,000 |
|
Purchases |
377,000 |
424,000 |
|
Purchase returns and allowances |
13,300 |
14,900 |
|
Purchase discounts |
8,500 |
9,500 |
|
Freight in |
8,800 |
9,900 |
|
Ending inventory |
36,000 |
? |
O’Reilly is fully insured for fire losses but must prepare a report for the insurance company.
Instructions
(a) Compute the gross profit rate for November.
(b) Using the gross profit rate for November, determine the estimated cost of the inventory lost in the fire.
Fond du Lac Books uses the retail inventory method to estimate its monthly ending inventories.The following information is available for two of its departments at October 31, 2
|
Hardcovers |
Paperbacks |
|||
|
Cost |
Retail |
Cost |
Retail |
|
|
Beginning inventory |
$ 420,000 |
$ 700,000 |
$ 280,000 |
$ 360,000 |
|
Purchases |
2,135,000 |
3,200,000 |
1,155,000 |
1,540,000 |
|
Freight in |
24,000 |
12,000 |
||
|
Purchase discounts |
44,000 |
22,000 |
||
|
Net sales |
3,100,000 |
1,570,000 |
||
At December 31, Fond du Lac Books takes a physical inventory at retail.The actual retail values of the inventories in each department are Hardcovers $790,000 and Paperbacks $335,000.
Instructions
(a) Determine the estimated cost of the ending inventory for each department at October 31, 2011, using the retail inventory method.
(b) Compute the ending inventory at cost for each department at December 31, assuming the cost to retail ratios for the year are 65% for hardcovers and 75% for paperbacks.
The notes that accompany a company’s financial statements provide informative details that would clutter the amounts and descriptions presented in the statements. Refer to the financial statements of PepsiCo, Inc. and the Notes to Consolidated Financial Statements in Appendix A.
Instructions
Answer the following questions. Complete the requirements in millions of dollars, as shown in PepsiCo’s annual report.
(a) What did PepsiCo report for the amount of inventories in its consolidated balance sheet at December 27, 2008? At December 29, 2007?
(b) Compute the dollar amount of change and the percentage change in inventories between 2007 and 2008. Compute inventory as a percentage of current assets at December 27, 2008.
(c) How does PepsiCo value its inventories? Which inventory cost flow method does PepsiCo use? (See Notes to the Financial Statements.)
(d) What is the cost of sales (cost of goods sold) reported by PepsiCo for 2008, 2007, and 2006? Compute the percentage of cost of sales to net sales in 2008.
Correspondence with the company’s principal customers produced acknowledgments of credit sales totaling $37,000 from April 1 to April 10. It was estimated that $5,600 of credit sales will never be acknowledged or recovered from customers. Inwood Company reached an agreement with the insurance company that its fire loss claim should be based on the average of the gross profit rates for the preceding 2 years. The financial statements for 2009 and 2010 showed the following data.
|
2010 |
2010 |
|
|
Net sales |
$600,000 |
$600,000 |
|
Cost of goods purchased |
404,000 |
404,000 |
|
Beginning inventory |
60,000 |
60,000 |
|
Ending inventory |
80,000 |
80,000 |
Inventory with a cost of $17,000 was salvaged from the fire.
Instructions
With the class divided into groups, answer the following.
(a) Determine the balances in (1) Sales and (2) Purchases at April 10.
*(b) Determine the average profit rate for the years 2009 and 2010. (Hint: Find the gross profit rate for each year and divide the sum by 2.)
*(c) Determine the inventory loss as a result of the fire, using the gross profit method.
B. J. Ortiz Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at B. J. Ortiz is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year’s net income and to take advantage of the changing income tax rate, the president of B. J. Ortiz Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.
Instructions
(a) What is the effect of this transaction on this year’s and next year’s income statement and income tax expense? Why?
(b) If B. J. Ortiz Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?
(c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?
Poorten Company’s bank statement for May 2011 shows the following data.
|
Balance 5/1 |
$12,650 |
Balance 5/31 |
$14,280 |
|
Debit memorandum: |
Credit memorandum: |
||
|
NSF check |
$175 |
Collection of note receivable |
$505 |
The cash balance per books at May 31 is $13,319. Your review of the data reveals the following.
1. The NSF check was from Copple Co., a customer.
2. The note collected by the bank was a $500, 3 month, 12% note .The bank charged a $10 collection fee. No interest has been accrued.
3. Outstanding checks at May 31 total $2,410.
4. Deposits in transit at May 31 total $1,752.
5. A Poorten Company check for $352, dated May 10, cleared the bank on May 25. The company recorded this check, which was a payment on account, for $325.
Instructions
(a) Prepare a bank reconciliation at May 31.
(b) Journalize the entries required by the reconciliation.
The following control procedures are used at Gonzales Company for over the counter cash receipts.
1. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked attaché case in the stock room until it is deposited in the bank.
2. All over the counter receipts are registered by three clerks who use a cash register with a single cash drawer.
3. The company accountant makes the bank deposit and then records the day’s receipts.
4. At the end of each day, the total receipts are counted by the cashier on duty and reconciled to the cash register total.
5. Cashiers are experienced; they are not bonded.
Instructions
(a) For each procedure, explain the weakness in internal control, and identify the control principle that is violated.
(b) For each weakness, suggest a change in procedure that will result in good internal control.
At Hutchingson Company, checks are not pre numbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining to goods purchased for resale. Prior to payment, the purchasing agent determines that the goods have been received and verifies the mathematical accuracy of the vendor’s invoice. After payment, the invoice is filed by the vendor, and the purchasing agent records the payment in the cash disbursements journal. The treasurer pays all other bills following approval by authorized employees. After payment, the treasurer stamps all bills PAID, files them by payment date, and records the checks in the cash disbursements journal. Hutching son Company maintains one checking account that is reconciled by the treasurer.
Instructions
(a) List the weaknesses in internal control over cash disbursements.
(b) Write a memo to the company treasurer indicating your recommendations for improvement.
Listed below are five procedures followed by Collins Company.
1. Employees are required to take vacations.
2. Any member of the sales department can approve credit sales.
3. Jethro Bodine ships goods to customers, bills customers, and receives payment from customers.
4. Total cash receipts are compared to bank deposits daily by someone who has no other cash responsibilities.
5. Time clocks are used for recording time worked by employees.
Instructions
Indicate whether each procedure is an example of good internal control or of weak internal control. If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is violated. Use the table below.
|
Procedure |
IC Good or Weak? |
Related Internal Control Principle |
|
1. |
||
|
2. |
||
|
3. |
||
|
4. |
||
|
5. |
Neverwas Company just took its physical inventory.The count of inventory items on hand at the company’s business locations resulted in a total inventory cost of $300,000. In reviewing the details of the count and related inventory transactions, you have discovered the following.
1. Neverwas has sent inventory costing $26,000 on consignment to Niagara Company. All of this inventory was at Niagara’s showrooms on December 31.
2. The company did not include in the count inventory (cost, $20,000) that was sold on December 28, terms FOB shipping point.The goods were in transit on December 31.
3. The company did not include in the count inventory (cost, $17,000) that was purchased with terms of FOB shipping point.The goods were in transit on December 31. Compute the correct December 31 inventory.
(a) Blank Company sells three different categories of tools (small, medium, and large). The cost and market value of its inventory of tools are as follows.
|
Cost |
Market |
|
|
Small |
$ 64,000 |
$ 73,000 |
|
Medium |
290,000 |
260,000 |
|
Large |
152,000 |
171,000 |
Determine the value of the company’s inventory under the lower of cost or market approach.
(b) Audio Company understated its 2011 ending inventory by $31,000. Determine the impact this error has on ending inventory, cost of goods sold, and stockholders’ equity in 2011 and 2012.
Early in 2011 Aragon Company switched to a just in time inventory system. Its sales, cost of goods sold, and inventory amounts for 2010 and 2011 are shown below.
|
2010 |
2011 |
|
|
Sales |
$3,120,000 |
$3,713,000 |
|
Cost of goods sold |
1,200,000 |
1,425,000 |
|
Beginning inventory |
180,000 |
220,000 |
|
Ending inventory |
220,000 |
80,000 |
Determine the inventory turnover and days in inventory for 2010 and 2011. Discuss the changes in the amount of inventory, the inventory turnover and days in inventory, and the amount of sales across the two years.
Kale Thompson, an auditor with Sneed CPAs, is performing a review of Strawser Company’s inventory account. Strawser did not have a good year and top management is under pressure to boost reported income. According to its records, the inventory balance at year end was $740,000. However, the following information was not considered when determining that amount.
1. Included in the company’s count were goods with a cost of $250,000 that the company is holding on consignment.The goods belong to Superior Corporation.
2. The physical count did not include goods purchased by Strawser with a cost of $40,000 that were shipped FOB destination on December 28 and did not arrive at Strawser’s warehouse until January 3.
3. Included in the inventory account was $17,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.
4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick up on December 31.The shipper picked up the goods on January 1 and delivered them on January 6.The shipping terms were FOB shipping point.The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
5. On December 29 Strawser shipped goods with a selling price of $80,000 and a cost of $60,000 to District Sales Corporation FOB shipping point. The goods arrived on January 3. District Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Strawser had authorized the shipment and said that if District wanted to ship the goods back next week, it could.
6. Included in the count was $40,000 of goods that were parts for a machine that the company no longer made. Given the high tech nature of Strawser’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”
Instructions
Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.
On December 1, Bargain Electronics Ltd. has three DVD players left in stock. All are identical, all are priced to sell at $150. One of the three DVD players left in stock, with serial #1012, was purchased on June 1 at a cost of $100. Another, with serial #1045, was purchased on November 1 for $90.The last player, serial #1056, was purchased on November 30 for $80.
Instructions
(a) Calculate the cost of goods sold using the FIFO periodic inventory method assuming that two of the three players were sold by the end of December, Bargain Electronics’ year end.
(b) If Bargain Electronics used the specific identification method instead of the FIFO method,how might it alter its earnings by “selectively choosing” which particular players to sell to the two customers? What would Bargain’s cost of goods sold be if the company wished to minimize earnings? Maximize earnings?
(c) Which of the two inventory methods do you recommend that Bargain use? Explain why.
Boarders sells a snowboard, Xpert, that is popular with snowboard enthusiasts. Information relating to Boarders’ purchases of Xpert snowboards during September is shown on the next page. During the same month, 121 Xpert snowboards were sold. Boarders uses a periodic inventory system.
|
Date |
Explanation |
Units |
Unit Cost |
Total Cost |
|
Sept. 1 |
Inventory |
26 |
$ 97 |
$ 2,522 |
|
Sept. 12 |
Purchases |
45 |
102 |
4,590 |
|
Sept. 19 |
Purchases |
20 |
104 |
2,080 |
|
Sept. 26 |
Purchases |
50 |
105 |
5,250 |
|
Totals |
141 |
$14,442 |
Instructions
(a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.
(b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold.What do you notice about the answers you found for each method?
Catlet Co. uses a periodic inventory system. Its records show the following for the month of May, in which 65 units were sold.
|
Units |
Unit Cost |
Total Cost |
|
|
May 1 Inventory |
30 |
$ 8 |
$240 |
|
15 Purchases |
25 |
11 |
275 |
|
24 Purchases |
35 |
12 |
420 |
|
Totals |
90 |
$935 |
Instructions
Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.
Yount Company reports the following for the month of June.
|
Units |
Unit Cost |
Total Cost |
|
|
June 1 Inventory |
200 |
$5 |
$1,000 |
|
12 Purchase |
300 |
6 |
1,800 |
|
23 Purchase |
500 |
7 |
3,500 |
|
30 Inventory |
120 |
Instructions
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and
(2) LIFO.
(b) Which costing method gives the higher ending inventory? Why?
(c) Which method results in the higher cost of goods sold? Why?
Americus Camera Shop uses the lower of cost or market basis for its inventory.The following data are available at December 31.
|
Item |
Units |
Unit Cost |
Market |
|
Cameras: |
|||
|
Minolta |
5 |
$170 |
$156 |
|
Canon |
6 |
150 |
152 |
|
Light meters: |
|||
|
Vivitar |
12 |
125 |
115 |
|
Kodak |
14 |
120 |
135 |
Instructions
Determine the amount of the ending inventory by applying the lower of cost or market basis.
Lebo Hardware reported cost of goods sold as follows.
|
2011 |
2012 |
|
|
Beginning inventory |
$ 20,000 |
$ 30,000 |
|
Cost of goods purchased |
150,000 |
175,000 |
|
Cost of goods available for sale |
170,000 |
205,000 |
|
Ending inventory |
30,000 |
35,000 |
|
Cost of goods sold |
$140,000 |
$170,000 |
Lebo made two errors: (1) 2011 ending inventory was overstated $3,000, and (2) 2012 ending inventory was understated $6,000.
Instructions
Compute the correct cost of goods sold for each year.
Staley Watch Company reported the following income statement data for a 2 year period.
|
2011 |
2012 |
|
|
Sales |
$210,000 |
$250,000 |
|
Cost of goods sold |
||
|
Beginning inventory |
32,000 |
44,000 |
|
Cost of goods purchased |
173,000 |
202,000 |
|
Cost of goods available |
205,000 |
246,000 |
|
Ending inventory |
44,000 |
52,000 |
|
Cost of goods sold |
161,000 |
194,000 |
|
Gross profit |
$ 49,000 |
$ 56,000 |
Staley uses a periodic inventory system. The inventories at January 1, 2011, and December 31, 2012, are correct. However, the ending inventory at December 31, 2011, was overstated $5,000.
Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
(c) Explain in a letter to the president of Staley Company what has happened—i.e., the nature of the error and its effect on the financial statements.
|
2010 |
2011 |
2012 |
|
|
Beginning inventory |
$ 100,000 |
$ 300,000 |
$ 400,000 |
|
Ending inventory |
300,000 |
400,000 |
480,000 |
|
Cost of goods sold |
900,000 |
1,120,000 |
1,300,000 |
|
Sales |
1,200,000 |
1,600,000 |
1,900,000 |
Instructions
Calculate inventory turnover, days in inventory, and gross profit rate (from Chapter 5) for Santo’s Photo Corporation for 2010, 2011, and 2012. Comment on any trends.
The cost of goods sold computations for O’Brien Company and Weinberg Company are shown below.
|
O’Brien Company |
Weinberg Company |
|
|
Beginning inventory |
$ 45,000 |
$ 71,000 |
|
Cost of goods purchased |
200,000 |
290,000 |
|
Cost of goods available for sale |
245,000 |
361,000 |
|
Ending inventory |
55,000 |
69,000 |
|
Cost of goods sold |
$190,000 |
$292,000 |
Instructions
(a) Compute inventory turnover and days in inventory for each company.
(b) Which company moves its inventory more quickly?
Yount Company reports the following for the month of June.
|
Date |
Explanation |
Units |
Unit Cost |
Total Cost |
|
June 1 |
Inventory |
200 |
$5 |
$1,000 |
|
12 |
Purchase |
300 |
6 |
1,800 |
|
23 |
Purchase |
500 |
7 |
3,500 |
|
30 |
Inventory |
120 |
Instructions
(a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 400 units occurred on June 15 for a selling price of $8 and a sale of 480 units on June 27 for $9.
(b) How do the results differ from E6 6 and E6 8?
(c) Why is the average unit cost not $6 [($5 +$6+$7) ÷3 =$6]?
Doc Gibbs Company reported the following information for November and December 2010.
|
Cost of goods purchased |
November |
December |
|
Inventory, beginning of month |
$500,000 |
$ 610,000 |
|
Inventory, end of month |
100,000 |
120,000 |
|
Sales |
120,000 |
???? |
|
800,000 |
1,000,000 |
Doc Gibbs’s ending inventory at December 31 was destroyed in a fire.
Instructions
(a) Compute the gross profit rate for November.
(b) Using the gross profit rate for November, determine the estimated cost of inventory lost in the fire.
Quayle Shoe Store uses the retail inventory method for its two departments,Women’s Shoes and Men’s Shoes.The following information for each department is obtained.
|
Women’s |
Men’s |
|
|
Item |
Department |
Department |
|
Beginning inventory at cost |
$ 32,000 |
$ 45,000 |
|
Cost of goods purchased at cost |
148,000 |
136,300 |
|
Net sales |
178,000 |
185,000 |
|
Beginning inventory at retail |
46,000 |
60,000 |
|
Cost of goods purchased at retail |
179,000 |
185,000 |
Instructions
Compute the estimated cost of the ending inventory for each department under the retail inventory method.
Heath Limited is trying to determine the value of its ending inventory at February 28, 2011, the company’s year end.The accountant counted everything that was in the warehouse as of February 28, which resulted in an ending inventory valuation of $48,000. However, she didn’t know how to treat the following transactions so she didn’t record them.
(a) On February 26, Heath shipped to a customer goods costing $800. The goods were shippedFOB shipping point, and the receiving report indicates that the customer received the goods on March 2.
(b) On February 26, Seller Inc. shipped goods to Heath FOB destination.The invoice price was $350.The receiving report indicates that the goods were received by Heath on March 2.
(c) Heath had $500 of inventory at a customer’s warehouse “on approval .”The customer was going to let Heath know whether it wanted the merchandise by the end of the week, March 4.
(d) Heath also had $400 of inventory on consignment at a Jasper craft shop.
(e) On February 26, Heath ordered goods costing $750. The goods were shipped FOB shipping point on February 27. Heath received the goods on March 1.
(f) On February 28, Heath packaged goods and had them ready for shipping to a customer FOB destination.The invoice price was $350; the cost of the items was $250.The receiving report indicates that the goods were received by the customer on March 2.
(g) Heath had damaged goods set aside in the warehouse because they are no longer saleable. These goods originally cost $400 and, originally, Heath expected to sell these items for $600.
Instructions
For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount. For each item that is not included in ending inventory, indicate who owns it and what account, if any, it should have been recorded in.
Glanville Distribution markets CDs of the performing artist Harrilyn Clooney.At the beginning of March, Glanville had in beginning inventory 1,500 Clooney CDs with a unit cost of $7. During March Glanville made the following purchases of Clooney CDs.
|
March 5 |
3,000 @ $8 |
March 21 |
4,000 @ $10 |
|
March 13 |
5,500 @ $9 |
March 26 |
2,000 @ $11 |
During March 12,500 units were sold. Glanville uses a periodic inventory system.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.
(c) Which cost flow method results in (1) the highest inventory amount for the balance sheet and
(2) the highest cost of goods sold for the income statement?
Eddings Company had a beginning inventory of 400 units of Product XNA at a cost of $8.00 per unit. During the year, purchases were:
|
Feb. 20 |
600 units at $9 |
Aug. 12 |
300 units at $11 |
|
May 5 |
500 units at $10 |
Dec. 8 |
200 units at $12 |
Eddings Company uses a periodic inventory system. Sales totaled 1,500 units.
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory, and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.
(c) Which cost flow method results in (1) the lowest inventory amount for the balance sheet, and
(2) the lowest cost of goods sold for the income statement?
The management of Morales Co. is reevaluating the appropriateness of using its present inventory cost flow method, which is average cost. They request your help in determining the results of operations for 2011 if either the FIFO method or the LIFO method had been used. For 2011, the accounting records show the following data.
|
Inventories |
Purchases and Sales |
||
|
Beginning (15,000 units) |
$32,000 |
Total net sales (215,000 units) |
$865,000 |
|
Ending (30,000 units) |
Total cost of goods purchased |
||
|
(230,000 units) |
595,000 |
Purchases were made quarterly as follows.
|
Quarter |
Units |
Unit Cost |
Total Cost |
|
1 |
60,000 |
$2.40 |
$144,000 |
|
2 |
50,000 |
2.50 |
125,000 |
|
3 |
50,000 |
2.60 |
130,000 |
|
4 |
70,000 |
2.80 |
196,000 |
|
230,000 |
$595,000 |
Operating expenses were $147,000, and the company’s income tax rate is 34%.
Instructions
(a) Prepare comparative condensed income statements for 2010 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?
(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than under FIFO? Why?
(5) Will gross profit under the average cost method be higher or lower than (a) FIFO and
(b) LIFO? (Note: It is not necessary to quantify your answer.)
You are provided with the following information for Pavey Inc. for the month ended October 31, 2011. Pavey uses a periodic method for inventory.
|
Unit Cost or |
|||
|
Date |
Description |
Units |
Selling Price |
|
October 1 |
Beginning inventory |
60 |
$25 |
|
October 9 |
Purchase |
120 |
26 |
|
October 11 |
Sale |
100 |
35 |
|
October 17 |
Purchase |
70 |
27 |
|
October 22 |
Sale |
60 |
40 |
|
October 25 |
Purchase |
80 |
28 |
|
October 29 |
Sale |
110 |
40 |
Instructions
(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods.
(1) LIFO.
(2) FIFO.
(3) Average cost.
(b) Compare results for the three cost flow assumptions.
The following information is taken from the 2012 general ledger of Okonedo Company.
|
Rent |
Rent expense |
$ 40,000 |
|
Prepaid rent, January 1 |
5,900 |
|
|
Prepaid rent, December 31 |
9,000 |
|
|
Salaries |
Salaries and wages expense |
$ 54,000 |
|
Salaries and wages payable, January 1 |
10,000 |
|
|
Salaries and wages payable, December 31 |
8,000 |
|
|
Sales |
Sales revenue |
$170,000 |
|
Accounts receivable, January 1 |
16,000 |
|
|
Accounts receivable, December 31 |
7,000 |
Instructions
In each case, compute the amount that should be reported in the operating activities section of the statement of cash flows under the direct method.
You are provided with the following transactions that took place during a recent fiscal year.
|
Statement of |
Cash Inflow, |
|
|
Cash Flow |
Outflow, or |
|
|
Transaction |
Activity Affected |
No Effect? |
|
(a) Recorded depreciation expense on the |
||
|
plant assets. |
||
|
(b) Recorded and paid interest expense. |
||
|
(c) Recorded cash proceeds from a sale of |
||
|
plant assets. |
||
|
(d) Acquired land by issuing common stock. |
||
|
(e) Paid a cash dividend to preferred |
||
|
stockholders. |
||
|
(f) Paid a cash dividend to common |
||
|
stockholders. |
||
|
(g) Recorded cash sales. |
||
|
(h) Recorded sales on account. |
||
|
(i) Purchased inventory for cash. |
||
|
(j) Purchased inventory on account. |
Instructions
Complete the table indicating whether each item (1) affects operating (O) activities, investing (I) activities, financing (F) activities, or is a noncash (NC) transaction reported in a separate schedule, and (2) represents a cash inflow or cash outflow or has no cash flow effect. Assume use of the indirect approach.
The following account balances relate to the stockholders’ equity accounts of Chipo Corp. at year end.
|
2012 |
2011 |
|
|
Common stock, 10,500 and 10,000 shares, |
||
|
respectively, for 2012 and 2011 |
$160,000 |
$140,000 |
|
Preferred stock, 5,000 shares |
125,000 |
125,000 |
|
Retained earnings |
300,000 |
260,000 |
A small stock dividend was declared and issued in 2012. The market value of the shares was $10,500. Cash dividends were $15,000 in both 2012 and 2011. The common stock has no par or stated value.
Instructions
(a) What was the amount of net income reported by Chipo Corp. in 2012?
(b) Determine the amounts of any cash inflows or outflows related to the common stock and dividend accounts in 2012.
(c) Indicate where each of the cash inflows or outflows identified in (b) would be classified onthe statement of cash flows.
The income statement of Toby Zed Company is presented here.
|
TOBY ZED COMPANY |
||
|
Income Statement |
||
|
For the Year Ended November 30, 2012 |
||
|
Sales revenue |
$7,700,000 |
|
|
Cost of goods sold |
||
|
Beginning inventory |
$1,900,000 |
|
|
Purchases |
4,400,000 |
|
|
Goods available for sale |
6,300,000 |
|
|
Ending inventory |
1,400,000 |
|
|
Total cost of goods sold |
4,900,000 |
|
|
Gross profit |
2,800,000 |
|
|
Operating expenses |
1,150,000 |
|
|
Net income |
$1,650,000 |
|
Additional information:
1. Accounts receivable increased $250,000 during the year, and inventory decreased $500,000.
2. Prepaid expenses increased $150,000 during the year.
3. Accounts payable to suppliers of merchandise decreased $340,000 during the year.
4. Accrued expenses payable decreased $100,000 during the year.
5. Operating expenses include depreciation expense of $90,000.
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended November 30, 2012, for Toby Zed Company, using the indirect method.
Rattigan Company’s income statement contained the condensed information below.
|
RATTIGAN COMPANY |
RATTIGAN COMPANY |
|
|
Income Statement |
Income Statement |
|
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$970,000 |
|
|
Operating expenses, excluding depreciation |
$624,000 |
|
|
Depreciation expense |
60,000 |
|
|
Loss on sale of equipment |
16,000 |
700,000 |
|
Income before income taxes |
270,000 |
|
|
Income tax expense |
40,000 |
|
|
Net income |
$230,000 |
|
|
Rattigan’s balance sheet contained the comparative data at December 31, shown below. |
||
|
2012 |
2011 |
|
|
Accounts receivable |
$75,000 |
$60,000 |
|
Accounts payable |
41,000 |
28,000 |
|
Income taxes payable |
11,000 |
7,000 |
Accounts payable pertain to operating expenses.
Instructions
Prepare the operating activities section of the statement of cash flows using the indirect method.
Presented below are the financial statements of Rajesh Company.
|
RAJESH COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$ 35,000 |
$ 20,000 |
|
Accounts receivable |
33,000 |
14,000 |
|
Inventory |
27,000 |
20,000 |
|
Equipment |
60,000 |
78,000 |
|
Accumulated depreciation—equipment |
(29,000) |
(24,000) |
|
Total |
$126,000 |
$108,000 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 29,000 |
$ 15,000 |
|
Income taxes payable |
7,000 |
8,000 |
|
Bonds payable |
27,000 |
33,000 |
|
Common stock |
18,000 |
14,000 |
|
Retained earnings |
45,000 |
38,000 |
|
Total |
$126,000 |
$108,000 |
|
RAJESH COMPANY |
|
|
Income Statement |
|
|
For the Year Ended December 31, 2012 |
|
|
Sales revenue |
$242,000 |
|
Cost of goods sold |
175,000 |
|
Gross profit |
67,000 |
|
Operating expenses |
24,000 |
|
Income from operations |
43,000 |
|
Interest expense |
3,000 |
|
Income before income taxes |
40,000 |
|
Income tax expense |
8,000 |
|
Net income |
$ 32,000 |
Additional data:
1. Dividends declared and paid were $25,000.
2. During the year equipment was sold for $8,500 cash. This equipment cost $18,000 originally and had a book value of $8,500 at the time of sale.
3. All depreciation expense, $14,500, is in the operating expenses.
4. All sales and purchases are on account.
Instructions
(a) Prepare a statement of cash flows using the indirect method.
(b) Compute free cash flow.
Condensed financial data of Sinjh Inc. follow.
|
SINJH INC. |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$ 90,800 |
$ 48,400 |
|
Accounts receivable |
92,800 |
33,000 |
|
Inventory |
112,500 |
102,850 |
|
Prepaid expenses |
28,400 |
26,000 |
|
Investments |
138,000 |
114,000 |
|
Plant assets |
270,000 |
242,500 |
|
Accumulated depreciation |
(50,000) |
(52,000) |
|
Total |
$682,500 |
$514,750 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$112,000 |
$ 67,300 |
|
Accrued expenses payable |
16,500 |
17,000 |
|
Bonds payable |
110,000 |
150,000 |
|
Common stock |
220,000 |
175,000 |
|
Retained earnings |
224,000 |
105,450 |
|
Total |
$682,500 |
$514,750 |
|
SINJH INC. |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales |
$392,780 |
|
|
Less: |
||
|
Cost of goods sold |
$135,460 |
|
|
Operating expenses, excluding |
||
|
depreciation |
12,410 |
|
|
Depreciation expense |
46,500 |
|
|
Income taxes |
27,280 |
|
|
Interest expense |
4,730 |
|
|
Loss on sale of plant assets |
7,500 |
233,880 |
|
Net income |
$158,900 |
|
Additional information:
1. New plant assets costing $85,000 were purchased for cash during the year.
2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash.
3. Bonds matured and were paid off at face value for cash.
4. A cash dividend of $40,350 was declared and paid during the year.
Instructions
Prepare a statement of cash flows using the indirect method.
The comparative balance sheets for Strackman Lux Company as of December 31 are presented below.
|
STRACKMAN LUX COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$ 71,000 |
$ 45,000 |
|
Accounts receivable |
44,000 |
62,000 |
|
Inventory |
151,450 |
142,000 |
|
Prepaid expenses |
15,280 |
21,000 |
|
Land |
105,000 |
130,000 |
|
Equipment |
228,000 |
155,000 |
|
Accumulated depreciation—equipment |
(45,000) |
(35,000) |
|
Buildings |
200,000 |
200,000 |
|
Accumulated depreciation—buildings |
(60,000) |
(40,000) |
|
Total |
$709,730 |
$680,000 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 47,730 |
$ 40,000 |
|
Bonds payable |
260,000 |
300,000 |
|
Common stock, $1 par |
200,000 |
160,000 |
|
Retained earnings |
202,000 |
180,000 |
|
Total |
$709,730 |
$680,000 |
Additional information:
1. Operating expenses include depreciation expense of $42,000 and charges from prepaid expenses of $5,720.
2. Land was sold for cash at book value.
3. Cash dividends of $15,000 were paid.
4. Net income for 2012 was $37,000.
5. Equipment was purchased for $95,000 cash. In addition, equipment costing $22,000 with a book value of $10,000 was sold for $6,000 cash.
6. Bonds were converted at face value by issuing 40,000 shares of $1 par value common stock.
Instructions
Prepare a statement of cash flows for the year ended December 31, 2012, using the indirect method.
The following selected account balances relate to the plant asset accounts of Raji Inc. at year end.
|
2012 |
2011 |
|
|
Accumulated depreciation—buildings |
$337,500 |
$300,000 |
|
Accumulated depreciation—equipment |
144,000 |
96,000 |
|
Buildings |
750,000 |
750,000 |
|
Depreciation expense |
101,500 |
85,500 |
|
Equipment |
300,000 |
240,000 |
|
Land |
100,000 |
70,000 |
|
Loss on sale of equipment |
8,000 |
0 |
Additional information:
1. Raji purchased $95,000 of equipment and $30,000 of land for cash in 2012.
2. Raji also sold equipment in 2012.
3. Depreciation expense in 2012 was $37,500 on building and $64,000 on equipment.
Instructions
(a) Determine the amounts of any cash inflows or outflows related to the plant asset accounts in 2012.
(b) Indicate where each of the cash inflows or outflows identified in (a) would be classified on the statement of cash flows.
The income statement of Asquith Company is presented on the next page. Additional information:
1. Accounts receivable decreased $320,000 during the year, and inventory increased $120,000.
2. Prepaid expenses increased $175,000 during the year.
3. Accounts payable to merchandise suppliers increased $50,000 during the year.
4. Accrued expenses payable increased $155,000 during the year.
|
ASQUITH COMPANY |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$5,400,000 |
|
|
Cost of goods sold |
||
|
Beginning inventory |
$1,780,000 |
|
|
Purchases |
3,430,000 |
|
|
Goods available for sale |
5,210,000 |
|
|
Ending inventory |
1,900,000 |
|
|
Total cost of goods sold |
3,310,000 |
|
|
Gross profit |
2,090,000 |
|
|
Operating expenses |
105,000 |
|
|
Depreciation expense |
20,000 |
|
|
Amortization expense |
945,000 |
|
|
Other expenses |
1,070,000 |
|
|
Net income |
$1,020,000 |
|
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2012, for Asquith Company, using the indirect method.
The income statement of Anne Droid Inc. reported the following condensed information.
|
ANNE DROID INC. |
|
|
Income Statement |
|
|
For the Year Ended December 31, 2012 |
|
|
Sales revenue |
$545,000 |
|
Operating expenses |
400,000 |
|
Income from operations |
145,000 |
|
Income tax expense |
36,000 |
|
Net income |
$109,000 |
Anne Droid’s balance sheet contained these comparative data at December 31.
|
2012 |
2011 |
|
|
Accounts receivable |
$50,000 |
$70,000 |
|
Accounts payable |
30,000 |
51,000 |
|
Income taxes payable |
10,000 |
4,000 |
Anne Droid has no depreciable assets. Accounts payable pertain to operating expenses.
Instructions
Prepare the operating activities section of the statement of cash flows using the indirect method.
Presented below are the financial statements of Rocastle Company.
|
ROCASTLE COMPANY |
||||
|
Comparative Balance Sheets |
||||
|
December 31 |
||||
|
Assets |
2012 |
2011 |
||
|
Cash |
$ 24,000 |
$ 33,000 |
||
|
Accounts receivable |
25,000 |
14,000 |
||
|
Inventory |
41,000 |
25,000 |
||
|
Equipment |
$ 70,000 |
$ 78,000 |
||
|
Less: Accumulated depreciation— |
||||
|
equipment |
(27,000) |
43,000 |
(24,000) |
54,000 |
|
Total |
$133,000 |
$126,000 |
||
|
Liabilities and Stockholders’ Equity |
||||
|
Accounts payable |
$ 31,000 |
$ 43,000 |
||
|
Income taxes payable |
24,000 |
20,000 |
||
|
Bonds payable |
20,000 |
10,000 |
||
|
Common stock |
25,000 |
25,000 |
||
|
Retained earnings |
33,000 |
28,000 |
||
|
Total |
$133,000 |
$126,000 |
||
|
ROCASTLE COMPANY |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$286,000 |
|
|
Cost of goods sold |
204,000 |
|
|
Gross profit |
82,000 |
|
|
Operating expenses |
37,000 |
|
|
Income from operations |
45,000 |
|
|
Interest expense |
7,000 |
|
|
Income before income taxes |
38,000 |
|
|
Income tax expense |
10,000 |
|
|
Net income |
$ 28,000 |
|
Additional data:
1. Dividends of $23,000 were declared and paid.
2. During the year equipment was sold for $10,000 cash. This equipment cost $15,000 originally and had a book value of $10,000 at the time of sale.
3. All depreciation expense, $8,000, is in the operating expenses.
4. All sales and purchases are on account.
5. Additional equipment was purchased for $7,000 cash.
Instructions
(a) Prepare a statement of cash flows using the indirect method.
(b) Compute free cash flow.
Data for Rocastle Company are presented in P17 7B. Further analysis reveals the following.
1. Accounts payable pertains to merchandise creditors.
2. All operating expenses except for depreciation are paid in cash.
Instructions
(a) Prepare a statement of cash flows using the direct method.
(b) Compute free cash flow.
|
MINNIE HOOPER COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$102,700 |
$ 33,400 |
|
Accounts receivable |
60,800 |
37,000 |
|
Inventory |
126,900 |
102,650 |
|
Investments |
79,500 |
107,000 |
|
Plant assets |
315,000 |
205,000 |
|
Accumulated depreciation |
(44,500) |
(40,000) |
|
Total |
$640,400 |
$445,050 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 57,700 |
$ 48,280 |
|
Accrued expenses payable |
15,100 |
18,830 |
|
Bonds payable |
145,000 |
70,000 |
|
Common stock |
250,000 |
200,000 |
|
Retained earnings |
172,600 |
107,940 |
|
Total |
$640,400 |
$445,050 |
|
MINNIE HOOPER COMPANY |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$297,500 |
|
|
Gain on sale of plant assets |
5,000 |
|
|
Less: |
302,500 |
|
|
Cost of goods sold |
$99,460 |
|
|
Operating expenses, excluding |
||
|
depreciation expense |
19,670 |
|
|
Depreciation expense |
30,500 |
|
|
Income taxes |
37,270 |
|
|
Interest expense |
2,940 |
189,840 |
|
Net income |
$112,660 |
|
Additional information:
1. New plant assets costing $146,000 were purchased for cash during the year.
2. Investments were sold at cost.
3. Plant assets costing $36,000 were sold for $15,000, resulting in a gain of $5,000.
4. A cash dividend of $48,000 was declared and paid during the year.
Instructions
Prepare a statement of cash flows using the indirect method.
Presented on next page are the comparative balance sheets for Vernet Company at December 31.
|
VERNET COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$ 41,000 |
$ 57,000 |
|
Accounts receivable |
77,000 |
64,000 |
|
Inventory |
172,000 |
140,000 |
|
Prepaid expenses |
12,140 |
16,540 |
|
Land |
110,000 |
150,000 |
|
Equipment |
215,000 |
175,000 |
|
Accumulated depreciation—equipment |
(70,000) |
(42,000) |
|
Buildings |
250,000 |
250,000 |
|
Accumulated depreciation—buildings |
(70,000) |
(50,000) |
|
Total |
$737,140 |
$760,540 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 58,000 |
$ 45,000 |
|
Bonds payable |
235,000 |
265,000 |
|
Common stock, $1 par |
280,000 |
250,000 |
|
Retained earnings |
164,140 |
200,540 |
|
Total |
$737,140 |
$760,540 |
Additional information:
1. Operating expenses include depreciation expense $55,000 and charges from prepaid expenses of $4,400.
2. Land was sold for cash at cost.
3. Cash dividends of $84,290 were paid.
4. Net income for 2012 was $47,890.
5. Equipment was purchased for $80,000 cash. In addition, equipment costing $40,000 with a book value of $33,000 was sold for $37,000 cash.
6. Bonds were converted at face value by issuing 30,000 shares of $1 par value common stock.
Instructions
Prepare a statement of cash flows for 2012 using the indirect method.
Refer to the financial statements of PepsiCo’s, presented in Appendix A, and answer the following questions.
(a) What was the amount of net cash provided by operating activities for the year ended December 26, 2009? For the year ended December 27, 2008?
(b) What was the amount of increase or decrease in cash and cash equivalents for the year ended December 26, 2009? For the year ended December 27, 2008?
(c) Which method of computing net cash provided by operating activities does PepsiCo use?
(d) From your analysis of the 2009 statement of cash flows, did the change in accounts and notes receivable require or provide cash? Did the change in inventories require or provide cash? Did the change in accounts payable and other current liabilities require or provide cash?
(e) What was the net outflow or inflow of cash from investing activities for the year ended December 26, 2009?
(f) What was the amount of interest paid in the year ended December 26, 2009? What was the amount of income taxes paid in the year ended December 26, 2009?
Ron Nord and Lisa Smith are examining the following statement of cash flows for Carpino Company for the year ended January 31, 2012.
|
CARPINO COMPANY |
||
|
Statement of Cash Flows |
||
|
For the Year Ended January 31, 2012 |
||
|
Sources of cash |
||
|
From sales of merchandise |
$380,000 |
|
|
From sale of capital stock |
420,000 |
|
|
From sale of investment (purchased below) |
80,000 |
|
|
From depreciation |
55,000 |
|
|
From issuance of note for truck |
20,000 |
|
|
From interest on investments |
6,000 |
|
|
Total sources of cash |
961,000 |
|
|
Uses of cash |
||
|
For purchase of fixtures and equipment |
330,000 |
|
|
For merchandise purchased for resale |
258,000 |
|
|
For operating expenses (including depreciation) |
160,000 |
|
|
For purchase of investment |
75,000 |
|
|
For purchase of truck by issuance of note |
20,000 |
|
|
For purchase of treasury stock |
10,000 |
|
|
For interest on note payable |
3,000 |
|
|
Total uses of cash |
856,000 |
|
|
Net increase in cash |
$105,000 |
|
Ron claims that Carpino’s statement of cash flows is an excellent portrayal of a superb first year with cash increasing $105,000. Lisa replies that it was not a superb first year. Rather, she says, the year was an operating failure, that the statement is presented incorrectly, and that $105,000 is not the actual increase in cash.
The cash balance at the beginning of the year was $140,000.
Instructions
With the class divided into groups, answer the following.
(a) Using the data provided, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in the income statement are depreciation and the gain from the sale of the investment.
(b) With whom do you agree, Ron or Lisa? Explain your position.
(a) Tracy Company sells three different types of home heating stoves (wood, gas, and pellet). The cost and market value of its inventory of stoves are as follows.
|
Cost |
Market |
|
|
Gas |
$ 84,000 |
$ 79,000 |
|
Wood |
250,000 |
280,000 |
|
Pellet |
112,000 |
101,000 |
Determine the value of the company’s inventory under the lower of cost or market approach.
(b) Visual Company overstated its 2011 ending inventory by $22,000. Determine the impact this error has on ending inventory, cost of goods sold, and stockholders’ equity in 2011 and 2012.
Early in 2011 Westmoreland Company switched to a just in time inventory system. Its sales, cost of goods sold, and inventory amounts for 2010 and 2011 are shown below.
|
2010 |
2011 |
|
|
Sales |
$2,000,000 |
$1,800,000 |
|
Cost of goods sold |
1,000,000 |
910,000 |
|
Beginning inventory |
290,000 |
210,000 |
|
Ending inventory |
210,000 |
50,000 |
|
Sales |
2010 |
2011 |
Determine the inventory turnover and days in inventory for 2010 and 2011. Discuss the changes in the amount of inventory, the inventory turnover and days in inventory, and the amount of sales across the two years.
Gerald D. Englehart Company has the following inventory, purchases, and sales data for the month of March.
|
Inventory: |
March 1 |
200 units @ $4.00 |
$ 800 |
|
Purchases: |
|||
|
March 10 |
500 units @ $4.50 |
2,250 |
|
|
March 20 |
400 units @ $4.75 |
1,900 |
|
|
March 30 |
300 units @ $5.00 |
1,500 |
|
|
Sales: |
|||
|
March 15 |
500 units |
||
|
March 25 |
400 units |
The physical inventory count on March 31 shows 500 units on hand.
Instructions
Under a periodic inventory system, determine the cost of inventory on hand at March 31 and the cost of goods sold for March under (a) FIFO, (b) LIFO, and (c) average cost.
showed cost of goods sold computations under a periodic inventory system. Now let’s assume that Gerald D. Englehart Company uses a perpetual inventory system.The company has the same inventory, purchases, and sales data for the month of March as shown earlier.
|
Inventory: |
March 1 |
200 units @ $4.00 |
$ 800 |
|
Purchases: |
March 10 |
500 units @ $4.50 |
2,250 |
|
March 20 |
400 units @ $4.75 |
1,900 |
|
|
March 30 |
300 units @ $5.00 |
1,500 |
|
|
Sales: |
March 15 |
500 units |
|
|
March 25 |
400 units |
The physical inventory count on March 31 shows 500 units on hand.
Instructions
Under a perpetual inventory system, determine the cost of inventory on hand at March 31 and the cost of goods sold for March under (a) FIFO, (b) LIFO, and (c) average cost.
Natalie has been approached by Ken Thornton, a shareholder of The Beanery Coffee Inc. Ken wants to retire and would like to sell his 1,000 shares in The Beanery Coffee, which represents 20% of all shares issued. The Beanery is currently operated by Ken’s twin daughters, who each own 40% of the common shares. The Beanery not only operates a coffee shop but also roasts and sells beans to retailers, under the name “Rocky Mountain Beanery.”
Ken has met with Curtis and Natalie to discuss the business operation. All have concluded that there would be many advantages for Cookie & Coffee Creations Inc. to acquire an interest in The Beanery Coffee. Despite the apparent advantages, however, Natalie and Curtis are still not convinced that they should participate in this business venture.
At the beginning of the question and answer portion of the annual stockholders’ meeting of Kemper Corporation, stockholder Mike Kerwin asks, “Why did management sell the holdings in UMW Company at a loss when this company has been very profitable during the period its stock was held by Kemper?”
Since president Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, “I remember we paid $1,300,000 for that stock some years ago, and I am sure we sold that stock at a much higher price. You must be mistaken.”
Kerwin retorts, “Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned $520,000 this year and paid out $160,000 in cash dividends. Further, a summary statement indicates that in past years, while Kemper held UMW stock, UMW earned $1,240,000 and paid out $440,000 in dividends. Finally, the income statement for this year shows a loss on the sale of UMW stock of $180,000. So, I doubt that I am mistaken.”
Red faced, president Chavez turns to you.
Instructions
With the class divided into groups, answer the following.
(a) What dollar amount did Kemper receive upon the sale of the UMW stock?
(b) Explain why both stockholder Kerwin and president Chavez are correct.
Bartlet Financial Services Company holds a large portfolio of debt and stock securities as an investment. The total fair value of the portfolio at December 31, 2012, is greater than total cost. Some securities have increased in value and others have decreased. Deb Faust, the financial vice president, and Jan McCabe, the controller, are in the process of classifying for the first time the securities in the portfolio.
Faust suggests classifying the securities that have increased in value as trading securities in order to increase net income for the year. She wants to classify the securities that have decreased in value as long term available for sale securities, so that the decreases in value will not affect 2012 net income.
McCabe disagrees. She recommends classifying the securities that have decreased in value as trading securities and those that have increased in value as long term available for sale securities. McCabe argues that the company is having a good earnings year and that recognizing the losses now will help to smooth income for this year. Moreover, for future years, when the company may not be as profitable, the company will have built in gains.
Instructions
(a) Will classifying the securities as Faust and McCabe suggest actually affect earnings as each says it will?
(b) Is there anything unethical in what Faust and McCabe propose? Who are the stakeholders affected by their proposals?
(c) Assume that Faust and McCabe properly classify the portfolio. Assume, at year end, that Faust proposes to sell the securities that will increase 2012 net income, and that McCabe proposes to sell the securities that will decrease 2012 net income. Is this unethical?
Use the information below and prepare a statement of cash flows using the indirect method
|
Reynolds Company |
|||
|
Comparative Balance Sheets |
|||
|
December 31 |
|||
|
Change |
|||
|
Assets |
2012 |
2011 |
Increase/Decrease |
|
Cash |
$ 54,000 |
$ 37,000 |
$ 17,000 Increase |
|
Accounts receivable |
68,000 |
26,000 |
42,000 Increase |
|
Inventory |
54,000 |
–0– |
54,000 Increase |
|
Prepaid expenses |
4,000 |
6,000 |
2,000 Decrease |
|
Land |
45,000 |
70,000 |
25,000 Decrease |
|
Buildings |
200,000 |
200,000 |
–0– |
|
Accumulated depreciation—buildings |
(21,000) |
(11,000) |
10,000 Increase |
|
Equipment |
193,000 |
68,000 |
125,000 Increase |
|
Accumulated depreciation—equipment |
(28,000) |
(10,000) |
18,000 Increase |
|
Totals |
$569,000 |
$386,000 |
|
|
Liabilities and Stockholders’ Equity |
|||
|
Accounts payable |
$ 23,000 |
$ 40,000 |
$ 17,000 Decrease |
|
Accrued expenses payable |
10,000 |
–0– |
10,000 Increase |
|
Bonds payable |
110,000 |
150,000 |
40,000 Decrease |
|
Common stock ($1 par) |
220,000 |
60,000 |
160,000 Increase |
|
Retained earnings |
206,000 |
136,000 |
70,000 Increase |
|
Totals |
$569,000 |
$386,000 |
|
|
Reynolds Company |
|||
|
Income Statement |
|||
|
For the Year Ended December 31, 2012 |
|||
|
Sales revenue |
$890,000 |
||
|
Cost of goods sold |
$465,000 |
||
|
Operating expenses |
221,000 |
||
|
Interest expense |
12,000 |
||
|
Loss on sale of equipment |
2,000 |
700,000 |
|
|
Income before income taxes |
190,000 |
||
|
Income tax expense |
65,000 |
||
|
Net income |
$125,000 |
||
Additional information:
1. Operating expenses include depreciation expense of $33,000 and charges from prepaid expenses of $2,000.
2. Land was sold at its book value for cash.
3. Cash dividends of $55,000 were declared and paid in 2012.
4. Interest expense of $12,000 was paid in cash.
5. Equipment with a cost of $166,000 was purchased for cash. Equipment with
a cost of $41,000 and a book value of $36,000 was sold for $34,000 cash.
6. Bonds of $10,000 were redeemed at their face value for cash. Bonds of $30,000 were converted into common stock.
7. Common stock ($1 par) of $130,000 was issued for cash.
8. Accounts payable pertain to merchandise suppliers.
Chicago Corporation issued the following statement of cash flows for 2012.
|
Cash flows from operating activities |
||
|
Net income |
$19,000 |
|
|
Adjustments to reconcile net income to net cash |
||
|
provided by operating activities: |
||
|
Depreciation expense |
$ 8,100 |
|
|
Loss on disposal of plant assets |
1,300 |
|
|
Decrease in accounts receivable |
6,900 |
|
|
Increase in inventory |
(4,000) |
|
|
Decrease in accounts payable |
(2,000) |
10,300 |
|
Net cash provided by operating activities |
29,300 |
|
|
Cash flows from investing activities |
||
|
Sale of investments |
1,100 |
|
|
Purchase of equipment |
(19,000) |
|
|
Net cash used by investing activities |
(17,900) |
|
|
Cash flows from financing activities |
||
|
Issuance of stock |
10,000 |
|
|
Payment on long term note payable |
(5,000) |
|
|
Payment for dividends |
(9,000) |
|
|
Net cash used by financing activities |
(4,000) |
|
|
Net increase in cash |
7,400 |
|
|
Cash at beginning of year |
10,000 |
|
|
Cash at end of year |
$ 17,400 |
(a) Compute free cash flow for Chicago Corporation. (b) Explain why free cash flow often provides better information than “Net cash provided by operating activities.”
The income statement for the year ended December 31, 2012, for Kosinski Manufacturing Company contains the following condensed information.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$6,583,000 |
|
|
Operating expenses (excluding depreciation) |
$4,920,000 |
|
|
Depreciation expense |
880,000 |
5,800,000 |
|
Income before income taxes |
783,000 |
|
|
Income tax expense |
353,000 |
|
|
Net income |
$ 430,000 |
|
Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. Machinery was purchased at a cost of $750,000. The following balances are reported on Kosinski’s comparative balance sheets at December 31.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Comparative Balance Sheets (partial) |
||
|
2012 |
2011 |
|
|
Cash |
$672,000 |
$130,000 |
|
Accounts receivable |
775,000 |
610,000 |
|
Inventory |
834,000 |
867,000 |
|
Accounts payable |
521,000 |
501,000 |
Income tax expense of $353,000 represents the amount paid in 2012. Dividends declared and paid in 2012 totaled $200,000.
Instructions
Prepare the statement of cash flows using the indirect method.
The income statement for Kosinski Manufacturing Company contains the following condensed information.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Income Statement |
||
|
For the Year Ended December 31, 2012 |
||
|
Sales revenue |
$6,583,000 |
|
|
Operating expenses, excluding depreciation |
$4,920,000 |
|
|
Depreciation expense |
880,000 |
5,800,000 |
|
Income before income taxes |
783,000 |
|
|
Income tax expense |
353,000 |
|
|
Net income |
$ 430,000 |
|
Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. Machinery was purchased at a cost of $750,000. The following balances are reported on Kosinski’s comparative balance sheet at December 31.
|
KOSINSKI MANUFACTURING COMPANY |
||
|
Comparative Balance Sheets (partial) |
||
|
2012 |
2011 |
|
|
Cash |
$672,000 |
$130,000 |
|
Accounts receivable |
775,000 |
610,000 |
|
Inventory |
834,000 |
867,000 |
|
Accounts payable |
521,000 |
501,000 |
Income tax expense of $353,000 represents the amount paid in 2012. Dividends declared and paid in 2012 totaled $200,000.
Instructions
Prepare the statement of cash flows using the direct method.
Zielinski Corporation issued the following statement of cash flows for 2012.
|
Cash flows from operating activities |
$59,000 |
|
|
Net income |
||
|
Adjustments to reconcile net income to net cash |
||
|
provided by operating activities: |
||
|
Depreciation expense |
$ 9,100 |
|
|
Decrease in accounts receivable |
9,500 |
|
|
Loss on sale of equipment |
3,300 |
|
|
Increase in inventory |
(5,000) |
|
|
Decrease in accounts payable |
(2,200) |
|
|
Net cash provided by operating activities |
(23,900) |
|
|
Cash flows from financing activities |
||
|
Issuance of stock |
20,000 |
|
|
Payment on long term note payable |
(10,000) |
|
|
Payment for dividends |
(15,000) |
|
|
Net cash used by financing activities |
(5,000) |
|
|
Net increase in cash |
44,800 |
|
|
Cash at beginning of year |
13,000 |
|
|
Cash at end of year |
$57,800 |
(a) Compute free cash flow for Zielinski Corporation. (b) Explain why free cash flow often provides better information than “Net cash provided by operating activities.”
The following data are available for Allen Clapp Corpo ration.
|
Net income |
$200,000 |
|
Depreciation expense |
40,000 |
|
Dividends paid |
60,000 |
|
Gain on sale of land |
10,000 |
|
Decrease in accounts receivable |
20,000 |
|
Decrease in accounts payable |
30,000 |
Net cash provided by operating activities is:
a. $160,000.
b. $220,000.
c. $240,000.
d. $280,000.
The following T account is a summary of the cash account of Wiegman Company.
|
Cash (Summary Form) |
|||
|
Balance, Jan. 1 |
8,000 |
||
|
Receipts from customers |
364,000 |
Payments for goods |
200,000 |
|
Dividends on stock investments |
6,000 |
Payments for operating expenses |
140,000 |
|
Proceeds from sale of equipment |
36,000 |
Interest paid |
10,000 |
|
Proceeds from issuance of |
Taxes paid |
8,000 |
|
|
bonds payable |
300,000 |
Dividends paid |
50,000 |
|
Balance, Dec. 31 |
306,000 |
||
What amount of net cash provided (used) by financing activities should be reported in the statement of cash flows?
The T accounts for Equipment and the related Accumulated Depreciation—Equipment for Ada Company at the end of 2012 are shown here.
|
Equipment |
|||
|
Beg. bal. |
80,000 |
Disposals |
22,000 |
|
Acquisitions |
41,600 |
||
|
End. bal. |
99,600 |
||
|
Accumulated Depreciation—Equipment |
|||
|
Disposals |
5,500 |
Beg. bal. |
44,500 |
|
Depr. exp. |
12,000 |
||
|
End. bal. |
51,000 |
||
In addition, Ada Company’s income statement reported a loss on the sale of equipment of $5,500. What amount was reported on the statement of cash flows as “cash flow from sale of equipment”?
Quarshee Corporation had these transactions during 2012.
(a) Issued $50,000 par value common stock for cash.
(b) Purchased a machine for $30,000, giving a long term note in exchange.
(c) Issued $200,000 par value common stock upon conversion of bonds having a face value of $200,000.
(d) Declared and paid a cash dividend of $18,000.
(e) Sold a long term investment with a cost of $15,000 for $15,000 cash.
(f) Collected $16,000 of accounts receivable.
(g) Paid $18,000 on accounts payable.
Instructions
Analyze the transactions and indicate whether each transaction resulted in a cash flow from operating activities, investing activities, financing activities, or noncash investing and financing activities.
An analysis of comparative balance sheets, the current year’s income statement, and the general ledger accounts of Solomon Corp. uncovered the following items. Assume all items involve cash unless there is information to the contrary.
(a) Payment of interest on notes payable.
(b) Exchange of land for patent.
(c) Sale of building at book value.
(d) Payment of dividends.
(e) Depreciation.
(f) Receipt of dividends on investment in stock.
(g) Receipt of interest on notes receivable.
(h) Issuance of capital stock.
(i) Amortization of patent.
(j) Issuance of bonds for land.
(k) Purchase of land.
(l) Conversion of bonds into common stock.
(m) Loss on sale of land.
(n) Retirement of bonds.
Instructions
Indicate how each item should be classified in the statement of cash flows using these four major classifications: operating activity (indirect method), investing activity, financing activity, and significant noncash investing and financing activity.
The current sections of Nasreen Inc.’s balance sheets at December 31, 2011 and 2012, are presented here.
Nasreen’s net income for 2012 was $153,000. Depreciation expense was $24,000.
|
2012 |
2011 |
|
|
Current assets |
||
|
Cash |
$105,000 |
$ 99,000 |
|
Accounts receivable |
110,000 |
89,000 |
|
Inventory |
158,000 |
172,000 |
|
Prepaid expenses |
27,000 |
22,000 |
|
Total current assets |
$400,000 |
$382,000 |
|
Current liabilities |
||
|
Accrued expenses payable |
$ 15,000 |
$ 5,000 |
|
Accounts payable |
85,000 |
92,000 |
|
Total current liabilities |
$100,000 |
$ 97,000 |
Instructions
Prepare the net cash provided by operating activities section of the company’s statement of cash flows for the year ended December 31, 2012, using the indirect method.
The three accounts shown below appear in the general ledger of Chaudry Corp. during 2012.
|
Equipment |
||||
|
Date |
Debit |
Credit |
Balance |
|
|
Jan. 1 |
Balance |
160,000 |
||
|
July 31 |
Purchase of equipment |
70,000 |
230,000 |
|
|
Sept. 2 |
Cost of equipment constructed |
53,000 |
283,000 |
|
|
Nov. 10 |
Cost of equipment sold |
49,000 |
234,000 |
|
|
Accumulated Depreciation—Equipment |
||||
|
Date |
Debit |
Credit |
Balance |
|
|
Jan. 1 |
Balance |
71,000 |
||
|
Nov. 10 |
Accumulated depreciation on |
|||
|
equipment sold |
30,000 |
41,000 |
||
|
Dec. 31 |
Depreciation for year |
28,000 |
69,000 |
|
|
Retained Earnings |
||||
|
Date |
Debit |
Credit |
Balance |
|
|
Jan. 1 |
Balance |
105,000 |
||
|
Aug. 23 |
Dividends (cash) |
14,000 |
91,000 |
|
|
Dec. 31 |
Net income |
67,000 |
158,000 |
|
Instructions
From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale of equipment was $5,000. (Hint: Cost of equipment constructed is reported in the investing activities section as a decrease in cash of $53,000.)
Meera Corporation’s comparative balance sheets are presented below.
|
MEERA CORPORATION |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
2012 |
2011 |
|
|
Cash |
$ 14,300 |
$ 10,700 |
|
Accounts receivable |
21,200 |
23,400 |
|
Land |
20,000 |
26,000 |
|
Buildings |
70,000 |
70,000 |
|
Accumulated depreciation—buildings |
(15,000) |
(10,000) |
|
Total |
$110,500 |
$120,100 |
|
Accounts payable |
$ 12,370 |
$ 31,100 |
|
Common stock |
75,000 |
69,000 |
|
Retained earnings |
23,130 |
20,000 |
|
Total |
$110,500 |
$120,100 |
Additional information:
1. Net income was $22,630. Dividends declared and paid were $19,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $4,900.
Instructions
(a) Prepare a statement of cash flows for 2012 using the indirect method.
(b) Compute free cash flow.
Here are comparative balance sheets for Syal Company.
|
SYAL COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
2012 |
2011 |
|
|
Assets |
||
|
Cash |
$ 73,000 |
$ 22,000 |
|
Accounts receivable |
85,000 |
76,000 |
|
Inventory |
170,000 |
189,000 |
|
Land |
75,000 |
100,000 |
|
Equipment |
260,000 |
200,000 |
|
Accumulated depreciation—equipment |
(66,000) |
(32,000) |
|
Total |
$597,000 |
$555,000 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 39,000 |
$ 47,000 |
|
Bonds payable |
150,000 |
200,000 |
|
Common stock ($1 par) |
216,000 |
174,000 |
|
Retained earnings |
192,000 |
134,000 |
|
Total |
$597,000 |
$555,000 |
Additional information:
1. Net income for 2012 was $103,000.
2. Cash dividends of $45,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
4. Common stock was issued for $42,000 cash.
5. No equipment was sold during 2012, but land was sold at cost.
Instructions
Prepare a statement of cash flows for 2012 using the indirect method.
Cassandra Corporation’s comparative balance sheets are presented below.
|
CASSANDRA CORPORATION |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
2012 |
2011 |
|
|
Cash |
$ 15,200 |
$ 17,700 |
|
Accounts receivable |
25,200 |
22,300 |
|
Investments |
20,000 |
16,000 |
|
Equipment |
60,000 |
70,000 |
|
Accumulated depreciation—equipment |
(14,000) |
(10,000) |
|
Total |
$106,400 |
$116,000 |
|
Accounts payable |
$ 14,600 |
$ 11,100 |
|
Bonds payable |
10,000 |
30,000 |
|
Common stock |
50,000 |
45,000 |
|
Retained earnings |
31,800 |
29,900 |
|
Total |
$106,400 |
$116,000 |
Additional information:
1. Net income was $18,300. Dividends declared and paid were $16,400.
2. Equipment which cost $10,000 and had accumulated depreciation of $1,200 was sold for $3,300.
3. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation.
Instructions
(a) Prepare a statement of cash flows for 2012 using the indirect method.
(b) Compute free cash flow.
Comparative balance sheets for Erisa Magambo Company are presented below.
|
ERISA MAGAMBO COMPANY |
||
|
Comparative Balance Sheets |
||
|
December 31 |
||
|
Assets |
2012 |
2011 |
|
Cash |
$ 63,000 |
$ 22,000 |
|
Accounts receivable |
85,000 |
76,000 |
|
Inventory |
180,000 |
189,000 |
|
Land |
75,000 |
100,000 |
|
Equipment |
260,000 |
200,000 |
|
Accumulated depreciation—equipment |
(66,000) |
(42,000) |
|
Total |
$597,000 |
$545,000 |
|
Liabilities and Stockholders’ Equity |
||
|
Accounts payable |
$ 34,000 |
$ 47,000 |
|
Bonds payable |
150,000 |
200,000 |
|
Common stock ($1 par) |
214,000 |
164,000 |
|
Retained earnings |
199,000 |
134,000 |
|
Total |
$597,000 |
$545,000 |
Additional information:
1. Net income for 2012 was $125,000.
2. Cash dividends of $60,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
4. Common stock was issued for $50,000 cash.
5. Depreciation expense was $24,000.
6. Sales for the year were $978,000.
Instructions
Prepare a worksheet for a statement of cash flows for 2012 using the indirect method. Enter the reconciling items directly on the worksheet, using letters to cross reference each entry.
The 2012 accounting records of Liz Ten Transport reveal these transactions and events.
|
Payment of interest |
$ 10,000 |
Collection of accounts receivable |
$182,000 |
|
Cash sales |
48,000 |
Payment of salaries and wages |
53,000 |
|
Receipt of dividend revenue |
18,000 |
Depreciation expense |
16,000 |
|
Payment of income taxes |
12,000 |
Proceeds from sale of vehicles |
12,000 |
|
Net income |
38,000 |
Purchase of equipment for cash |
22,000 |
|
Payment of accounts payable |
Loss on sale of vehicles |
3,000 |
|
|
for merchandise |
115,000 |
Payment of dividends |
14,000 |
|
Payment for land |
74,000 |
Payment of operating expenses |
28,000 |
Instructions
Prepare the cash flows from operating activities section using the direct method. (Not all of the items will be used.)
Identify where each of the following items would be reported in the financial statements.
1. Interest earned on investments in bonds.
2. Market adjustment—available for sale.
3. Unrealized loss on available for sale securities.
4. Gain on sale of investments in stock.
5. Unrealized gain on trading securities.
Use the following possible categories:
|
Balance sheet: |
|
|
Current assets |
Current liabilities |
|
Investments |
Long term liabilities |
|
Property, plant, and equipment |
Stockholders’ equity |
|
Intangible assets |
|
|
Income statement: |
|
|
Other revenues and gains |
Other expenses and losses |
In its first year of operations, DeMarco Company had the following selected transactions in stock investments that are considered trading securities.
|
June 1 |
Purchased for cash 600 shares of Sanburg common stock at $24 per share, plus $300 |
|
brokerage fees. |
|
|
July 1 |
Purchased for cash 800 shares of Cey common stock at $33 per share, plus $600 brokerage |
|
fees. |
|
|
Sept. 1 |
Received a $1 per share cash dividend from Cey Corporation. |
|
Nov. 1 |
Sold 200 shares of Sanburg common stock for cash at $27 per share, less $150 brokerage fees. |
|
Dec. 15 |
Received a $0.50 per share cash dividend on Sanburg common stock. |
Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry at December 31 to report the securities at fair value.
Kurtyka Corporation had the following transactions relating to debt investments:
|
Jan. 1 |
Purchased 50, $1,000, 12% Nordica Company bonds for $50,000 plus broker’s fees of |
|
$1,500. Interest is payable semiannually on January 1 and July 1. |
|
|
July 1 |
Received semiannual interest from Nordica Company bonds. |
|
July 1 |
Sold 30 Nordica Company bonds for $30,000, less $800 broker’s fees. |
(a) Journalize the transactions, and (b) prepare the adjusting entry for the accrual of interest on December 31.
Identify where each of the following items would be reported in the financial statements.
1. Loss on sale of investments in stock.
2. Unrealized gain on available for sale securities.
3. Market adjustment—trading.
4. Interest earned on investments in bonds.
5. Unrealized loss on trading securities.
Use the following possible categories:
|
Balance sheet: |
|
|
Current assets |
Current liabilities |
|
Investments |
Long term liabilities |
|
Property, plant, and equipment |
Stockholders’ equity |
|
Intangible assets |
|
|
Income statement: |
|
|
Other revenues and gains |
Other expenses and losses |
Diann Company had the following transactions pertaining to stock investments.
|
Feb. 1 |
Purchased 600 shares of Ronn common stock (2%) for $6,000 cash, plus brokerage fees of $200. |
|
July 1 |
Received cash dividends of $1 per share on Ronn common stock. |
|
Sept. 1 |
Sold 300 shares of Ronn common stock for $4,400, less brokerage fees of $100. |
|
Dec. 1 |
Received cash dividends of $1 per share on Ronn common stock. |
Instructions
(a) Journalize the transactions.
(b) Explain how dividend revenue and the gain (loss) on sale should be reported in the income statement.
Spring Inc. had the following transactions pertaining to investments in common stock.
|
Jan. 1 |
Purchased 2,500 shares of Angeltide Corporation common stock (5%) for $140,000 |
|
cash plus $2,100 broker’s commission. |
|
|
July 1 |
Received a cash dividend of $3 per share. |
|
Dec. 1 |
Sold 500 shares of Angeltide Corporation common stock for $32,000 cash, less $800 |
|
broker’s commission. |
|
|
Dec. 31 |
Received a cash dividend of $3 per share. |
Instructions
Journalize the transactions.
Presented below are two independent situations.
1. Chicory Cosmetics acquired 15% of the 200,000 shares of common stock of Racine Fashion at a total cost of $13 per share on March 18, 2012. On June 30, Racine declared and paid a $60,000 dividend. On December 31, Racine reported net income of $122,000 for the year. At December 31, the market price of Racine Fashion was $15 per share. The stock is classified as available for sale.
2. Frank, Inc., obtained significant influence over Nowak Corporation by buying 30% of Nowak’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2012. On June 15, Nowak declared and paid a cash dividend of $30,000. On December 31, Nowak reported a net income of $80,000 for the year.
Instructions
Prepare all the necessary journal entries for 2012 for (1) Chicory Cosmetics and (2) Frank, Inc.
At December 31, 2012, the trading securities for Oglesbee, Inc. are as follows.
|
Security |
Cost |
Fair Value |
|
A |
$17,500 |
$16,000 |
|
B |
12,500 |
14,000 |
|
C |
23,000 |
19,000 |
|
$53,000 |
$49,000 |
Instructions
(a) Prepare the adjusting entry at December 31, 2012, to report the securities at fair value.
(b) Show the balance sheet and income statement presentation at December 31, 2012, after adjustment to fair value.
Pagnucci Carecenters Inc. provides financing and capital to the health care industry, with a particular focus on nursing homes for the elderly. The following selected transactions relate to bonds acquired as an investment by Pagnucci, whose fiscal year ends on December 31.
|
2012 |
Purchased at face value $2,000,000 of Franco Nursing Centers, Inc., 10 year, 8% |
|
Jan. 1 |
bonds dated January 1, 2012, directly from Franco. |
|
Received the semiannual interest on the Franco bonds. |
|
|
July 1 |
Accrual of interest at year end on the Franco bonds. |
|
Dec. 31 |
Purchased at face value $2,000,000 of Franco Nursing Centers, Inc., 10 year, 8% |
(Assume that all intervening transactions and adjustments have been properly recorded and that the number of bonds owned has not changed from December 31, 2012, to December 31, 2014.)
|
2012 |
Received the semiannual interest on the Franco bonds. |
|
Jan. 1 |
Sold $1,000,000 Franco bonds at 106. The broker deducted $6,000 for commissions |
|
Jan. 1 |
and fees on the sale. |
|
Received the semiannual interest on the Franco bonds. |
|
|
July 1 |
Accrual of interest at year end on the Franco bonds. |
|
Dec. 31 |
Received the semiannual interest on the Franco bonds. |
Instructions
(a) Journalize the listed transactions for the years 2012 and 2015.
(b) Assume that the fair value of the bonds at December 31, 2012, was $2,200,000. These bonds
are classified as available for sale securities. Prepare the adjusting entry to record these bonds at fair value.
(c) Based on your analysis in part (b), show the balance sheet presentation of the bonds and interest receivable at December 31, 2012. Assume the investments are considered long term.
Indicate where any unrealized gain or loss is reported in the financial statements.
In January 2012, the management of Stefan Company concludes that it has sufficient cash to permit some short term investments in debt and stock securities. During the year, the following transactions occurred.
|
Feb. 1 |
Purchased 600 shares of Superior common stock for $31,800, plus brokerage fees of $600. |
|
Mar. 1 |
Purchased 800 shares of Pawlik common stock for $20,000, plus brokerage fees of $400. |
|
Apr. 1 |
Purchased 50 $1,000, 7% Venice bonds for $50,000, plus $1,000 brokerage fees. Interest |
|
is payable semiannually on April 1 and October 1. |
|
|
July 1 |
Received a cash dividend of $0.60 per share on the Superior common stock. |
|
Aug. 1 |
Sold 200 shares of Superior common stock at $58 per share less brokerage fees of $200. |
|
Sept. 1 |
Received a $1 per share cash dividend on the Pawlik common stock. |
|
Oct. 1 |
Received the semiannual interest on the Venice bonds. |
|
Oct. 1 |
Sold the Venice bonds for $50,000 less $1,000 brokerage fees. |
At December 31, the fair value of the Superior common stock was $55 per share. The fair value of the Pawlik common stock was $24 per share.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2012, to report the investment securities at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2012.
(d) Identify the income statement accounts and give the statement classification of each account.
On December 31, 2012, Ogallala Associates owned the following securities, held as a long term investment. The securities are not held for influence or control of the investee.
|
Common Stock |
Shares |
Cost |
|
Carlene Co. |
2,000 |
$60,000 |
|
Riverdale Co. |
5,000 |
45,000 |
|
Raczynski Co. |
1,500 |
30,000 |
On December 31, 2012, the total fair value of the securities was equal to its cost. In 2013, the following transactions occurred.
|
July 1 |
Received $1 per share semiannual cash dividend on Riverdale Co. common stock. |
|
Aug. 1 |
Received $0.50 per share cash dividend on Carlene Co. common stock. |
|
Sept. 1 |
Sold 1,500 shares of Riverdale Co. common stock for cash at $8 per share, less brokerage |
|
fees of $300. |
|
|
Oct. 1 |
Sold 800 shares of Carlene Co. common stock for cash at $33 per share, less brokerage |
|
fees of $500. |
|
|
Nov. 1 |
Received $1 per share cash dividend on Raczynski Co. common stock. |
|
Dec. 15 |
Received $0.50 per share cash dividend on Carlene Co. common stock. |
|
31 |
Received $1 per share semiannual cash dividend on Riverdale Co. common stock. |
At December 31, the fair values per share of the common stocks were: Carlene Co. $32, Riverdale Co. $8, and Raczynski Co. $18.
Instructions
(a) Journalize the 2013 transactions and post to the account Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2013, to show the securities at fair value. The stock should be classified as available for sale securities.
c) Show the balance sheet presentation of the investments at December 31, 2013. At this date, Ogallala Associates has common stock $1,500,000 and retained earnings $1,000,000.
Control Alt Design acquired 30% of the outstanding common stock of Walter Company on January 1, 2012, by paying $800,000 for the 45,000 shares. Walter declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2012. Walter reported net income of $320,000 for the year. At December 31, 2012, the market price of Walter common stock was $24 per share.
Instructions
(a) Prepare the journal entries for Control Alt Design for 2012 assuming Control Alt Design cannot exercise significant influence over Walter. (Use the cost method and assume that Walter common stock should be classified as a trading security.)
(b) Prepare the journal entries for Control Alt Design for 2012, assuming Control Alt Design can exercise significant influence over Walter. Use the equity method.
(c) Indicate the balance sheet and income statement account balances at December 31, 2012, under each method of accounting.
The following securities are in Amberwood Company’s portfolio of long term availablefor sale securities at December 31, 2012.
|
Cost |
|
|
1,000 shares of Reginald Corporation common stock |
$52,000 |
|
1,400 shares of Elderberry Corporation common stock |
84,000 |
|
1,200 shares of Mattoon Corporation preferred stock |
33,600 |
On December 31, 2012, the total cost of the portfolio equaled total fair value. Amberwood had the following transactions related to the securities during 2013.
|
Jan. |
20 |
Sold all 1,000 shares of Reginald Corporation common stock at $55 per share less |
|
brokerage fees of $600. |
||
|
28 |
Purchased 400 shares of $70 par value common stock of Hachito Corporation at $78 |
|
|
per share, plus brokerage fees of $480. |
||
|
30 |
Received a cash dividend of $1.15 per share on Elderberry Corp. common stock. |
|
|
Feb. |
8 |
Received cash dividends of $0.40 per share on Mattoon Corp. preferred stock. |
|
18 |
Sold all 1,200 shares of Mattoon Corp. preferred stock at $27 per share less brokerage fees of $360. |
|
|
July |
30 |
Received a cash dividend of $1.00 per share on Elderberry Corp. common stock. |
|
Sept. |
6 |
Purchased an additional 900 shares of $10 par value common stock of Hachito |
|
Corporation at $82 per share, plus brokerage fees of $1,200. |
||
|
Dec. |
1 |
Received a cash dividend of $1.50 per share on Hachito Corporation common stock. |
At December 31, 2013, the fair values of the securities were:
|
Elderberry Corporation common stock |
$64 per share |
|
Hachito Corporation common stock |
$72 per share |
Instructions
(a) Prepare journal entries to record the transactions.
(b) Post to the investment accounts. (Use T accounts.)
(c) Prepare the adjusting entry at December 31, 2013 to report the portfolio at fair value.
(d) Show the balance sheet presentation at December 31, 2013, for the investment related accounts.
The following data, presented in alphabetical order, are taken from the records of Radar Corporation.
|
Accounts payable |
$ 240,000 |
|
Accounts receivable |
140,000 |
|
Accumulated depreciation—buildings |
180,000 |
|
Accumulated depreciation—equipment |
52,000 |
|
Allowance for doubtful accounts |
6,000 |
|
Bonds payable (10%, due 2020) |
500,000 |
|
Buildings |
950,000 |
|
Cash |
42,000 |
|
Common stock ($10 par value; 500,000 shares authorized, |
|
|
150,000 shares issued) |
1,500,000 |
|
Dividends payable |
80,000 |
|
Equipment |
275,000 |
|
Goodwill |
200,000 |
|
Income taxes payable |
120,000 |
|
Inventory |
170,000 |
|
Investment in Sasse common stock (10% ownership), at cost |
278,000 |
|
Investment in Mara common stock (30% ownership), at equity |
380,000 |
|
Land |
390,000 |
|
Market adjustment—available for sale securities (Dr) |
8,000 |
|
Notes payable (due 2013) |
70,000 |
|
Paid in capital in excess of par—common stock |
130,000 |
|
Premium on bonds payable |
40,000 |
|
Prepaid insurance |
16,000 |
|
Retained earnings |
103,000 |
|
Short term investments, at fair value (and cost) |
180,000 |
|
Unrealized gain—available for sale securities |
8,000 |
The investment in Sasse common stock is considered to be a long term available for sale security.
Instructions
Prepare a classified balance sheet at December 31, 2012.
Cheese Farms is a grower of hybrid seed corn for Steenbergen Genetics Corporation. It has had two exceptionally good years and has elected to invest its excess funds in bonds. The selected transactions, shown on the next page, relate to bonds acquired as an investment by Cheese Farms, whose fiscal year ends on December 31.
|
2012 |
|
|
Jan. 1 |
Purchased at face value $400,000 of Stombaugh Corporation 10 year, 9% bonds dated |
|
January 1, 2012, directly from the issuing corporation. |
|
|
July 1 |
Received the semiannual interest on the Stombaugh bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Stombaugh bonds. |
(Assume that all intervening transactions and adjustments have been properly recorded and the number of bonds owned has not changed from December 31, 2012, to December 31, 2014.)
|
2015 |
|
|
Jan. 1 |
Received the semiannual interest on the Stombaugh bonds. |
|
Jan. 1 |
Sold $200,000 of Stombaugh bonds at 114. The broker deducted $7,000 for commissions |
|
and fees on the sale. |
|
|
July 1 |
Received the semiannual interest on the Stombaugh bonds. |
|
Dec. 31 |
Accrual of interest at year end on the Stombaugh bonds. |
Instructions
(a) Journalize the listed transactions for the years 2012 and 2015.
(b) Assume that the fair value of the bonds at December 31, 2012, was $385,000. These bonds are classified as available for sale securities. Prepare the adjusting entry to record these bonds at fair value.
(c) Based on your analysis in part (b), show the balance sheet presentation of the bonds and interest receivable at December 31, 2012. Assume the investments are considered long term.
Indicate where any unrealized gain or loss is reported in the financial statements.
In January 2012, the management of Gina Company concludes that it has sufficient cash to purchase some short term investments in debt and stock securities. During the year, the following transactions occurred.
|
Feb. 1 |
Purchased 500 shares of Joy common stock for $30,000, plus brokerage fees of $800. |
|
Mar. 1 |
Purchased 600 shares of Aurelius common stock for $20,000, plus brokerage fees of $300. |
|
Apr. 1 |
Purchased 40 $1,000, 9% Sikich bonds for $40,000, plus $1,200 brokerage fees. Interest |
|
is payable semiannually on April 1 and October 1. |
|
|
July 1 |
Received a cash dividend of $0.60 per share on the Joy common stock. |
|
Aug. 1 |
Sold 300 shares of Joy common stock at $69 per share, less brokerage fees of $350. |
|
Sept. 1 |
Received a $1 per share cash dividend on the Aurelius common stock. |
|
Oct. 1 |
Received the semiannual interest on the Sikich bonds. |
|
Oct. 1 |
Sold the Sikich bonds for $45,000, less $1,000 brokerage fees. |
At December 31, the fair value of the Joy common stock was $66 per share. The fair value of the Aurelius common stock was $29 per share.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2012, to report the investments at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2012.
(d) Identify the income statement accounts and give the statement classification of each account.
Tuecke’s Concrete acquired 20% of the outstanding common stock of Drew, Inc. on January 1, 2012, by paying $1,100,000 for 40,000 shares. Drew declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2012. Drew reported net income of $600,000 for the year. At December 31, 2012, the market price of Drew’s common stock was $30 per share.
Instructions
(a) Prepare the journal entries for Tuecke’s Concrete for 2012, assuming Tuecke’s cannot exercise significant influence over Drew. (Use the cost method and assume Drew common stock should be classified as available for sale.)
(b) Prepare the journal entries for Tuecke’s Concrete for 2012, assuming Tuecke’s can exercise significant influence over Drew. (Use the equity method.)
(c) Indicate the balance sheet and income statement account balances at December 31, 2012, under each method of accounting.
The following are in Verbitsky’s Company’s portfolio of long term available for sale securities at December 31, 2012.
|
Cost |
|
|
700 shares of Sasha Corporation common stock |
$35,000 |
|
900 shares of Ukraine Corporation common stock |
42,000 |
|
800 shares of Zaba Corporation preferred stock |
22,400 |
On December 31, the total cost of the portfolio equaled total fair value. Verbitsky’s Company had the following transactions related to the securities during 2013.
|
Jan. |
7 |
Sold 700 shares of Sasha Corporation common stock at $56 per share, less brokerage fees of $700. |
|
10 |
Purchased 300 shares, $70 par value common stock of Vanucci Corporation at $78 per |
|
|
share, plus brokerage fees of $240. |
||
|
26 |
Received a cash dividend of $1.15 per share on Ukraine Corporation common stock. |
|
|
Feb. |
2 |
Received cash dividends of $0.40 per share on Zaba Corporation preferred stock. |
|
10 |
Sold all 800 shares of Zaba Corporation preferred stock at $26 per share less brokerage fees of $180. |
|
|
July |
1 |
Received a cash dividend of $1.00 per share on Ukraine Corporation common stock. |
|
Sept. |
1 |
Purchased an additional 800 shares of the $70 par value common stock of Vanucci |
|
Corporation at $75 per share, plus brokerage fees of $900. |
||
|
Dec. |
15 |
Received a cash dividend of $1.50 per share on Vanucci Corporation common stock. |
At December 31, 2013, the fair values of the securities were:
|
Ukraine Corporation common stock |
$48 per share |
|
Vanucci Corporation common stock |
$72 per share |
Instructions
(a) Prepare journal entries to record the transactions.
(b) Post to the investment accounts. (Use T accounts.)
(c) Prepare the adjusting entry at December 31, 2013, to report the portfolio at fair value.
(d) Show the balance sheet presentation at December 31, 2013, for the investment related accounts.
The following data, presented in alphabetical order, are taken from the records of Redlands Corporation.
|
Accounts payable |
$ 375,000 |
|
Accounts receivable |
135,000 |
|
Accumulated depreciation—buildings |
270,000 |
|
Accumulated depreciation—equipment |
80,000 |
|
Allowance for doubtful accounts |
10,000 |
|
Bonds payable (10%, due 2022) |
600,000 |
|
Buildings |
1,350,000 |
|
Cash |
210,000 |
|
Common stock ($5 par value; 500,000 shares authorized, |
|
|
440,000 shares issued) |
2,200,000 |
|
Discount on bonds payable |
30,000 |
|
Dividends payable |
75,000 |
|
Equipment |
415,000 |
|
Goodwill |
300,000 |
|
Income taxes payable |
180,000 |
|
Inventory |
255,000 |
|
Investment in Bonita Inc. stock (30% ownership), at equity |
900,000 |
|
Land |
780,000 |
|
Notes payable (due 2013) |
110,000 |
|
Paid in capital in excess of par—common stock |
300,000 |
|
Prepaid insurance |
25,000 |
|
Retained earnings |
480,000 |
|
Short term investments, at fair value (and cost) |
280,000 |
Instructions
Prepare a classified balance sheet at December 31, 2012.
Part I Mindy Feldkamp and her two colleagues, Oscar Lopez and Lori Melton, are personal trainers at an upscale health spa/resort in Tampa, Florida. They want to start a health club that specializes in health plans for people in the 501 age range. The growing population in this age range and strong consumer interest in the health benefits of physical activity have convinced them they can profitably operate their own club. In addition to many other decisions, they need to determine what type of business organization they want. Oscar believes there are more advantages to the corporate form than a partnership, but he hasn’t yet convinced Mindy and Lori. They have come to you, a small business consulting specialist, seeking information and advice regarding the choice of starting a partnership versus a corporation.
Instructions
(a) Prepare a memo (dated May 26, 2011) that describes the advantages and disadvantages of both partnerships and corporations. Advise Mindy, Oscar, and Lori regarding which organizational form you believe would better serve their purposes. Make sure to include reasons supporting your advice.
Part II After deciding to incorporate, each of the three investors receives 20,000 shares of $2 par common stock on June 12, 2011, in exchange for their co owned building ($200,000 fair value) and $100,000 total cash they contributed to the business. The next decision that Mindy, Oscar, and Lori need to make is how to obtain financing for renovation and equipment. They understand the difference between equity securities and debt securities, but do not understand the tax, net income, and earnings per share consequences of equity versus debt financing on the future of their business.
Instructions
(b) Prepare notes for a discussion with the three entrepreneurs in which you will compare the consequences of using equity versus debt financing. As part of your notes, show the differences in interest and tax expense assuming $1,400,000 is financed with common stock, and then alternatively with debt. Assume that when common stock is used, 140,000 shares will be issued. When debt is used, assume the interest rate on debt is 9%, the tax rate is 32%, and income before interest and taxes is $300,000. (You may want to use an electronic spreadsheet.)
Part III During the discussion about financing, Lori mentions that one of her clients, Roberto Marino, has approached her about buying a significant interest in the new club. Having an interested investor sways the three to issue equity securities to provide the financing they need. On July 21, 2011, Mr. Marino buys 90,000 shares at a price of $10 per share. The club, LifePath Fitness, opens on January 12, 2012, and after a slow start, begins to produce the revenue desired by the owners. The owners decide to pay themselves a stock dividend, since cash has been less than abundant since they opened their doors. The 10% stock dividend is declared by the owners on July 27, 2012. The market price of the stock is $3 on the declaration date. The date of record is July 31, 2012 (there have been no changes in stock ownership since the initial issuance), and the issue date is August 15, 2012. By the middle of the fourth quarter of 2012, the cash flow of LifePath Fitness has improved to the point that the owners feel ready to pay themselves a cash dividend. They declare a $0.05 cash dividend on December 4, 2012. The record date is December 14, 2012, and the payment date is December 24, 2012.
Instructions
(c) (1) Record all of the transactions related to the common stock of LifePath Fitness during the years 2011 and 2012. (2) Indicate how many shares are issued and outstanding after the stock dividend is issued.
Part IV Since the club opened, a major concern has been the pool facilities. Although the existing pool is adequate, Mindy, Oscar, and Lori all desire to make LifePath a cutting edge facility. Until the end of 2012, financing concerns prevented this improvement. However, because there has been steady growth in clientele, revenue, and income since the fourth quarter of 2012, the owners have explored possible financing options. They are hesitant to issue stock and change the ownership mix because they have been able to work together as a team with great effectiveness.
They have formulated a plan to issue secured term bonds to raise the needed $600,000 for the pool facilities. By the end of April 2013, everything was in place for the bond issue to go ahead. On June 1, 2013, the bonds were issued for $548,000. The bonds pay semiannual interest of 3% (6% annual) on December 1 and June 1 of each year. The bonds mature in 10 years, and amortization is computed using the straight line method.
Instructions
(d) Record (1) the issuance of the secured bonds, (2) the interest payment made on December 1, 2013, (3) the adjusting entry required at December 31, 2013, and (4) the interest payment made on June 1, 2014.
Part V Mr. Marino’s purchase of the stock of LifePath Fitness was done through his business. The stock investment has always been accounted for using the cost method on his firm’s books. However, early in 2014 he decided to take his company public. He is preparing an IPO (initial public offering), and he needs to have the firm’s financial statements audited. One of the issues to be resolved is to restate the stock investment in LifePath Fitness using the equity method, since Mr. Marino’s ownership percentage is greater than 20%.
Instructions
(e) (1) Give the entries that would have been made on Marino’s books if the equity method of accounting for investments had been used since the initial investment. Assume the following data for LifePath.
|
2011 |
2012 |
2013 |
|
|
Net income |
$30,000 |
$70,000 |
$105,000 |
|
Total cash dividends |
$ 2,100 |
$20,000 |
$ 50,000 |
(2) Compute the balance at the end of 2013.
Columbia Video Sales reported these data (adapted, in millions). The shareholders are very happy with Columbia’s steady increase in net income.
|
20X6 |
20X5 |
20X4 |
||||
|
Net sales revenue |
$36 |
$33 |
$30 |
|||
|
Cost of goods sold: |
||||||
|
Beginning inventory |
$ 6 |
$ 5 |
$ 4 |
|||
|
Purchases |
26 |
24 |
22 |
|||
|
Goods available |
32 |
29 |
26 |
|||
|
Less: Ending inventory |
(7) |
(6) |
(5) |
|||
|
Cost of goods sold |
25 |
23 |
21 |
|||
|
Gross profit |
11 |
10 |
9 |
|||
|
Total operating expenses |
8 |
8 |
8 |
|||
|
Net income |
$ 3 |
$ 2 |
$ 1 |
Auditors discovered that the ending inventory for 20X4 was understated by $1 million and that the ending inventory for 20X5 was also understated by $1 million. The ending inventory for 20X6 was correct.
Required
1. Show corrected income statements for each of the 3 years.
2. How much did these assumed corrections add to or take away from Columbia’s total net income over the 3 year period? How did the corrections affect the trend of net income?
3. Will Columbia’s shareholders still be happy with the company’s trend of net income? Give the reason for your answer. (Challenge)
(Computing amounts for the GAAP inventory methods—periodic system) Suppose Intel Corporation’s inventory records for a particular computer chip indicate the following at October 31:
|
Oct. 1 |
Beginning inventory |
5 units @ $160 |
= |
$ 800 |
|
8 |
Purchase |
4 units @ 160 |
= |
640 |
|
15 |
Purchase |
11 units @ 170 |
= |
1,870 |
|
26 |
Purchase |
5 units @ 180 |
= |
900 |
The physical count of inventory at October 31 indicates that 8 units of inventory are on hand.
Required
Compute ending inventory and cost of goods sold, using each of the following methods. Round all amounts to the nearest dollar:
1. Specific unit cost, assuming four $160 units
2. Average cost
3. First in, first out and four $170 units are on hand
4. Last in, first out
q
Suppose FedEx purchased equipment on January 1, 20X7, for $44,000. The expected useful life of the equipment is 10 years or 100,000 units of production, and its residual value is $4,000. Under 3 depreciation methods, the annual depreciation expense and the balance of accumulated depreciation at the end of 20X7 and 20X8 are as follows:
|
Method A |
Method B |
Method C |
||||
|
Year |
Annual Depreciation Expense |
Accumulated Depreciation |
Annual Depreciation Expense |
Accumulated Depreciation |
Annual Depreciation Expense |
Accumulated Depreciation |
|
20X7 |
$4,000 |
$4,000 |
$8,800 |
$ 8,800 |
$1,200 |
$1,200 |
|
20X8 |
4,000 |
8,000 |
7,040 |
15,840 |
5,600 |
6,800 |
Required
1. Identify the depreciation method used in each instance, and show the equation and computation for each.
2. Assume continued use of the same method through year 20X9. Determine the annual depreciation expense, accumulated depreciation, and book value of the equipment for 20X7 through 20X9 under each method, assuming 12,000 units of production in 20X9.
The figures that follow to give the answer:
|
Method A: Straight Line |
Method B: Double Declining Balance |
|||||
|
Year |
Annual Depreciation Expense |
Accumulated Depreciation |
Book Value |
Annual Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Start |
$44,000 |
$44,000 |
||||
|
20X7 |
$4,000 |
$ 4,000 |
40,000 |
$8,800 |
$ 8,800 |
35,200 |
|
20X8 |
4,000 |
8,000 |
36,000 |
7,040 |
15,840 |
28,160 |
|
20X9 |
4,000 |
12,000 |
32,000 |
5,632 |
21,472 |
22,528 |
Required
1. Suppose the income tax authorities permitted a choice between these 2 depreciation methods. Which method would FedEx select for income tax purposes? Why?
2. Suppose FedEx purchased the equipment described in the table on January 1, 20X7. Management has depreciated the equipment by using the double declining balance method. On July 1, 20X9, FedEx sold the equipment for $27,000 cash.
Required
Record depreciation for 20X9 and the sale of the equipment on July 1, 20X9.
(Learning Objective 5: Accounting for the depletion of a company’s natural resources) ChevronTexaco, the giant oil company, holds reserves of oil and gas assets. At the end of 20X4, assume the cost of ChevronTexaco’s mineral assets totaled $150 billion, representing 12 billion barrels of oil in the ground.
1. Which depreciation method do ChevronTexaco’s and other oil companies use to compute their annual depletion expense for the minerals removed from the ground?
2. Suppose ChevronTexaco removed 0.6 billion barrels of oil during 20X5. Record depletion expense for the year. Show amounts in billions.
3. At December 31, 20X4, ChevronTexaco’s Accumulated Depletion account stood at $85.0 billion. Report Mineral Assets and Accumulated Depletion at December 31, 20X5. Do ChevronTexaco’s Mineral Assets appear to be plentiful or mostly used up? Give your reason.
(Learning Objective 6: Accounting for patents and research and development cost) This exercise summarizes the accounting for patents, which like copyrights, trademarks, and franchises, provide the owner with a special right or privilege. It also covers research and development costs. Suppose Jaguar Automobiles Limited paid $500,000 to research and develop a new global positioning system. Jaguar also paid $1,200,000 to acquire a patent on a new motor. After readying the motor for production, Jaguar’s sales revenue for the first year totaled $6,500,000. Cost of goods sold was $3,200,000, and selling expenses totaled $300,000. All these transactions occurred during 20X4. Jaguar expects the patent to have a useful life of 3 years. Prepare Jaguar Automobiles’ income statement for the year ended December 31, 20X4, complete with a heading. Ignore income tax.
(Learning Objective 1: Distinguishing capital expenditures from expenses) Assume M&M Mars purchased conveyor belt machinery. Classify each of the following expenditures as a capital expenditure or an immediate expense related to machinery: (a) sales tax paid on the purchase price, (b) transportation and insurance while machinery is in transit from seller to buyer, (c) purchase price, (d) installation, (e) training of personnel for initial operation of the machinery, (f) special reinforcement to the machinery platform, (g) income tax paid on income earned from the sale of products manufactured by the machinery, (h) major overhaul to extend the machinery’s useful life by 3 years, (i) ordinary repairs to keep the machinery in good working order, (j) lubrication of the machinery before it is placed in service and (k) periodic lubrication after the machinery is placed in service.
(Learning Objective 2, 3: Determining depreciation amounts by three methods) Little Caesar”s Pizza bought a used Nissan delivery van on January 2, 20X1, for $15,000. The van was expected to remain in service 4 years (100,000 miles). At the end of its useful life, Little Caesar”s officials estimated that the van”s residual value will be $3,000. The van traveled 34,000 miles the first year, 28,000 the second year, 18,000 the third year, and 20,000 in the fourth year. Prepare a schedule of depreciation expense per year for the van under the 3 depreciation methods. Show your computations. Which method best tracks the wear and tear on the van? Which method would Little Caesar”s prefer to use for income tax purposes? Explain in detail why Little Caesar”s prefers this method.
(Learning Objective 1, 2, 7: Reporting plant assets, depreciation, and investing cash flows) Assume that in January 20X6, an IHOP restaurant purchased a building, paying $50,000 cash and signing a $100,000 note payable. The restaurant paid another $60,000 to remodel the building. Furniture and fixtures cost $50,000, and dishes and supplies—a current asset—were obtained for $9,000. IHOP is depreciating the building over 20 years by the straight line method, with estimated residual value of $50,000. The furniture and fixtures will be replaced at the end of 5 years and are being depreciated by the double declining balance method, with zero residual value. At the end of the first year, the restaurant still has dishes and supplies worth $2,000. Show what the restaurant will report for supplies, plant assets, and cash flows at the end of the first year on its
• Income statement • Balance sheet • Statement of cash flows
Show all computations. (investing only)
(Learning Objective 1, 2, 4: Measuring a plant asset”s cost, using UOP depreciation, and trading in a used asset) Celadon is a large trucking company that operates throughout the United States. Celadon uses the units of production (UOP) method to depreciate its trucks. Celadon trades in trucks often to keep driver morale high and to maximize fuel economy. Consider these facts about one Volvo truck in the company”s fleet: When acquired in 20X2, the tractor trailer rig cost $285,000 and was expected to remain in service for 5 years or 1,000,000 miles. Estimated residual value was $35,000. During 20X2, the truck was driven 75,000 miles; during 20X3, 120,000 miles; and during 20X4, 210,000 miles. After 35,000 miles in 20X5, the company traded in the Volvo truck for a Mack rig. Celadon paid cash of $150,000. Determine Celadon”s cost of the new truck. Journal entries are not required.
(Learning Objective 4: Determining the sale price of property and equipment) FedEx Corporation reported the following for property and equipment (in millions, adapted):
|
Year End |
||
|
20X6 |
20X5 |
|
|
Property and equipment |
$24,074 |
$22,017 |
|
Accumulated depreciation |
(13,304) |
(12,080) |
During 20X6, FedEx paid $2,518 million for new property and equipment. Depreciation for the year totaled $1,548 million. During 20X6, FedEx sold property and equipment for cash of $64 million. How much was FedEx’s gain or loss on the sale of property and equipment during 20X6?
Which statement about depreciation is false?
a. Depreciation is a process of allocating the cost of an asset to expense over its useful life.
b. Depreciation should not be recorded in years that the market value of the asset has increased.
c. A major objective of depreciation accounting is to match the cost of using an asset with the revenues it helps to generate.
d. Obsolescence as well as physical wear and tear should be considered when determining the period over which an asset should be depreciated.
Madison Corporation acquired a machine for $26,000 and has recorded depreciation for 3 years using the straight line method over a 6 year life and $2,000 residual value. At the start of the fourth year of use, Madison revised the estimated useful life to a total of 10 years. Estimated residual value declined to $0.
(Learning Objective 1, 2: Identifying the elements of a plant asset’s cost) Assume Google Inc. opened an office in Orlando, Florida. Further assume that Google incurred the following costs in acquiring land, making land improvements, and constructing and furnishing the new sales building:
|
Purchase price of land, including an old building that will be used for a garage (land market value is $320,000; building market value is $80,000) |
$350,000 |
|
|
Landscaping (additional dirt and earth moving) |
8,100 |
|
|
Fence around the land |
31,600 |
|
|
Attorney fee for title search on the land |
600 |
|
|
Delinquent real estate taxes on the land to be paid by Google |
5,900 |
|
|
Company signs at entrance to the property |
1,800 |
|
|
Building permit for the sales building |
300 |
|
|
Architect fee for the design of the sales building |
19,800 |
|
|
Masonry, carpentry, and roofing of the sales building |
516,000 |
|
|
Renovation of the garage building |
41,800 |
|
|
Interest cost on construction loan for sales building |
9,000 |
|
|
Landscaping (trees and shrubs) |
6,400 |
|
|
Parking lot and concrete walks on the property |
52,300 |
|
|
Lights for the parking lot and walkways |
7,300 |
|
|
Salary of construction supervisor (85% to sales building; 9% to land improvements; and 6% to garage building renovation) |
40,000 |
|
|
Office furniture for the sales building |
79,400 |
|
|
Transportation and installation of furniture |
1,800 |
Assume Google depreciates buildings over 40 years, land improvements over 20 years, and furniture over 8 years, all on a straight line basis with zero residual value.
Required
1. Set up columns for Land, Land Improvements, Sales Building, Garage Building, and Furniture. Show how to account for each of Google’s costs by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on May 2. Record depreciation for the year ended December 31.
3. How will what you learned in this problem help you manage a business?
(Learning Objective 1, 2, 4: Recording plant asset transactions, exchanges, and changes in useful life) Lamborghini, Inc., has the following plant asset accounts: Land, Buildings, and Equipment, with a separate accumulated depreciation account for each of these except land. Lamborghini completed the following transactions:
|
Jan. 2 |
Traded in equipment with accumulated depreciation of $67,000 (cost of $130,000) for similar new equipment with a cash cost of $176,000. Received a trade in allowance of $70,000 on the old equipment and paid $106,000 in cash. |
|
June 30 |
Sold a building that had a cost of $650,000 and had accumulated depreciation of $145,000 through December 31 of the preceding year. Depreciation is computed on a straight line basis. The building has a 40 year useful life and a residual value of $250,000. Lamborghini received $100,000 cash and a $400,000 note receivable. |
|
Oct. 29 |
Purchased land and a building for a single price of $420,000. An independent appraisal valued the land at $150,000 and the building at $300,000. |
|
Dec. 31 |
Recorded depreciation as follows:Equipment has an expected useful life of 6 years and an estimated residual value of 5% of cost. Depreciation is computed on the double declining balance method. Depreciation on buildings is computed by the straight line method. The new building carries a 40 year useful life and a residual value equal to 10% of its cost. |
Record the transactions in Lamborghini, Inc’s., journal.
(Learning Objective 2, 4, 7: Analyzing plant asset transactions from a company’s financial statements) Best Buy Inc. sells electronics and appliances. The excerpts that follow are adapted from Best Buy’s financial statements for 2006.
|
February 28, |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Total current assets |
$7,985 |
$6,903 |
|
Property, plant, and equipment |
4,836 |
4,192 |
|
Less: Accumulated depreciation |
2,124 |
1,728 |
|
Goodwill |
557 |
513 |
|
Statement of Cash Flows (dollars in millions) |
||
|
Year Ended February 28, |
||
|
2006 |
2005 |
|
|
Operating activities: |
||
|
Net income |
$1,140 |
$984 |
|
Noncash items affecting net income: |
||
|
Depreciation |
456 |
459 |
|
Investing activities: |
||
|
Additions to property, plant, and equipment |
723 |
619 |
Required
Answer these questions about Best Buy’s plant assets and goodwill:
1. How much was Best Buy’s cost of plant assets at February 28, 2006? How much was the book value of plant assets? Show computations.
2. The financial statements give 3 evidences that Best Buy purchased plant assets and goodwill during 2006. What are they?
3. Prepare T accounts for Property, Plant, and Equipment; Accumulated Depreciation, and Goodwill. Then show all the activity in these accounts during 2006. Label each increase or decrease and give its dollar amount. During 2006, Best Buy sold plant assets that had cost the company $79 million (accumulated depreciation on these assets was $60 million). Assume there were no losses on goodwill during 2006.
(Learning Objective 5: Accounting for natural resources, and the related expense) Atlantic Energy Company’s balance sheet includes the asset Iron Ore. Atlantic Energy paid $2.6 million cash for a lease giving the firm the right to work a mine that contained an estimated 200,000 tons of ore. The company paid $60,000 to remove unwanted buildings from the land and $70,000 to prepare the surface for mining. Atlantic Energy also signed a $30,000 note payable to a landscaping company to return the land surface to its original condition after the lease ends. During the first year, Atlantic Energy removed 40,000 tons of ore, which it sold on account for $32 per ton. Operating expenses for the first year totaled $240,000, all paid in cash. In addition, the company accrued income tax at the tax rate of 40%.
Required
1. Record all of Atlantic Engery’s transactions for the year.
2. Prepare the company’s income statement for its iron ore operations for the first year. Evaluate the profitability of the company’s operations
(Learning Objective 7: Reporting plant asset transactions on the statement of cash flows) At the end of 20X0, Solar Power Associates (SPA) had total assets of $17.3 billion and total liabilities of $9.5 billion. Included among the assets were property, plant, and equipment with a cost of $4.8 billion and accumulated depreciation of $3.4 billion. SPA completed the following selected transactions during 20X1: The company earned total revenues of $26.5 billion and incurred total expenses of $21.3 billion, which included depreciation of $1.7 billion. During the year, SPA paid $1.4 billion for new property, plant, and equipment and sold old plant assets for $0.3 billion. The cost of the assets sold was $0.8 billion, and their accumulated depreciation was $0.4 billion.
Required
1. Explain how to determine whether SPA had a gain or loss on the sale of old plant assets during the year. What was the amount of the gain or loss, if any?
2. Show how SPA would report property, plant, and equipment on the balance sheet at December 31, 20X1, after all the year’s activity. What was the book value of property, plant, and equipment?
3. Show how SPA would report its operating activities and investing activities on its statement of cash flows for 20X1. Ignore gains and losses.
(Learning Objective 1, 2: Identifying the elements of a plant asset’s cost) Scissors Salons operate in several states. The home office incurred the following costs to acquire land and a garage, make land improvements, and construct and furnish the office building.
|
Purchase price of land, including a building that will be used as a garage (land market value is $150,000; building market value is $50,000) |
$180,000 |
|
|
Landscaping (additional dirt and earth moving) |
3,700 |
|
|
Fence around the land |
3,550 |
|
|
Title insurance on the land acquisition |
1,000 |
|
|
Delinquent real estate taxes on the land to be paid by Scissors |
26,000 |
|
|
Company signs at near front and rear approaches to company property |
200 |
|
|
Building permit for the office building |
45,000 |
|
|
Architect fee for the design of the office building |
53,550 |
|
|
Masonry, carpentry, and roofing to construct the office building |
16,400 |
|
|
Renovation of the garage |
322,000 |
|
|
Interest cost on construction loan for office building |
234,000 |
|
|
Parking lots and concrete walks on the property |
3,400 |
|
|
Lights for the parking lot, walkways, and company signs |
17,450 |
|
|
Concrete, wood, and other materials used in the office building |
8,900 |
|
|
Salary of construction supervisor (90% to office building, 6% to and improvements, and 4% to garage renovation) |
55,000 |
|
|
Landscaping (trees and shrubs) |
61,500 |
|
|
Furniture for the office building |
1,300 |
|
|
Transportation of furniture from seller to the office building |
9,100 |
Scissors Salons depreciates buildings over 40 years, land improvements over 20 years, and furniture over 8 years, all on a straight line basis with zero residual value.
Required
1. Set up columns for Land, Land Improvements, Office Building, Garage, and Furniture. Show how to account for each of Scissors’ costs by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on March 29. Record depreciation for the year ended December 31.
3. How will what you learned in this problem help you manage a business? (Challenge)
Waldo Corporation had the following transactions pertaining to debt investments.
|
Jan. 1 |
Purchased 30, $1,000 Hillary Co. 10% bonds for $30,000, plus brokerage fees of $900. |
|
Interest is payable semiannually on July 1 and January 1. |
|
|
July 1 |
Received semiannual interest on Hillary Co. bonds. |
|
July 1 |
Sold 15 Hillary Co. bonds for $15,000, less $400 brokerage fees. |
(a) Journalize the transactions, and (b) prepare the adjusting entry for the accrual of interest on December 31.
Some of Powder horn Corporation’s investment securities are classified as trading securities and some are classified as available for sale. The cost and fair value of each category at December 31, 2012, are shown on page 736.
|
Cost |
Fair Value |
Unrealized Gain (Loss) |
|
|
Trading securities |
$93,600 |
$94,900 |
$1,300 |
|
Available for sale securities |
$48,800 |
$51,400 |
$2,600 |
At December 31, 2011, the Market Adjustment—Trading account had a debit balance of $9,200, and the Market Adjustment—Available for Sale account had a credit balance of $5,750. Prepare the required journal entries for each group of securities for December 31, 2012.
(Learning Objective 1: Distinguishing capital expenditures from expenses) Assume M&M Mars purchased conveyor belt machinery. Classify each of the following expenditures as a capital expenditure or an immediate expense related to machinery: (a) sales tax paid on the purchase price, (b) transportation and insurance while machinery is in transit from seller to buyer, (c) purchase price, (d) installation, (e) training of personnel for initial operation of the machinery, (f) special reinforcement to the machinery platform, (g) income tax paid on income earned from the sale of products manufactured by the machinery, (h) major overhaul to extend the machinery’s useful life by 3 years, (i) ordinary repairs to keep the machinery in good working order, (j) lubrication of the machinery before it is placed in service and (k) periodic lubrication after the machinery is placed in service.
(Learning Objective 1, 2: Measuring, depreciating, and reporting plant assets) During 20X4, Golden Book Store paid $480,000 for land and built a store in Chicago. Prior to construction, the city of Chicago charged Golden $1,000 for a building permit, which Golden paid. Golden also paid $15,000 for architect’s fees. The construction cost of $660,000 was financed by a long term note payable, with interest cost of $39,000 paid at completion of the project. The building was completed September 30, 20X4. Golden depreciates the building by the straight line method over 35 years, with estimated residual value of $330,000.
1. Journalize transactions for
a. Purchase of the land
b. All the costs chargeable to the building in a single entry
c. Depreciation on the building Explanations are not required.
2. Report Golden Book Store’s plant assets on the company’s balance sheet at December 31, 20X4.
3. What will Golden’s income statement for the year ended December 31, 20X4, report for this situation?
(Learning Objective 2, 3: Determining depreciation amounts by three methods) Little Caesar”s Pizza bought a used Nissan delivery van on January 2, 20X1, for $15,000. The van was expected to remain in service 4 years (100,000 miles). At the end of its useful life, Little Caesar”s officials estimated that the van”s residual value will be $3,000. The van traveled 34,000 miles the first year, 28,000 the second year, 18,000 the third year, and 20,000 in the fourth year. Prepare a schedule of depreciation expense per year for the van under the 3 depreciation methods. Show your computations. Which method best tracks the wear and tear on the van? Which method would Little Caesar”s prefer to use for income tax purposes? Explain in detail why Little Caesar”s prefers this method.
(Learning Objective 1, 2, 7: Reporting plant assets, depreciation, and investing cash flows) Assume that in January 20X6, an IHOP restaurant purchased a building, paying $50,000 cash and signing a $100,000 note payable. The restaurant paid another $60,000 to remodel the building. Furniture and fixtures cost $50,000, and dishes and supplies—a current asset—were obtained for $9,000. IHOP is depreciating the building over 20 years by the straight line method, with estimated residual value of $50,000. The furniture and fixtures will be replaced at the end of 5 years and are being depreciated by the double declining balance method, with zero residual value. At the end of the first year, the restaurant still has dishes and supplies worth $2,000. Show what the restaurant will report for supplies, plant assets, and cash flows at the end of the first year on its Income statement • Balance sheet • Statement of cash flows Show all computations. (investing only)
(Learning Objective 1, 2, 4: Measuring a plant asset’s cost, using UOP depreciation, and trading in a used asset) Celadon is a large trucking company that operates throughout the United States. Celadon uses the units of production (UOP) method to depreciate its trucks. Celadon trades in trucks often to keep driver morale high and to maximize fuel economy. Consider these facts about one Volvo truck in the company’s fleet: When acquired in 20X2, the tractor trailer rig cost $285,000 and was expected to remain in service for 5 years or 1,000,000 miles. Estimated residual value was $35,000. During 20X2, the truck was driven 75,000 miles; during 20X3, 120,000 miles; and during 20X4, 210,000 miles. After 35,000 miles in 20X5, the company traded in the Volvo truck for a Mack rig. Celadon paid cash of $150,000. Determine Celadon’s cost of the new truck. Journal entries are not required.
(Learning Objective 6: Computing and accounting for goodwill) Assume Google paid $18 million to purchase MySpace.com. Assume further that MySpace had the following summarized data at the time of the Google acquisition (amounts in millions):
|
Assets |
Liabilities and Equity |
||
|
Current assets |
$10 |
Total liabilities |
$24 |
|
Long term assets |
20 |
Stockholders’ equity |
6 |
|
$30 |
$30 |
Required
1. Compute the cost of goodwill purchased by Google.
2. Journalize Google’s purchase of MySpace.
3. Explain how Google will account for goodwill in the future.
(Learning Objective 7: Reporting cash flows for property and equipment) Assume Starbucks Corporation completed the following transactions. For each transaction, show what Starbucks would report for investing activities on its statement of cash flows. Show negative amounts in parentheses.
a. Sold a store building for $600,000. The building had cost Starbucks $1,000,000, and at the time of the sale its accumulated depreciation totaled $400,000.
b. Lost a store building in a fire. The building cost $300,000 and had accumulated depreciation of $180,000. The insurance proceeds received by Starbucks totaled $120,000.
c. Renovated a store at a cost of $100,000.
d. Purchased store fixtures for $50,000. The fixtures are expected to remain in service for 10 years and then be sold for $15,000. Starbucks uses the straight line depreciation method.
(Learning Objective 4: Determining the sale price of property and equipment) FedEx Corporation reported the following for property and equipment (in millions, adapted):
|
Year End |
||
|
20X6 |
20X5 |
|
|
Property and equipment |
$24,074 |
$22,017 |
|
Accumulated depreciation |
(13,304) |
(12,080) |
During 20X6, FedEx paid $2,518 million for new property and equipment. Depreciation for the year totaled $1,548 million. During 20X6, FedEx sold property and equipment for cash of $64 million. How much was FedEx’s gain or loss on the sale of property and equipment during 20X6?
(Learning Objective 1: Capitalizing versus expensing; measuring the effect of an error) Agence France Press (AFP) is a major French telecommunication conglomerate. Assume that early in year 1, AFP purchased equipment at a cost of 6 million euros (E6 million). Management expects the equipment to remain in service 4 years and estimated residual value to be negligible. AFP uses the straight line depreciation method. Through an accounting error, AFP expensed the entire cost of the equipment at the time of purchase. Because AFP is operated as a partnership, it pays no income tax.
Required
Prepare a schedule to show the overstatement or understatement in the following items at the end of each year over the 4 year life of the equipment:
1.Total current assets 2. Equipment, net 3. Net income
Which statement about depreciation is false?
a. Depreciation is a process of allocating the cost of an asset to expense over its useful life.
b. Depreciation should not be recorded in years that the market value of the asset has increased.
c. A major objective of depreciation accounting is to match the cost of using an asset with the revenues it helps to generate.
d. Obsolescence as well as physical wear and tear should be considered when determining the period over which an asset should be depreciated.
Madison Corporation acquired a machine for $26,000 and has recorded depreciation for 3 years using the straight line method over a 6 year life and $2,000 residual value. At the start of the fourth year of use, Madison revised the estimated useful life to a total of 10 years. Estimated residual value declined to $0.
(Learning Objective 1, 2: Identifying the elements of a plant asset’s cost) Assume Google Inc. opened an office in Orlando, Florida. Further assume that Google incurred the following costs in acquiring land, making land improvements, and constructing and furnishing the new sales building:
|
Purchase price of land, including an old building that will be used for a garage (land market value is $320,000; building market value is $80,000) |
$350,000 |
|
|
Landscaping (additional dirt and earth moving) |
8,100 |
|
|
Fence around the land |
31,600 |
|
|
Attorney fee for title search on the land |
600 |
|
|
Delinquent real estate taxes on the land to be paid by Google |
5,900 |
|
|
Company signs at entrance to the property |
1,800 |
|
|
Building permit for the sales building |
300 |
|
|
Architect fee for the design of the sales building |
19,800 |
|
|
Masonry, carpentry, and roofing of the sales building |
516,000 |
|
|
Renovation of the garage building |
41,800 |
|
|
Interest cost on construction loan for sales building |
9,000 |
|
|
Landscaping (trees and shrubs) |
6,400 |
|
|
Parking lot and concrete walks on the property |
52,300 |
|
|
Lights for the parking lot and walkways |
7,300 |
|
|
Salary of construction supervisor (85% to sales building; 9% to land improvements; and 6% to garage building renovation) |
40,000 |
|
|
Office furniture for the sales building |
79,400 |
|
|
Transportation and installation of furniture |
1,800 |
Assume Google depreciates buildings over 40 years, land improvements over 20 years, and furniture over 8 years, all on a straight line basis with zero residual value.
Required
1. Set up columns for Land, Land Improvements, Sales Building, Garage Building, and Furniture. Show how to account for each of Google’s costs by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on May 2. Record depreciation for the year ended December 31.
3. How will what you learned in this problem help you manage a business?
(Learning Objective 2: Recording plant asset transactions; reporting on the balance sheet) Highland Lakes Resort reported the following on its balance sheet at December 31, 20X5:
|
Property, plant, and equipment, at cost: |
|
|
Land |
$ 140,000 |
|
Buildings |
700,000 |
|
Less: Accumulated depreciation |
(340,000) |
|
Equipment |
400,000 |
|
Less: Accumulated depreciation |
(260,000) |
In early July 20X6, the resort expanded operations and purchased additional equipment at a cost of $100,000. The company depreciates buildings by the straight line method over 20 years with residual value of $80,000. Due to obsolescence, the equipment has a useful life of only 10 years and is being depreciated by the double declining balance method with zero residual value.
Required
1. Journalize Highland Lakes Resort’s plant asset purchase and depreciation transactions for 20X6. 2. Report plant assets on the December 31, 20X6, balance sheet.
(Learning Objective 1, 2, 4: Recording plant asset transactions, exchanges, and changes in useful life) Lamborghini, Inc., has the following plant asset accounts: Land, Buildings, and Equipment, with a separate accumulated depreciation account for each of these except land. Lamborghini completed the following transactions:
|
Jan. 2 |
Traded in equipment with accumulated depreciation of $67,000 (cost of $130,000) for similar new equipment with a cash cost of $176,000. Received a trade in allowance of $70,000 on the old equipment and paid $106,000 in cash. |
|
June 30 |
Sold a building that had a cost of $650,000 and had accumulated depreciation of $145,000 through December 31 of the preceding year. Depreciation is computed on a straight line basis. The building has a 40 year useful life and a residual value of $250,000. Lamborghini received $100,000 cash and a $400,000 note receivable. |
|
Oct. 29 |
Purchased land and a building for a single price of $420,000. An independent appraisal valued the land at $150,000 and the building at $300,000. |
|
Dec. 31 |
Recorded depreciation as follows:Equipment has an expected useful life of 6 years and an estimated residual value of 5% of cost. Depreciation is computed on the double declining balance method. Depreciation on buildings is computed by the straight line method. The new building carries a 40 year useful life and a residual value equal to 10% of its cost. |
Record the transactions in Lamborghini, Inc’s., journal.
(Learning Objective 2: Explaining the concept of depreciation) The board of directors of Fiberglass Structures, Inc., is reviewing the 20X7 annual report. A new board member—a wealthy woman with little business experience—questions the company accountant about the depreciation amounts. The new board member wonders why depreciation expense has decreased from $200,000 in 20X6 to $184,000 in 20X7 to $172,000 in 20X8. She states that she could understand the decreasing annual amounts if the company had been disposing of properties each year, but that has not occurred. Further, she notes that growth in the city is increasing the values of company properties. Why is the company recording depreciation when the property values are increasing?
Required
Write a paragraph or 2 to explain the concept of depreciation to the new board member and to answer her questions.
(Learning Objective 2, 3: Computing depreciation by 3 methods and the cash flow advantage of accelerated depreciation for tax purposes) On January 3, 20X2, J.B. Weld Co. paid $224,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $6,200, $6,700 sales tax, and $3,100 for a special platform on which to place the computer. J.B. Weld management estimates that the computer will remain in service 5 years and have a residual value of $20,000. The computer will process 50,000 documents the first year, with annual processing decreasing by 5,000 documents during each of the next 4 years (that is, 45,000 documents in 20X3; 40,000 documents in 20X4; and so on). In trying to decide which depreciation method to use, the company president has requested a depreciation schedule for each of 3 depreciation methods (straight line, units of production, and double declining balance).
Required
1. For each of the generally accepted depreciation methods, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2. J.B. Weld reports to stockholders and creditors in the financial statements using the depreciation method that maximizes reported income in the early years of asset use. For income tax purposes, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year J.B. Weld Co. uses the computer. Identify the depreciation methods that meet Weld’s objectives, assuming the income tax authorities permit the use of any of the methods.
3. Cash provided by operations before income tax is $150,000 for the computer’s first year. The income tax rate is 40%. For the 2 depreciation methods identified in Requirement 2, compare the net income and cash provided by operations (cash flow). Show which method gives the net income advantage and which method gives the cash flow advantage.
(Learning Objective 2, 4, 7: Analyzing plant asset transactions from a company’s financial statements) Best Buy Inc. sells electronics and appliances. The excerpts that follow are adapted from Best Buy’s financial statements for 2006.
|
February 28, |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Total current assets |
$7,985 |
$6,903 |
|
Property, plant, and equipment |
4,836 |
4,192 |
|
Less: Accumulated depreciation |
2,124 |
1,728 |
|
Goodwill |
557 |
513 |
|
Statement of Cash Flows (dollars in millions) |
||
|
Year Ended February 28, |
||
|
2006 |
2005 |
|
|
Operating activities: |
||
|
Net income |
$1,140 |
$984 |
|
Noncash items affecting net income: |
||
|
Depreciation |
456 |
459 |
|
Investing activities: |
||
|
Additions to property, plant, and equipment |
723 |
619 |
Required
Answer these questions about Best Buy’s plant assets and goodwill:
1. How much was Best Buy’s cost of plant assets at February 28, 2006? How much was the book value of plant assets? Show computations.
2. The financial statements give 3 evidences that Best Buy purchased plant assets and goodwill during 2006. What are they?
3. Prepare T accounts for Property, Plant, and Equipment; Accumulated Depreciation, and Goodwill. Then show all the activity in these accounts during 2006. Label each increase or decrease and give its dollar amount. During 2006, Best Buy sold plant assets that had cost the company $79 million (accumulated depreciation on these assets was $60 million). Assume there were no losses on goodwill during 2006.
(Learning Objective 5: Accounting for natural resources, and the related expense) Atlantic Energy Company’s balance sheet includes the asset Iron Ore. Atlantic Energy paid $2.6 million cash for a lease giving the firm the right to work a mine that contained an estimated 200,000 tons of ore. The company paid $60,000 to remove unwanted buildings from the land and $70,000 to prepare the surface for mining. Atlantic Energy also signed a $30,000 note payable to a landscaping company to return the land surface to its original condition after the lease ends. During the first year, Atlantic Energy removed 40,000 tons of ore, which it sold on account for $32 per ton. Operating expenses for the first year totaled $240,000, all paid in cash. In addition, the company accrued income tax at the tax rate of 40%.
Required
1. Record all of Atlantic Engery’s transactions for the year.
2. Prepare the company’s income statement for its iron ore operations for the first year. Evaluate the profitability of the company’s operations.
(Learning Objective 7: Reporting plant asset transactions on the statement of cash flows) At the end of 20X0, Solar Power Associates (SPA) had total assets of $17.3 billion and total liabilities of $9.5 billion. Included among the assets were property, plant, and equipment with a cost of $4.8 billion and accumulated depreciation of $3.4 billion. SPA completed the following selected transactions during 20X1: The company earned total revenues of $26.5 billion and incurred total expenses of $21.3 billion, which included depreciation of $1.7 billion. During the year, SPA paid $1.4 billion for new property, plant, and equipment and sold old plant assets for $0.3 billion. The cost of the assets sold was $0.8 billion, and their accumulated depreciation was $0.4 billion.
Required
1. Explain how to determine whether SPA had a gain or loss on the sale of old plant assets during the year. What was the amount of the gain or loss, if any?
2. Show how SPA would report property, plant, and equipment on the balance sheet at December 31, 20X1, after all the year’s activity. What was the book value of property, plant, and equipment?
3. Show how SPA would report its operating activities and investing activities on its statement of cash flows for 20X1. Ignore gains and losses.
(Learning Objective 1, 2: Identifying the elements of a plant asset’s cost) Scissors Salons operate in several states. The home office incurred the following costs to acquire land and a garage, make land improvements, and construct and furnish the office building.
|
Purchase price of land, including a building that will be used as a garage (land market value is $150,000; building market value is $50,000) |
$180,000 |
|
|
Landscaping (additional dirt and earth moving) |
3,700 |
|
|
Fence around the land |
3,550 |
|
|
Title insurance on the land acquisition |
1,000 |
|
|
Delinquent real estate taxes on the land to be paid by Scissors |
26,000 |
|
|
Company signs at near front and rear approaches to company property |
200 |
|
|
Building permit for the office building |
45,000 |
|
|
Architect fee for the design of the office building |
53,550 |
|
|
Masonry, carpentry, and roofing to construct the office building |
16,400 |
|
|
Renovation of the garage |
322,000 |
|
|
Interest cost on construction loan for office building |
234,000 |
|
|
Parking lots and concrete walks on the property |
3,400 |
|
|
Lights for the parking lot, walkways, and company signs |
17,450 |
|
|
Concrete, wood, and other materials used in the office building |
8,900 |
|
|
Salary of construction supervisor (90% to office building, 6% to and improvements, and 4% to garage renovation) |
55,000 |
|
|
Landscaping (trees and shrubs) |
61,500 |
|
|
Furniture for the office building |
1,300 |
|
|
Transportation of furniture from seller to the office building |
9,100 |
Scissors Salons depreciates buildings over 40 years, land improvements over 20 years, and furniture over 8 years, all on a straight line basis with zero residual value.
Required
1. Set up columns for Land, Land Improvements, Office Building, Garage, and Furniture. Show how to account for each of Scissors’ costs by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on March 29. Record depreciation for the year ended December 31.
3. How will what you learned in this problem help you manage a business? (Challenge)
A (Learning Objective 3: Using gross profit percentage and inventory turnover to evaluate two companies) Krispy Kreme Doughnuts and Starbucks are both specialty food chains. The 2 companies reported these figures, in millions:
|
Krispy Kreme Doughnuts, Inc. Statement of Operations (Adapted) |
||
|
Fiscal Year |
||
|
2006 |
2005 |
|
|
Revenues: |
||
|
Net sales |
$543 |
$708 |
|
Costs and Expenses: |
||
|
Cost of goods sold |
475 |
598 |
|
General and administrative expenses |
68 |
55 |
|
Krispy Kreme Doughnuts, Inc.Balance Sheet (Adapted) |
||
|
January 31, |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Current assets: |
||
|
Inventories |
$17 |
$28 |
|
Cash and cash equivalents |
24 |
29 |
|
Receivables |
27 |
30 |
|
Starbucks Corporation Statement of Earnings (Adapted) |
||
|
Fiscal Year |
||
|
206 |
2005 |
|
|
Sellings, general and administrative expenses |
$7,787 |
$6,369 |
|
Net sales |
2,948 |
2,363 |
|
Cost of goods sold |
3,179 |
2,605 |
|
Starbucks Corporation Balance Sheet (Adapted) |
||
|
Year End |
||
|
2006 |
205 |
|
|
Assets |
||
|
Current assets: |
||
|
Inventories |
$313 |
$174 |
|
Cash and temporary investments |
636 |
546 |
|
Receivables, net |
224 |
191 |
Required
1. Compute the gross profit percentage and the rate of inventory turnover for Krispy Kreme and for Starbucks for 2006.
2. Based on these statistics, which company looks more profitable? Why? What other expense category should we consider in evaluating these 2 companies? (Challenge)
You are an accountant at a local CPA firm that is auditing the accounting records of ABC Company. You have been asked to educate the accounting department about the limitations of the internal control system in preparation for an upcoming audit. During your audit, you have identified that because of a weak internal control system, an adjusting entry for prepaid insurance was not recorded for the first 3 months of the year at $500 per month.
Large Mart has previously attempted to develop a “study pillow” which would have allowed students to upload study material into their brain whilst sleeping. However, Large Mart has recently discovered that an American company called Bpple already holds a patent for this type of device. As a result, Large Mart has given up on its development attempts and decided to sell the Bpple product, which is called iSLEEP.
In order to sell the iSLEEP, Large Mart has rented a second store in Armidale. Large Mart signs a two year renting contract on 1st May 201x. The rent for the store will be $5,000 per month and the renting contract requires Large Mart to pay rent at the beginning of each month, starting on 1st May 201x. The rent that is paid on the beginning of each month is for the following month. For example, the payment on 1st May is for the month of May whilst the payment on 1st June will be for June.
As soon as the renting contract for the new store is signed, Large Mart employs two UNE students (Chuck and Morgan). Chuck and Morgan are employed for 30 hours each month. Their job is to organise a iSLEEP fan site on Facebook. Chuck and Morgan start their jobs on 1st May 201x and will be paid $30 per hour. On 31st May 201x the HR department tries to pay Chuck and Morgan for the work they completed during the month. However, the HR department notices that Chuck and Morgan have not provided Large Mart with their bank account details and, as a result, Large Mart is unable to pay Chuck and Morgan for their work. After the HR department sends Chuck and Morgan and email, they forward their bank account details to Large Mart on 10th June 201x and Large Mart is finally able to pay Chuck and Morgan for the work they have completed in May 201x. Large Mart make the payment on 10th June 201x.
The furniture in the new store is designed and manufactured in China. An important part of the store design is a big bed on which customers can lie to test the iSLEEP before purchasing it. The bed is delivered on 1st June 201x. On that day, Large Mart also receives an invoice of $40,000 from the Chinese designer/manufacturer of the bed. When the bed was produced in China, the director of the Large Mart sales department travelled to the Chinese designer/manufacturer to discuss solutions to production problems. The director of the sales department did not make any other stops during his trip to China and only met with the design/manufacturing team of the bed. The overall expenditure associated with the sales director’s visit to China was $12,000.
After the new store is completed, Large Mart orders 50 iSLEEPs from Bpple for a price of $800 per iSLEEP, and these iSLEEPs arrive on 1st June 201x, and are paid via bank transfer 10 days later after Large Mart deducts a 10% early payment discount. After this initial purchase, the following purchase and sales transactions take place within the new store:
• On 5th June 201x, Large Mart purchases another 60 iSLEEPs from Bpple for a special price of $750 per iSLEEP. The iSLEEPs arrive on the same day and Large Mart pays this new delivery of iSLEEPs on the next day without deducting any early payment discounts.
• On 7th June 201x UNE purchases 100 iSLEEPs for the library for a price of $2,500 per iSLEEP on credit. Two days later UNE returns 20 of the purchased iSLEEPs because there is not enough space in the library for all 100 iSLEEPs. UNE then pays the remaining iSLEEPs on 10th June 201x, after deducting an early payment discount of 5% from the invoice.
• On 12th June 201x, Large Mart purchases a further 50 iSLEEPs for a price of $700 per iSLEEP. The iSLEEPs arrive on the same day and Large Mart pays the invoice two days later after deducting a 10% early payment discount.
On 1st July 201x, Large Mart leases a company car for the service department of the new store (called the “Nerd Herd”). The duration of the lease is 7 years, and the car has an expected useful life of 8 years. The lease contract requires Large Mart to pay $5,000 at the time the lease is signed. This payment is made via a bank transfer. A further $10,000 must be paid (also via bank transfer) on 30th June of each year during the lease period. The lease contract states that Large Mart can cancel the lease at any time during the lease period after paying a penalty that is equal to 50% of the outstanding lease payments. If Large Mart does not cancel the lease, Large Mart will take over the ownership of the car at the end of the lease period. The interest rate implicit in the lease is 19%. Large Mart decided to enter into the lease agreement instead of purchasing the car because the purchase price would have been $47,000 and Large Mart did not have sufficient cash resources to make such a purchase at that time.
Please answer the following questions about the scenario outlined above:
Question 1) Provide all journal entries that are necessary in the books of Large Mart to account for the renting contract and all associated payments for the month of May 201x (and explain your journal entries) (1.5 marks).
Question 2) Provide all journal entries that are necessary in the books of Large Mart to account for the work that Chuck and Morgan have done during the month of May 201x as well as the payment of wages to Chuck and Morgan on 10 June 201x (and explain your journal entries) (2 marks).
Question 3)Decide whether or not the expenditures associated with the China trip of the sales director are part of the cost of the bed (and explain your decision) (0.5 marks) and provide all journal entries that are necessary in the books of Large Mart to account for the purchase and delivery of the bed, assuming that all costs associated with the bed will be paid at a later date (1.0 mark).
Question 4) Provide all journal entries that are necessary in the books of Large Mart to account for all inventory purchase and sales transactions (including the payment and receipt of funds) of the new store, assuming that Large Mart uses a perpetual inventory system on a first in first out basis (5.0 marks).
Question 5)Calculate the total Cost of Goods Sold (COGS) for the financial year ended 30 June 201x (1.0 mark), the value of all iSLEEPs that remain in the inventory account at the end of the year (the 30 June 201x) (1.0 mark), and the total amount of revenue that Large Mark collected through the sale of the iSLEEP during the year ended 30 June 201x (0.5 marks) (and outline all necessary calculations).
Question 6) Determine whether the lease of the company car is an operating lease or finance lease and provide a detailed explanation for your decision (2.5 marks).
Attachments:
You have recently been appointed as an audit senior and have been assigned to the audit of TNO Limited (TNO) a listed public company. It is the beginning of January 2014 and you are gathering information in order to prepare the audit plan for the year ended 31 December 2013. The firm for which you work has been the auditor of TNO for a number of years. The following information has been gathered to date. The principal activities of TNO are: ? research and development of technologies relating to medical equipment; ? manufacture and distribution of medical equipment; ? investment of surplus funds; and ? investment in the property market. TNO was incorporated in 1990 and has operated successfully and profitably since that date. In the last few years it has branched out into the property market, acquiring a number of commercial properties which are let mainly to medical practitioners.
Question 1 15% of total assessment You have recently been appointed as an audit senior and have been assigned to the audit of TNO Limited (TNO) a listed public company. It is the beginning of January 2014 and you are gathering information in order to prepare the audit plan for the year ended 31 December 2013. The firm for which you work has been the auditor of TNO for a number of years. The following information has been gathered to date. The principal activities of TNO are: ? research and development of technologies relating to medical equipment; ? manufacture and distribution of medical equipment; ? investment of surplus funds; and ? investment in the property market. TNO was incorporated in 1990 and has operated successfully and profitably since that date. In the last few years it has branched out into the property market, acquiring a number of commercial properties which are let mainly to medical practitioners. The directors of TNO are: ? Mr. John Stanton, Chairman ? Ms Jane Quade, Chief Executive Officer ? Mr. Joe Quade ? Dr Jim Xie ? Dr Jenny Yeo Doctors X and Y are independent non executive directors and have been directors since 2001. The other three executive directors have been employed by the company since its incorporation and have considerable experience in the industry. Mr Stanton controls a number of private companies. In prior years, the audit firm placed reliance on internal controls based on satisfactory results of extensive tests of control. Recent discussions with the client have revealed no changes in the system of internal control since last year. The company does not have an internal audit function. In February 2013, research activities relating to a new laser surgery device commenced. Significant costs were incurred in relation to this research. In April 2013 a competitor announced that it had successfully developed and patented a similar device. In order to finance the…
Attachments:
Assume a Nike outlet store began August 20X0 with 40 pairs of running shoes that cost the store $40 each. The sale price of these shoes was $70. During August, the store completed these inventory transactions:
|
Units |
Unit Cost |
Unit Sale Price |
||
|
Aug. 3 |
Sale |
16 |
$40 |
$70 |
|
8 |
Purchase |
80 |
41 |
|
|
11 |
Sale |
24 |
40 |
70 |
|
19 |
Sale |
9 |
41 |
72 |
|
24 |
Sale |
30 |
41 |
72 |
|
30 |
Purchase |
18 |
42 |
Required
1. The preceding data are taken from the store’s perpetual inventory records. Which cost method does the store use? Explain how you arrived at your answer.
2. Determine the store’s cost of goods sold for August. Also compute gross profit for August.
3. What is the cost of the store’s August 31 inventory of running shoes?
Army Navy Surplus began March with 70 tents that cost $20 each. During the month, Army
Navy made the following purchases at cost:
|
March 4 |
100 tents @ $22 |
= |
$2,200 |
|
19 |
160 tents @ 24 |
= |
3,840 |
|
25 |
40 tents @ 25 |
= |
1,000 |
Army Navy Surplus sold 320 tents, and at March 31 the ending inventory consists of 50 tents. The sale price of each tent was $45.
Required
1. Determine the cost of goods sold and ending inventory amounts for March under (1) average cost, (2) FIFO cost, and (3) LIFO cost. Round average cost per unit to 4 decimal places, and round all other amounts to the nearest dollar.
2. Explain why cost of goods sold is highest under LIFO. Be specific.
3. Prepare Army Navy Surplus’s income statement for March. Report gross profit. Operating expenses totaled $4,000. Army Navy uses average costing for inventory. The income tax rate is 40%.
The records of Armstrong Aviation include the following accounts for inventory of aviation fuel at December 31 of the current year:
|
Inventory |
||||
|
1 |
Balance |
700 units @ $7.00 |
4,900 |
|
|
6 |
Purchase |
300 units @ 7.05 |
2,115 |
|
|
June |
22 |
Purchase |
8,400 units @ 7.50 |
63,000 |
|
4 |
Purchase |
500 units @ 8.50 |
4,250 |
|
Sales Revenue |
||
|
Dec. 31 |
9,000 units |
127,800 |
Required
1. Prepare a partial income statement through gross profit under the average, FIFO, and LIFO methods. Round average cost per unit to 4 decimal places and all other amounts to the nearest dollar.
2. Which inventory method would you use to minimize income tax? Explain why this method causes income tax to be the lowest.
(Learning Objective 3: Using gross profit percentage and inventory turnover to evaluate two companies) Krispy Kreme Doughnuts and Starbucks are both specialty food chains. The 2 companies reported these figures, in millions:
|
Krispy Kreme Doughnuts, Inc. Statement of Operations (Adapted) |
||
|
Fiscal Year |
||
|
2006 |
2005 |
|
|
Revenues: |
||
|
Net sales |
$543 |
$708 |
|
Costs and Expenses: |
||
|
Cost of goods sold |
475 |
598 |
|
General and administrative expenses |
68 |
55 |
|
Krispy Kreme Doughnuts, Inc.Balance Sheet (Adapted) |
||
|
January 31, |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Current assets: |
||
|
Inventories |
$17 |
$28 |
|
Cash and cash equivalents |
24 |
29 |
|
Receivables |
27 |
30 |
|
Starbucks Corporation Statement of Earnings (Adapted) |
||
|
Fiscal Year |
||
|
206 |
2005 |
|
|
Sellings, general and administrative expenses |
$7,787 |
$6,369 |
|
Net sales |
2,948 |
2,363 |
|
Cost of goods sold |
3,179 |
2,605 |
|
Starbucks Corporation Balance Sheet (Adapted) |
||
|
Year End |
||
|
2006 |
205 |
|
|
Assets |
||
|
Current assets: |
||
|
Inventories |
$313 |
$174 |
|
Cash and temporary investments |
636 |
546 |
|
Receivables, net |
224 |
191 |
Required
1. Compute the gross profit percentage and the rate of inventory turnover for Krispy Kreme and for Starbucks for 2006.
2. Based on these statistics, which company looks more profitable? Why? What other expense category should we consider in evaluating these 2 companies? (Challenge)
Here are condensed versions of Pontiac Convenience Store’s most recent income statement and balance sheet. Because the business is organized as a proprietorship, it pays no corporate income tax.
|
Pontiac Convenience Store Income Statement Year Ended December 31, 20X2 |
|
|
Sales |
$900,000 |
|
Cost of sales |
700,000 |
|
Gross profit |
200,000 |
|
Operating expenses |
80,000 |
|
Net income |
$120,000 |
|
Pontiac Convenience Store Balance Sheet December 31, 20X2 |
|||
|
Assets |
Liabilities and Capital |
||
|
Cash |
$ 70,000 |
Accounts payable |
$ 35,000 |
|
Inventories |
35,000 |
Note payable |
280,000 |
|
Land and buildings, net |
360,000 |
Total liabilities |
315,000 |
|
Total assets |
$465,000 |
Owner, capital |
150,000 |
|
Total liabilities and capital |
$465,000 |
The owner is budgeting for 20X3. She expects sales and cost of goods sold to increase by 8%. To meet customer demand for the increase in sales, ending inventory will need to be $50,000 at December 31, 20X3. The owner hopes to earn a net income of $160,000 next year.
Required
1. One of the most important decisions a manager makes is the amount of inventory to purchase. Compute the amount of inventory to purchase in 20X3.
2. Prepare the store’s budgeted income statement for 20X3 to reach the target net income of $160,000. To reach this goal, operating expenses must decrease by $24,000. (Challenge)
Columbia Video Sales reported these data (adapted, in millions). The shareholders are very happy with Columbia’s steady increase in net income.
|
20X6 |
20X5 |
20X4 |
||||
|
Net sales revenue |
$36 |
$33 |
$30 |
|||
|
Cost of goods sold: |
||||||
|
Beginning inventory |
$ 6 |
$ 5 |
$ 4 |
|||
|
Purchases |
26 |
24 |
22 |
|||
|
Goods available |
32 |
29 |
26 |
|||
|
Less: Ending inventory |
(7) |
(6) |
(5) |
|||
|
Cost of goods sold |
25 |
23 |
21 |
|||
|
Gross profit |
11 |
10 |
9 |
|||
|
Total operating expenses |
8 |
8 |
8 |
|||
|
Net income |
$ 3 |
$ 2 |
$ 1 |
Auditors discovered that the ending inventory for 20X4 was understated by $1 million and that the ending inventory for 20X5 was also understated by $1 million. The ending inventory for 20X6 was correct.
Required
1. Show corrected income statements for each of the 3 years.
2. How much did these assumed corrections add to or take away from Columbia’s total net income over the 3 year period? How did the corrections affect the trend of net income?
3. Will Columbia’s shareholders still be happy with the company’s trend of net income? Give the reason for your answer. (Challenge)
Whitewater Sports began July with 50 backpacks that cost $19 each. The sale price of each backpack was $36. During July, Whitewater completed these inventory transactions:
|
July 2 |
Purchase |
Units |
Unit Cost |
Unit Sale Price |
|
8 |
Sale |
12 |
$20 |
|
|
13 |
Sale |
37 |
19 |
$36 |
|
Sale |
13 |
19 |
36 |
|
|
17 |
Purchase |
4 |
20 |
37 |
|
22 |
Sale |
24 |
20 |
|
|
15 |
20 |
37 |
Required
1. The preceding data are taken from Whitewater’s perpetual inventory records. Which cost method does Whitewater use? How can you tell?
2. Determine Whitewater’s cost of goods sold for July. Also compute gross profit for July.
3. What is the cost of Whitewater’s July 31 inventory of backpacks?
Using gross profit percentage and inventory turnover to evaluate two leading companies Hewlett Packard and Apple Computer are competitors. The companies reported these amounts, in billions:
|
Hewlett Packard Company Statement of Earnings (Adapted) |
||
|
Fiscal Years |
||
|
2006 |
2005 |
|
|
Net sales |
$73.6 |
$68.9 |
|
Cost of sales |
55.2 |
52.6 |
|
Selling, general, and administrative expenses |
11.3 |
11.2 |
|
Hewlett Packard Company Balance Sheet (Adapted) |
||
|
Year End |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Cash and cash equivalents |
$16.4 |
$13.9 |
|
Accounts receivable |
10.9 |
9.9 |
|
Inventories |
7.8 |
6.9 |
|
Apple Computer, Inc. Statement of Operations (Adapted) |
||
|
Fiscal Years |
||
|
2006 |
2005 |
|
|
Net sales |
$19.3 |
$13.9 |
|
Cost of sales |
13.7 |
9.9 |
|
Selling, general, and administrative expenses |
2.4 |
1.9 |
|
Apple Computer, Inc. Balance Sheet (Adapted) |
||
|
Year End |
||
|
2006 |
2005 |
|
|
Assets |
||
|
Cash and cash equivalents |
$6.4 |
$3.5 |
|
Accounts receivable |
1.3 |
0.9 |
|
Inventories |
0.3 |
0.2 |
Required
1. Compute both companies’ gross profit percentage and their rate of inventory turnover during 2006.
2. Can you tell from these statistics which company should be more profitable in percentage terms? Why? What other important category of expenses do the gross profit percentage and the inventory turnover ratio fail to consider? (Challenge)
(Determining the amount of inventory to purchase) A Pay Less convenience store’s income statement and balance sheet reported the following. The business is organized as a proprietorship, so it pays no corporate income tax. The owner is budgeting for 20X6. He expects sales and cost of goods sold to increase by 10%. To meet customer demand, ending inventory will need to be $80,000 at December 31,
20X6. The owner can lower operating expenses by $6,000 by doing some of the work himself. He hopes to earn a net income of $160,000 next year.
|
Pay Less Store Income Statement Year Ended December 31, 20X5 |
|
|
Sales |
$960,000 |
|
Cost of goods sold |
720,000 |
|
Gross profit |
240,000 |
|
Operating expenses |
110,000 |
|
Net income |
$130,000 |
|
Pay Less Store Balance Sheet December 31, 20X5 |
|||
|
Assets |
Liabilities and Capital |
||
|
Cash |
$ 40,000 |
Accounts payable |
$ 30,000 |
|
Inventories |
70,000 |
Note payable |
190,000 |
|
Land and buildings, net |
270,000 |
Total liabilities |
220,000 |
|
Total assets |
$380,000 |
Owner, capital |
160,000 |
|
Total liabilities and capital |
$380,000 |
Required
1. One of the most important decisions a business owner makes is the amount of inventory to purchase. Compute the amount of inventory to purchase in 20X6.
2. Prepare the store’s budgeted income statement for 20X6 to reach the target net income of $160,000. To reach this goal, Pay Less must decrease operating expenses by $6,000. (Challenge)
(Correcting inventory errors over a 3 year period) The accounting records of Oriental Rugs show these data (in thousands): Auditors discovered that the ending inventory for 2005 was overstated by $100 thousand and that the ending inventory for 2006 was understated by $50 thousand. The ending inventory at December 31, 2007, was correct.
|
Oriental Rugs |
||||||
|
(Amounts in thousands) |
2007 |
2006 |
2005 |
|||
|
Net sales revenue |
$1,400 |
$1,200 |
$1,100 |
|||
|
Cost of goods sold: |
||||||
|
Beginning inventory |
$ 400 |
$ 300 |
$ 200 |
|||
|
Purchases |
800 |
700 |
600 |
|||
|
Goods available |
1,200 |
1,000 |
800 |
|||
|
Less ending inventory |
(500) |
(400) |
(300) |
|||
|
Cost of goods sold |
700 |
600 |
500 |
|||
|
Gross profit |
700 |
600 |
600 |
|||
|
Total operating expenses |
500 |
430 |
450 |
|||
|
Net income |
$ 200 |
$ 170 |
$ 150 |
|||
Required
1. Show correct income statements for each of the 3 years.
2. How much did these corrections add to, or take away from, Oriental Rugs’ total net income over the 3 year period? How did the corrections affect the trend of net income?
(Computing amounts for the GAAP inventory methods—periodic system) Suppose Intel Corporation’s inventory records for a particular computer chip indicate the following at October 31:
|
Oct. 1 |
Beginning inventory |
5 units @ $160 |
= |
$ 800 |
|
8 |
Purchase |
4 units @ 160 |
= |
640 |
|
15 |
Purchase |
11 units @ 170 |
= |
1,870 |
|
26 |
Purchase |
5 units @ 180 |
= |
900 |
The physical count of inventory at October 31 indicates that 8 units of inventory are on hand.
Required
Compute ending inventory and cost of goods sold, using each of the following methods. Round all amounts to the nearest dollar:
1. Specific unit cost, assuming four $160 units
2. Average cost
3. First in, first out and four $170 units are on hand
4. Last in, first out
(Recording transactions in the periodic system; reporting inventory items in the financial statements) Accounting records for Total Desserts, Inc., yield the following data for the year ended December 31, 20X5 (amounts in thousands):
|
Inventory, December 31, 20X4 |
$ 370 |
|
Purchases of inventory (on account) |
2,900 |
|
Sales of inventory—80% on account; 20% for cash |
4,390 |
|
Inventory at the lower of FIFO cost or market, December 31, 20X5 |
560 |
Required
1. Journalize Total Desserts’ inventory transactions for the year under the periodic system. Show all amounts in thousands.
2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement (amounts in thousands). Show the computation of cost of goods sold.
Suppose FedEx purchased equipment on January 1, 20X7, for $44,000. The expected useful life of the equipment is 10 years or 100,000 units of production, and its residual value is $4,000. Under 3 depreciation methods, the annual depreciation expense and the balance of accumulated depreciation at the end of 20X7 and 20X8 are as follows:
|
Method A |
Method B |
Method C |
||||
|
Year |
Annual Depreciation Expense |
Accumulated Depreciation |
Annual Depreciation Expense |
Accumulated Depreciation |
Annual Depreciation Expense |
Accumulated Depreciation |
|
20X7 |
$4,000 |
$4,000 |
$8,800 |
$ 8,800 |
$1,200 |
$1,200 |
|
20X8 |
4,000 |
8,000 |
7,040 |
15,840 |
5,600 |
6,800 |
Required
1. Identify the depreciation method used in each instance, and show the equation and computation for each.
2. Assume continued use of the same method through year 20X9. Determine the annual depreciation expense, accumulated depreciation, and book value of the equipment for 20X7 through 20X9 under each method, assuming 12,000 units of production in 20X9.
The figures that follow to give the answer:
|
Method A: Straight Line |
Method B: Double Declining Balance |
|||||
|
Year |
Annual Depreciation Expense |
Accumulated Depreciation |
Book Value |
Annual Depreciation Expense |
Accumulated Depreciation |
Book Value |
|
Start |
$44,000 |
$44,000 |
||||
|
20X7 |
$4,000 |
$ 4,000 |
40,000 |
$8,800 |
$ 8,800 |
35,200 |
|
20X8 |
4,000 |
8,000 |
36,000 |
7,040 |
15,840 |
28,160 |
|
20X9 |
4,000 |
12,000 |
32,000 |
5,632 |
21,472 |
22,528 |
Required
1. Suppose the income tax authorities permitted a choice between these 2 depreciation methods. Which method would FedEx select for income tax purposes? Why?
2. Suppose FedEx purchased the equipment described in the table on January 1, 20X7. Management has depreciated the equipment by using the double declining balance method. On July 1, 20X9, FedEx sold the equipment for $27,000 cash.
Required
Record depreciation for 20X9 and the sale of the equipment on July 1, 20X9.
(Learning Objective 5: Accounting for the depletion of a company’s natural resources) ChevronTexaco, the giant oil company, holds reserves of oil and gas assets. At the end of 20X4, assume the cost of ChevronTexaco’s mineral assets totaled $150 billion, representing 12 billion barrels of oil in the ground.
1. Which depreciation method do ChevronTexaco’s and other oil companies use to compute their annual depletion expense for the minerals removed from the ground?
2. Suppose ChevronTexaco removed 0.6 billion barrels of oil during 20X5. Record depletion expense for the year. Show amounts in billions.
3. At December 31, 20X4, ChevronTexaco’s Accumulated Depletion account stood at $85.0 billion. Report Mineral Assets and Accumulated Depletion at December 31, 20X5. Do ChevronTexaco’s Mineral Assets appear to be plentiful or mostly used up? Give your reason.
(Learning Objective 6: Accounting for patents and research and development cost) This exercise summarizes the accounting for patents, which like copyrights, trademarks, and franchises, provide the owner with a special right or privilege. It also covers research and development costs. Suppose Jaguar Automobiles Limited paid $500,000 to research and develop a new global positioning system. Jaguar also paid $1,200,000 to acquire a patent on a new motor. After readying the motor for production, Jaguar”s sales revenue for the first year totaled $6,500,000. Cost of goods sold was $3,200,000, and selling expenses totaled $300,000. All these transactions occurred during 20X4. Jaguar expects the patent to have a useful life of 3 years. Prepare Jaguar Automobiles” income statement for the year ended December 31, 20X4, complete with a heading. Ignore income tax.
(Learning Objective 1, 4: Allocating costs to assets acquired in a lump sum purchase; disposing of a plant asset) Haley Davis Inc. bought 3 used machines in a $100,000 lump sum purchase. An independent appraiser valued the machines as follows:
|
Machine No. |
Appraised Value |
|
1 |
$27,000 |
|
2 |
45,000 |
|
3 |
36,000 |
What is each machine’s individual cost? Immediately after making this purchase, Haley Davis sold machine 2 for its appraised value. What is the result of the sale? Round decimals to 3 places.
Preparing an Income Statement and a Statement of Cash Flows
Beth’s Espresso Cart, first introduced in Chapter 4,“The Income Statement,” finished its second year of operations.
|
1. Cash collections from clients |
$35,505 |
|
2. Payments to suppliers (beans, etc.) |
17,347 |
|
3. Replacement of cups, pots, etc. |
1,000 |
|
4. Depreciation of coffee cart |
1,300 |
|
5. Withdrawals for personal use |
6,000 |
|
6. Purchases of propane, electricity, etc. |
510 |
|
7. Amortization of insurance (final year) |
400 |
|
8. Repaid start up loan (to her father) |
4,000 |
|
9. Paid interest on loan, two years at 10% simple interest (for last year and this year) |
|
Required
a. Prepare an income statement and a statement of cash flows on the basis of the data (assuming that all sales and purchases are for cash).Assume there have been no significant inventory changes (supplies,fuel,coffee beans,etc.) during the past year.
b. Write a short memo evaluating the year’s operating performance of Beth’s Espresso Cart. Provide suggestions for next year.
Interpreting Financial Statements: Cash Flow Effects
Versus Effects on Net Income
Four Square Computer Company has provided the following (partial) income statement for the year ended December 31, 2001:
|
Revenues |
|
|
Cash sales |
$1,600,000 |
|
Sales on account |
3,335,000 |
|
Subtotal |
4,935,000 |
|
Expenses |
|
|
Salary expense |
2,259,900 |
|
Supplies expense |
300,550 |
|
Advertising expense |
969,430 |
|
Rent |
1,200,000 |
|
Miscellaneous |
31,260 |
|
Subtotal |
$4,761,140 |
Required
a. Calculate income before taxes, tax expense (at 28%), and net income after taxes.
b. About half of the sales on account have still not been collected and are expected to be collected in January of the next fiscal year. On what basis are they included in this year’s income statement?
c. Given that about half of this year’s sales have not yet been collected and represent all the accounts receivable that are still outstanding, evaluate Four Square’s profitability. On the basis of this limited information, what would you conclude about its operating cash flows?
d. Assuming that all the non salary expenses have been paid as incurred, and assuming that salaries for December have not been paid or accrued, evaluate Four Square’s profitability and its operating cash outflows. Assume that salaries were earned by employees evenly throughout the year.
e. Now, assume that half of the advertising expense was incurred in December for a promotional campaign that was designed to boost sales in the post holiday period. Should these expenses have been omitted from this year’s income statement and deferred until the following year? Why? If GAAP required that such advertising costs be expensed (that is, shown in this year’s income statement), how might Four Square’s managers now view the results of 2001’s operations? Why?
f. On December 31, Four Square purchased 1,000 shares of Microcell (a computer software company) at $121 per share.Why isn’t this purchase reflected in the income statement?
g. In November,Four Square purchased 100,000 disk drive units at $12 per unit. These are very advanced disk drives that have not yet been sold.Why isn’t this purchase shown on the income statement?
h. When the outstanding accounts receivable are collected in the next year, should those collections be shown on next year’s income statement? Why?
i. When the disk drives are used to manufacture computers, should their cost be shown on the income statement for the month and year in which they are assembled into the finished product? Or should they be shown on the income statement in the month and year when the computers (and their associated disk drives) are sold? Why?
Effects of Timing on Revenue Recognition
Key, Inc., manu factures key rings and “dummy” keys for football fans to shake and rattle at opportune times during football games. These items are sold to sports specialty shops and sidewalk vendors during the football season. The company’s fiscal year ends December 31 each year. In 1999, just before the “bowl” season, the company received orders and payment for $23,000 worth of keys and key rings. The goods will be manufactured and shipped on January 1, 2000, just in time for the major bowl games later that day. The effects these orders have in December 1999 on key’s balance sheet equation is as follows:
|
ASSETS |
= |
LIABILITIES |
+ |
SHAREHOLDERS’ EQUITY |
|
Cash + $23,000 |
Sales Revenue + $23,000 |
|||
The company’s overall financial results, summarized under the accounting equation, were
|
ASSETS |
= |
LIABILITIES |
+ |
SHAREHOLDERS’ EQUITY |
|
$275,000 |
$266,000 |
$9,000 |
||
Key’s summarized income statement for 1999 is as follows:
|
Revenues |
$115,000 |
|
Expenses |
109,000 |
|
Net income |
$ 6,000 |
Required
a. Show how the $23,000 in December 1999 orders should have been recorded.
b. Reconstruct the income statement, showing how it might have appeared without the inclusion of the $23,000 in December orders. For this purpose, assume that the expenses associated with the orders were $11,000.
c. Show how the balance sheet would have changed if the $23,000 in orders had been recorded correctly. Why might Key management be unhappy with these results?
d. Discuss the ethical problems inherent in this situation for the company, for its financial managers, and for its auditors.
Effects of Returns on Net Income
Vapor Ware II, Inc. (VWIII),had spectacularly good financial results in 1999.However, in 2000, the millenium bug, other defects, and general customer dissatisfaction resulted in returns of $3 million. These products had originally been expensed for $1 million. It cost $5 million to satisfy VWIII’s irate customers. VWIII chose not to report any returns in 2000, while showing the $5 million as sales revenue in 2000.
Required
a. Show how the $3 million of returns should have been recorded.
b. If the defects had been properly anticipated, what impact would this have had on VWIII’s 1999 income statement?
c. Show how the 1999 balance sheet would have changed if the returns had been recorded correctly.Why might VWIII’s management be unhappy with these results?
d. Discuss how the 2000 financial statements will be affected by VWIII’s treatment of these returns.
e. Discuss the ethical problems inherent in this situation, for the company, for its financial managers, and for its auditors.
Interpreting Financial Statements: Cash Flow Effects
From Appendix D, “Wendy’s International, Inc.,” review Wendy’s cash flow statement and income statement.
Required
a.Evaluate Wendy’s cash flow from operations. Calculate the relevant, cash based ratios from this chapter.
b.Compare Wendy’s cash flow from operations to “income before taxes”(alternatively, you could calculate its operating income from the data shown on the income statement). Prepare a graph to help show trends in each.
c.Describe Wendy’s cash management strategies as revealed in the operating, financing, and investing activities sections of its cash flow statement.
d.. Write a short memo to a potential investor in which you critique Wendy’s cash management strategies. Contrast predicted cash flow from operations with predicted income before taxes. What evidence supports the view that Wendy’s will increase its operating cash flows and its income before taxes?
Interpreting Financial Statements: Cash Flow Effects
From Appendix E, “Reebok International Ltd.,” review Reebok’s cash flow statement and income statement.
Required
a. Evaluate Reebok’s cash flow from operations. Calculate the relevant cash based ratios from this chapter.
b. Compare Reebok’s cash flow from operations to its “income before income taxes and minority interest.” Prepare a graph to help show trends in each.
c. Describe Reebok’s cash management strategies as revealed in the operating, financing, and investing activities sections of its cash flow statement.
d. Write a short memo to a potential investor in which you critique Reebok’s cash management strategies. Contrast predicted cash flow from operations with predicted income before income taxes and minority interest. What evidence supports the view that Reebok will increase its operating cash flows and its income before income taxes and minority interest?
Analyzing Financial Statements of Several Companies
Obtain recent financial statements for two or three companies. If possible, these companies should be in the same industry and they should use the same method in reporting their cash flows from operating activities. Ideally, they will all use the direct method, though it will be hard to identify three such companies in the same industry who are otherwise comparable.
Required
a. Summarize each company’s cash flow from operations in tabular and graphical formats. Calculate the relevant cash based ratios from this chapter.
b. Summarize each company’s net operating income in tabular and graphical formats.
c. Identify the cash flow strategies of each company by examining the operating, financing, and investing activities sections of each cash flow statement.
d. Write a short memo to a potential investor in which you critique the cash flow strategies of each company. Identify which company might offer the most favorable prospects for increasing its operating cash flows.
Comparing Net Income with Cash Flow
The 10 K for Oncogene Science, a biotechnology company, contains a thorough description of its main products. Locate the most recent 10 K from the EDGAR archives.
Required
a. What are the main products of Oncogene Science?
b. Scroll down to the most recent set of financial statements. Using the income statement and the statement of cash flows, answer the following questions:
1. What is the reported amount of net income?
2. How much are net cash flows from operating activities?
3. How much are net cash flows from investing activities? What is the primary component of this item?
4. How much are net cash flows from financing activities?
5. How does Oncogene Science cover its shortfall in cash flows from operating activities?
Copy and paste your question here…Task
QUESTION 1 Probability and Statistical Quality Control 20 marks
Show all calculations/reasoning
(a)
5 marks, one for each part
An unbiased coin is tossed twice. Calculate the probability of each of the following:
1. A head on the first toss
2. A tail on the second toss given that the first toss was a head
3. Two tails
4. A tail on the first and a head on the second, or a head on the first and a tail on the second
5. At least one head on the two tosses
(b) 2 marks
Consider the following record of sales for a product for the last 100 days.
| SALES UNITS | NUMBER OF DAYS |
|---|---|
| 0 | 15 |
| 1 | 20 |
| 2 | 30 |
| 3 | 30 |
| 4 | 5 |
| 100 |
1. What was the probability of selling 1 or 2 units on any one day? (1/2 mark)
2. What were the average daily sales units? (1/2 mark)
3. What was the probability of selling 3 units or more? (1/2 mark)
4. What was the probability of selling 2 units or less? (1/2 mark)
(c) 3 marks, one for each part
The lifetime of a certain type of colour television picture tube is known to follow a normal distribution with a mean of 4600 hours and a standard deviation of 400 hours.
Calculate the probability that a single randomly chosen tube will last
1. more than 5000 hours
2. less than 4500 hours
3. between 4700 and 4900 hours
(d) 4 marks
A company wishes to set control limits for monitoring the direct labour time to produce an important product. Over the past the mean time has been 20 hours with a standard deviation of 9 hours and is believed to be normally distributed. The company proposes to collect random samples of 36 observations to monitor labour time.
Which procedure will provide the narrowest control limits? What are they? (2 marks)
(e) 6 marks (2 for each part)
(a) Search the Internet for the latest figures you can find on the age and sex of the Australian population.
(b) Then using Excel, prepare a table of population numbers (not percentages) by sex (in the columns) and age (in the rows). Break age into about 5 groups, eg, 0 14, 15 24, 24 54, 55 64, 65 and over. Insert total of each row and each column. Paste the table into Word as a picture.
Give the table a title, and below the table quote the source of the figures.
(c) Calculate from the table and explain:
QUESTION 2 Decision Analysis 20 marks
Show all calculations to support your answers. Round all probability calculations to 2 decimal places.
John Carpenter runs a timber company. John is considering an expansion to his product line by manufacturing a new product, garden sheds. He would need to construct either a large new plant to manufacture the sheds, or a small plant. He decides that it is equally likely that the market for this product would be favourable or unfavourable. Given a favourable market he expects a profit of $200,000 if he builds a large plant, or $100,000 from a small plant. An unfavourable market would lead to losses of $180,000 or $20,000 from a large or small plant respectively.
(a) 2 marks
Construct a payoff matrix for John’s problem. If John were to follow the EMV criterion, show calculations to indicate what should he do, and why?
(b) 2 marks
What is the expected value of perfect information and explain the reason for such a calculation?
John has the option of conducting a market research survey for a cost of $10,000. He has learned that of all new favourably marketed products, market surveys were positive 70% of the time but falsely predicted negative results 30% of the time. When there was actually an unfavourable market, however, 80% of surveys correctly predicted negative results while 20% of surveys incorrectly predicted positive results.
(c) 4 marks
Using the market research experience, calculate the revised probabilities of a favourable and an unfavourable market for John’s product given positive and negative survey predictions.
(d) 4 marks
Based on these revised probabilities what should John do? Support your answer with EVSI and ENGSI calculations.
(e) 8 marks
The decision making literature mostly adopts a rational approach. However, Tversky and Kahneman (T&K) (Reading 3.1) adopt a different approach, arguing that often people use other methods to make decisions, relying onheuristics.
What do they mean by the term heuristics? (2 marks)
Describethree types of heuristicsthat T&K suggest people use in judgments under uncertainty. (3 marks)
Give one example from your own experience of abiasthat might result fromeachof these heuristics. (3 marks)
QUESTION 3 Simulation 20 marks
Dr Catscan is an ophthalmologist who, in addition to prescribing glasses and contact lenses, performs laser surgery to correct myopia. This laser surgery is fairly easy and inexpensive to perform.
To inform the public about this procedure Dr Catscan advertises in the local paper and holds information sessions in her office one night a week at which she shows a videotape about the procedure and answers any questions potential patients might have.
The room where these meetings are held can seat 10 people, and reservations are required. The number of people attending each session varies from week to week. Dr Catscan cancels the meeting if 2 or fewer people have made reservations.
Using data from the previous year Dr Catscan determined that reservations follow this pattern:
| Number of reservations | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Probability | 0.02 | 0.05 | 0.08 | 0.16 | 0.26 | 0.18 | 0.11 | 0.07 | 0.05 | 0.01 | 0.01 |
Using the data from last year Dr Catscan determined that 25% of the people who attended information sessions elected to have the surgery performed. Of those who do not, most cite the cost of the procedure ($2,000 per eye, $4,000 in total as almost everyone has both eyes done) as their major concern. The surgery is regarded as cosmetic so that the cost is not covered by Medicare or private hospital insurance funds.
Dr Catscan has now hired you as a consultant to analyse her financial returns from this surgery. In particular, she would like answers to the following questions, which you are going to answer by building an Excel model to simulate 20 weeks of the practice. Random numbers must be generated in Excel and used with the VLOOKUP command to determine the number of reservations,0 and there must be no data in the model itself. The same set of random numbers should be used for all three parts. An IF statement is required for part (a) to determine attendance each week, given cancellation of meetings.
(a) 10 marks
On average, how much revenue does Dr Catscan’s practice in laser surgery earn each week? If your simulation shows a fractional number of people electing surgery use such fractional values in determining revenue. Paste your model results into Word including a copy of formulas with row and column headings.
(b) 3 marks
Adjust your model to determine on average, how much revenue would be generated each week if Dr Catscan did not cancel sessions with 2 or fewer reservations? Paste results into Word.
(c) 3 marks
Dr Catscan believes that 35% of people attending the information sessions would have the surgery if she reduced the price to $1,500 per eye or $3,000 in total. Under this scenario how much revenue per week could Dr Catscan expect from laser surgery? Modify your Excel model to answer this and paste results into Word.
(d) 4 marks
Write a brief report with your recommendations to Dr Catscan on the most appropriate strategy.
QUESTION 4 Regression Analysis and Cost Estimation 20 marks
The CEO of Carson Company has asked you to develop a cost equation to predict monthly overhead costs in the production department. You have collected actual overhead costs for the last 12 months, together with data for three possible cost drivers, number of Indirect Workers, number of Machine Hours worked in the department and the Number of Jobs worked on in each of the last 12 months:
| Overhead Costs | Indirect Workers | Machine Hours | Number of Jobs |
|---|---|---|---|
| $2,200 | 30 | 350 | 1,000 |
| 4,000 | 35 | 500 | 1,200 |
| 3,300 | 50 | 250 | 900 |
| 4,400 | 52 | 450 | 1,000 |
| 4,200 | 55 | 380 | 1,500 |
| 5,400 | 58 | 490 | 1,100 |
| 5,600 | 90 | 510 | 1,900 |
| 4,300 | 70 | 380 | 1,400 |
| 5,300 | 83 | 350 | 1,600 |
| 7,500 | 74 | 490 | 1,650 |
| 8,000 | 100 | 560 | 1,850 |
| 10,000 | 105 | 770 | 1,250 |
(a) 5 marks
The CEO suggests that he has heard that the high low method of estimating costs works fairly well and should be inexpensive to use. Write a response to this suggestion for the CEO indicating the advantages and disadvantages of this method. Include the calculation of a cost equation for this data using Machine Hours as the cost driver.
(b) 5 marks
Using Excel develop three scatter diagrams showing overhead costs against each of the three proposed independent variables. Comment on whether these scatter diagrams appear to indicate that linearity is a reasonable assumption for each.
(c) 5 marks
Using the regression module of Excel’s Add in Data Analysis, perform 3 simple regressions by regressing overhead costs against each of the proposed independent variables. Show the output for each regression and evaluate each of the regression results, indicating which of the three is best and why.
Provide the cost equations for those regression results which are satisfactory and from them calculate the predicted overhead in a month where there were 100 Indirect Workers and 500 Machine Hours and 1,000 Jobs worked.
(d) 5 marks
Selecting the two best regressions from part (c) conduct a multiple regression of overhead against these two independent variables. Evaluate the regression results.
Draw conclusions about the best of the four regression results to use.
QUESTION 5 Forecasting 20 marks
(a) 5 marks
All forecasts are never 100% accurate but subject to error.
(b) 10 marks as indicated below
Consider the following table of monthly sales of car tyres by a local company:
| Month | Unit Sales |
|---|---|
| January | 400 |
| February | 500 |
| March | 540 |
| April | 560 |
| May | 600 |
| June | ? |
(i) 3 marks
Using a 2 monthmoving averagedevelop forecasts sales for March to June inclusive.
(ii) 3 marks
Using a 2 monthweighted moving average, with weights of 2 for the most recent month and 1 for the previous month develop forecasts sales for March to June inclusive.
(iii) 3 marks
The sales manager had predicted sales for January of 400 units. Usingexponential smoothingwith a weight of 0.3 develop forecasts sales for March to June inclusive.
(iv) 1 mark
Which of the three techniques gives the most accurate forecasts? How do you know?
(c) 5 marks
Describe the four patterns typically found in time series data. What is meant by the expression “decomposition” with regard to forecasting? Briefly describe the process.
Topic 1: Ethics and budgeting Budgeting is generally regarded as an essential technique for planning and controlling an organisation’s activities. However, budgeting systems can also create incentives for unethical behaviour. Using examples to illustrate your discussion, explain: • How the use of budgets in planning and controlling an organisation’s activities may create incentives for unethical behaviour; and, • What strategies organisations can adopt to minimise the risk of their budgeting system leading to unethical behaviours. Topic 2: Accounting for overhead Modern manufacturing processes are typically characterised by large scale automation, with machines replacing people. Consequently, manufacturing overhead has often become a much more significant component of total manufacturing costs and this presents a particular challenge for cost and management accountants. Competitive pressures make it essential that firms have accurate and up to date cost data, but overhead is an indirect cost and allocating it to individual products and product lines will always involve subjectivity and estimation. Discuss the difficulties associated with allocating overhead costs in the contemporary manufacturing environment and identify strategies that firms can adopt to help make their overhead allocations more accurate and reliable. Presentation The assignment is to comply with the University’s General Guide for the Presentation of Academic Work. Students are required to use the APA style of referencing. See comments below regarding word length. Each group is to submit a single copy of their assignment. Assessment criteria In assessing submitted assignments consideration will be given to: • Overall neatness, completeness and quality of presentation. Graduate students are expected to achieve a satisfactory standard with respect to this criterion as a matter of course and for this reason, no credit will be granted for achieving it. However, assignments that fail…
Attachments:
MARY WHITE DIALYSIS CLINIC
Mary White Dialysis Clinic is an independent, non profit service renal dialysis clinic. The clinic provides two types of treatments. Hemodialysis (HD) requires patients to visit a dialysis clinic three times a week, where they are connected to special, expensive equipment to perform the dialysis. Peritoneal dialysis (PD) allows patients to administer their own treatment daily at home. The clinic monitors PD patients and assists them in ordering supplies consumed during the home treatment. The total and product line income provides statement for the clinic is shown below:
CLINIC INCOME STATEMENT TOTAL HD PD
Revenues
Number of patients 164 102 62
Number of treatments 34,967 14,343 20,624
Total revenue $3,006,775 $1,860,287 $1,146,488
Supply costs
Standard supplies (drugs, syringes) 664,900 512,619 152,281
Episodic supplies (for special conditions) 310,695 98,680 212,015
Total supply costs $975,595 $611,299 $364,296
Service costs
General overhead (occupancy, administration) 785,825
Durable equipment (maintenance, depreciation) 137,046
Nursing services (RNs, LPNS, nursing
administrators, equipment technicians) 883,280
Total service costs 1,806,151 1,117,463 688,688
Total operating expenses $2,781,746 $1,728,762 $1,052,984
Net income $225,029 $131,525 $93,504
The existing cost system assigned the traceable supply costs directly to the two types of treatments. The service costs, however, were not analysed by type of treatment. The total service costs of $1,800,000 were allocated to the treatments using the traditional ratio of cost to charges (RCC) method developed for government cost based reimbursement programs. With this procedure, since HD treatments represented about 61 % of total revenues, HD received an allocation of 61 % of the $1,800,000 service expenses (approximately $1,100,000).
For many years, clinics such as Mary White received much of their reimbursement on the basis of reported costs. Starting in the 1980s, however, payment mechanisms shifted (ie introduction of case mix funding), and Mary White now received most of its reimbursement on the basis of a fixed fee, not the cost of service provided. In particular, because HD and PD procedures were categorised by the government as a single category dialysis treatment the weekly reimbursement for each patient was the same: $389.10. As a consequence, the three HD treatments per week led to a reported revenue per HD treatment of $129.70, and the seven PD treatments per week led to a reported revenue per PD treatment of $55.59. Both procedures appeared to be profitable, according to the clinic’s existing cost and revenue recognition system. David Thomas, the financial controller of Mary White Dialysis Clinic was concerned, however, that the procedures currently being used to assign common expenses may not be representative of the underlying use of the common resources by the two different procedures. He wanted to understand their costs better so that Mary White’s managers could make more informed decisions about extending or contracting products and services and about where to look for process improvements. Thomas had recently attended a CPA Australia seminar titled ‘Activity Based Costing fad v fab costing system’. In the seminar, Adam Barr Coward (the ABC expert) argued that every organisation should focus on the activities performed by the organisation and try to link the cost of performing these activities directly to the products for which they were performed. The ABC principles outlined by Adam Barr Coward appeared to address many of the problems Thomas had encountered at the Mary White Dialysis Clinic. Thomas decided to explore whether activity based costing principles could provide a better idea of the underlying cost and profitability of HD and PD treatments.
Information for the ABC system
Thomas divided the General Overhead service cost category into four activity pools. He interviewed various staff and found that the facility costs included items such as rent, maintenance and cleaning. The administration and support staff were primarily responsible for items such as processing the weekly reimbursements from the government. The communications systems and medical records pool was primarily concerned with maintaining up to date records of patients’ treatments. Finally the utilities pool primarily contained electricity costs.
GENERAL OVERHEAD RESOURCE COST POOL SIZE OF POOL COST DRIVER
Facility costs $233,226 ?
Administration and support staff 354,682 ?
Communications systems and medical records 157,219 ?
Utilities 40,698 ?
Total $785,825
Thomas was unsure of how to handle the durable equipment service costs. Rather than continue to use the RCC method for allocating these costs, he asked the clinic staff for their judgments about how these costs should be allocated. On the basis of the staff s experience and judgment, they felt that HD treatments used about 75% of these resources, and PD about 25%.
With regard to the nursing services service costs, he knew that this category contained a mixture of different types of personnel: registered nurses (RNs), licensed practical nurses (LPNs), nursing administrators, and machine operators. He thought it was unlikely that each of these categories would be used in the same proportion by the two different treatments. Therefore Thomas disaggregated the nursing service category into four activity pools. He interviewed various staff and found that, as expected, registered nurses and licensed practical nurses were not evenly distributed between the two types of treatments. The nursing administration and support staff were responsible for organising the delivery of both types of treatments, while the dialysis machine operators were solely involved in administering treatments at the clinic only.
NURSING SERVICES RESOURCE POOL SIZE OF POOL COST DRIVER
Registered nurses $239,120 ?
Licensed practical nurses 404,064 ?
Nursing administration and support staff 115,168, ?
Dialysis machine operators 124,928 ?
Total $883,280
Thomas then went to medical records and other sources to identify the quantities of each cost driver for the two treatment types:
COST DRIVERS HD PD TOTAL
# of registered nurses 5 2 7
# of licensed practical nurses 15 4 19
Number of patients 102 62 164
Number of treatments 14,343 20,624 34,967
Number of clinic dialysis treatments 14,343 0 14,343
Area occupied (in square feet) 22,000 8,000 30,000
Estimated electricity (Kw) usage 563,295 99,405 662,700
Required
You are David Thomas, the financial controller of the clinic. After attending Adam Barr Coward’s seminar on ‘Activity Based Costing fad v fab costing system’ and conducting a preliminary analysis of the Mary White Dialysis Clinic’s existing costing system; you are convinced that the Organisation would benefit from implementing an ABC system. However, the clinic’s chief executive officer (CEO), Ms. M.T. Blairda, is sceptical of such a move and stated:
“David, you cannot expect me to authorise additional expenditure for a new costing system when there is nothing wrong with our current one I always go by the motto ‘if it ain’t broke, don’t fix it’. Secondly, I’ve never heard of ABC before. Surely if it is as good as you make it out to be, I would have heard of it! In my professional opinion, it’s probably just another example of consultants attempting to make more money. I cannot justify expenditure on such a system unless you can clearly demonstrate the additional benefits that will accrue to the clinic from its use. Have a detailed report on my desk 5 PM Tuesday at the latest!
After your brief conversation with Ms. M.T. Blairda, you rush back to your office, slam the door and sketch out a brief outline of what to include in your detailed report. Based upon the CEO’s lack of understanding of ABC, and the need to demonstrate the benefits of such a system, you decide to report specifically the following issues:
1.What is an ABC system? Your discussion should address the following issues:
· How does an ABC system work and how does it differ from traditional product costing systems?
· When is an ABC approach most advantageous/appropriate?
· What are the perceived benefits vs. costs of an ABC system (you are not expected to quantify the costs benefits)? (10 marks)
2.What are the problems associated with the costing system currently used by the clinic and how will an ABC system overcome these problems? (15 marks)
3.Use the information provided in the case study to calculate revised product line income statements (and average charge, cost and profit per treatment) for HD and PD under an ABC approach. How do these results compare with figures reported under the clinic’s existing costing system? If they are different, explain why. (40 marks)
4.Analyse the newly produced information and assess its implications for management at Mary White Dialysis Clinic. What decisions might managers of the clinic make with this new information that might differ from those made using information from the RCC method only? (15 marks)
5.The limitations of the clinic’s proposed ABC system (including how it could be improved) and limitations of ABC systems in general. (10 marks)
Report format, structure, readability, presentation and referencing. (10 marks)
Total marks for this assignment 100 worth 30% of your final mark.
Taxation(ACC3TAX)
Group report
The assessment task requires students to correctly calculate taxable income, income tax payable and complete an income tax return for a mixed business/sub newsagency called ALLNews. It gives the students the opportunity to:
??Demonstrate an understanding of legal principles and their application, specifically in relation to taxation and case law.
??Interpret the relevant legislation and common law principles and make informed judgements on issues relating to the application of these as they pertain to sole traders.
??Calculate taxable income and tax payable for a sole trader.
In order to complete this task, students will be allocated to groups from within their tutorial.
Due Date:
Mark Allocation: Weighting:
Week 10Due by 5pm Tues 13 May (via turnitin on student portal) 100 Marks
15% of Total Marks
Julie Smith commenced a mixed business/sub newsagency called ALLNews at 45 Orr Street Numurkah on 1stJuly 2012. She makes an appointment with you to prepare her 2013 income tax return. At the interview she supplies you with the following financial information:
Receipts
NAB–Business Loan
Cash Sales Banked
Receipts from debtors (note 1 below)
Payments
Motor Vehicle Expenses (note 4, 7 and 8 below) Replacement of petrol engine–Holden (note 9 below) Power
Rates
Insurance
Telephone Expenses (note 5 and 8 below)
Bank charges
Repairs and maintenance (note 3 below)
Drawings
Wages and Salaries May
Entertainment Allowance (note 8 below) Superannuation Expense
Subscription to Vogue Magazine (note 8 below)
Loan repayment (note 2 below)
100,000 950,200 320,800
10,310 5,000 11,470 1500 11,250 1,700 1,590 2,290 16000 15,000 1,000 1,388 700 18,500
1
Fixed asset acquisition (note 6 and 8 below) Cash purchase–trading stock
Payment to creditors (note 1 below)
93,100 311,150 228,670
From the interview, and an analysis of the cash records and the working papers to last year’s return, you ascertain:
1. Year end reporting details
Debtors at 30 June 2013 Creditors at 30 June 2013 Stock on Hand 30 June 2013
13,010 17,010 19,750
2. Loan repayment of $18,500 included a reduction in loan principal of $13,000. The loan was for business purposes only.
3. Repairs and maintenance comprised:
1 November 2012–acquisition and installation of air conditioner 31 January 2013–gravel for car park
1 May 2013–new thermostat for refrigerator unit
Motor Vehicle Expenses comprise operating cost of: Holden–sedan
Toyota corolla
Telephone Expenses: Telephone Costs–ALLNews Telephone Costs–May Wilson
Asset acquisition comprised:
1stJuly 2012 Freezer
1stJuly 2012 Refrigeration units
1stJuly 2012 Small appliances
1stJuly 2012 Furniture and Fittings
1stJuly 2012 Holden–sedan
1 April 2013–Mobile Phone
1 April 2013–Toyota Corolla including on road costs of $3,000 31 May 2013–new freezer
A trade in of $5000 was allowed for the old unit
2,000 150 140 $2,290
7,860
2,450
$10,310
1,400 300 $1,700
10,000 12,500 1,700 6,300 32,400 700 25,000 4,500
$93,100
2
Julie owns a Holden sedan (2,200cc non rotary engine) used 90% for business purposes. Log books have been maintained to substantiate this usage and the total running costs of maintaining this vehicle is $7,860.
Julie employed May Wilson on 1 April 2013 as a sales assistant/courier. May was provided with
the following benefits as part of her salary package:
Toyota Corolla 2,200 cc non rotary engine. The cost of the car was $25,000 and this included on road costs of $3,000. The total running costs for the period ending 30 June 2013 were $2,450. In the first three months the car travelled 7,000 kilometres.
Entertainment Allowance of $1,000
Telephone expenses of $300 of which $200 are business related calls.
Mobile phone cost of $700
Annual subscription to Vogue Magazine $700
On 1 June 2013 Julie was involved in a car accident. She decided to replace the car’s wrecked petrol engine with a more efficient diesel engine with a much greater economy of operation at a cost of $5,000. She liked the idea as the new and better engine will reduce the likelihood of future repair bills.
On 15 June 2013 Julie was informed that one of his clients who had owed him $2,000 since the beginning of the year was declared bankrupt and will receive no payment.
REQUIRED
Complete an Income Tax Return for ALLNews for the year ending 30.06.2013 with appropriate schedules.
Calculate any fringe benefits tax liability for ALLNews at 30thJune 2013.
The assignment should be completed in groups of 3 as allocated by your lecturer and the word limit is 1000 words.
Marks will be allocated according to the marking criteria as set out below:
Correct calculations inclusive of clear and concise explanation of calculations.
Comprehensive and accurate discussion of taxation issues citing appropriate legislation, ATO
Rulings and case law.
Evidence of usage of available legal material and wide reading/research.
Presentation–format, spelling, vocabulary, readability.
Appropriate referencing, including in text referencing and a reference list where appropriate.
Engaging proactively with team members in decision making and facilitating the achievement
of agreed group outcomes.
3
the jinwa corporation sells two brands of wine glasses: Plain and Chic. jinwa provides the following information for sales in the month of June 2009:
Static budget total contribution margin $5,600
Budgeted units to be sold of all glasses 2,000 units
Budgeted contribution margin per unit of Plain $2 per unit
Budgeted contribution margin per unit of Chic $6 per unit
Total Sales quantity variance $1400 U
Actual sales mix % of Plain 60%
All variances are to be computed in contribution margin terms
Required:
1. Calculate the sales quantity variance for each product for june 2009
2. Calculate the individual product and total sales mix variances for june 2009. Calculate the individual product and total sales volume variances for June 2009. View less »
You are the auditor of Glaxoa Corporation (Glaxoa) for the current year.For each situation:
1.Describe the corrections, if any, you would propose to management to make the financial statements conform to GAAP.
2.Identify the type of opinion you would issue if management refused to make your proposed changes along with any effects on your audit report.
3.Provide a brief (one to three sentences) reason for your decision.
EXAMPLE
You found that Glaxoa incorrectly included the value of a large accounts receivable account twice in its financial statements by incorrectly recording the related sale twice.The amount of the account was material. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
AJE to reduce Accounts Receivable and Sales for the unsupported amount
Type of Opinion if Management Refuses to Make Proposed Corrections:
Modified Opinion – Qualified with basis for modification paragraph
Reason(s):
The misstatement was material but was not pervasive.The financial statements, while materially misstated, were not so misleading as to not present fairly in conformity with GAAP.
Situation 1
You completed your audit of Glaxoa and found no material misstatements. You encountered no significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 2
You found that Glaxoa had changed its accounting principles relating to its cost flow method for inventory from LIFO to FIFO this year. Glaxoa did not disclose the change in the notes to the financial statements.You determined the impact of the change in accounting principles was material with respect to the financial statements. Upon further inquiry and testing, you determined the change was justified and that both methods are consistent with GAAP. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 3
You were unable to obtain sufficient, appropriate evidence about the value of Glaxoa’s investment in a foreign business because audited financial statements for that business were not available.The investment amount was material to Glaxoa’s financial statements.You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 4
You found that Glaxoa had a material notes receivable due from Glaxoa’s Chief Executive Officer that was properly disclosed in the financial statement footnotes in accordance with GAAP.You decide additional disclosure should be made because of the significance of the asset.You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 5
You found that Glaxoa used an accounting principle for its cost flow method related to inventory that was not consistent with GAAP. Glaxoa disclosed the accounting principle in the notes to the financial statements.You determined the impact on the financial statements was material. Upon further inquiry and testing, you determined the departure from GAAP was justified because following GAAP in Glaxoa’s unique situation would have resulted in misleading financial statements. You found no material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 6
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount.You also found an unrecorded liability resulting from civil litigation.Glaxoa’s legal counsel had concluded that the potential loss was both probable as of the balance sheet date and the amount of the loss could be reasonably estimated. The amount of the estimated loss was material to the financial statements. The total effect on the financial statements of the misstatements and non disclosures was both material and pervasive. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 7
You found that Glaxoa had a material notes receivable due from Glaxoa’s Chief Executive Officer that was only disclosed as a Notes Receivable on the balance sheet. You also found a material unrecorded liability resulting from civil litigation.Glaxoa’s legal counsel had concluded that the potential loss was both reasonably possible as of the balance sheet date and the amount of the loss could be reasonably estimated. The total effect on the financial statements of the non disclosures was both material and pervasive. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 8
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount.You also found an unrecorded liability resulting from civil litigation. Glaxoa’s legal counsel had concluded that the potential loss was both reasonably possible as of the balance sheet date and the amount of the loss could be reasonably estimated. The amount of the estimated loss was material to the financial statements. The total effect on the financial statements of the misstatements and non disclosures was material. You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 9
Glaxoa’s management refused to allow you observe the taking of physical inventory at two of its main warehouse citing concerns that company trade secrets might be revealed.The value of inventory held at those two locations was material to the financial statements.You found no material misstatements or encountered any other significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
Situation 10
You found that Glaxoa failed to properly expense general repairs and maintenance costs related to its plant and equipment assets. Glaxoa improperly capitalized those costs causing both assets and net income for the year to be overstated by a material amount.You found no other material misstatements or encountered any significant problems in conducting the audit.
Proposed Corrections to the Financial Statements:
Type of Opinion if Management Refuses to Make Proposed Corrections:
Reason(s):
In 2001, Belinda Barclay established the Barclay Trust, an irrevocable trust, and named as trustee Local Bank, 1234 Main Street, Gouldsboro, PA 18424. She funded the trust with corporate and municipal bonds. The trustee is directed to the distribute income and/or principle at it discretion to Belinda’s adult son , Anthony Barclay (421 78 0443) and Patrick Barclay (421 78 0445), for 15 years and then to pay out the remaining trust assets, including any accumulated income, equally between the two sons. The Tax ID number for the trust is 74 543127. Half of the trustee’s fee is charged to principal and half to income. During the current year, the trustee distributed $12,400 to Anthony, who resides at 31 Crimson COver, Tuscaloosa, AL 35487, and nothing to Patrick.
Other current year information for the trust is as follows :
Corporate bond interest $17,000
Municipal bond interest 19,000
Long term capital gain on sale of corporate bonds 2,200
CPA’s fee for prior year’s tax return 800
Trustee’s fee 1,500
Estimated federal income tax paid 3,700
The trustee has a $700 short term capital loss carryover from prior year. Prepare a Form 1041, and any needed Schedule K 1 for Barclay Trust. Ignore the alternative minimum tax . The bond are not private activity bonds. Attach schedule to show your calculation. Be sure to include all required return information (Schedule B and G, Schedule D (1041), schedule K 1 (1041), DNI, allocation of DNI)
TRUST TAX RETURN PROBLEM 14 56 You will work on Problem 14 56. I have provided you problem 14 55 as a sample. The problems are similar with minor variations. In Problem 14 56, Corporate Bonds are sold for a gain of $2,200. A Schedule D (Page 1 and 2) will be required. For date acquired you may put Before 2012 and for date sold you can put 2012 and show a gain of $2,200. Below is the answer for you to match: Taxable Income Line 22 Form 1041: $11,192
|
Solex Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split off point total $95,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split off point. These sales values are as follows: product X, $55,000; product Y, $91,000; and product Z, $61,000. |
|
Each product may be sold at the split off point or processed further. Additional processing requires no special facilities. The additional processing costs and the sales value after further processing for each product (on an annual basis) are shown below: |
| Product | Additional Processing Costs |
Sales Value after Further Processing |
||
| X | $ | 40,000 | $ | 81,000 |
| Y | $ | 37,000 | $ | 160,000 |
| Z | $ | 11,000 | $ | 77,000 |
|
|
||||
| Required: | |
| a. |
Compute the incremental profit (loss) for each product. |
the jinwa corporation sells two brands of wine glasses: Plain and Chic. jinwa provides the following information for sales in the month of June 2009:
Static budget total contribution margin $5,600
Budgeted units to be sold of all glasses 2,000 units
Budgeted contribution margin per unit of Plain $2 per unit
Budgeted contribution margin per unit of Chic $6 per unit
Total Sales quantity variance $1400 U
Actual sales mix % of Plain 60%
All variances are to be computed in contribution margin terms
Required:
1. Calculate the sales quantity variance for each product for june 2009
2. Calculate the individual product and total sales mix variances for june 2009. Calculate the individual product and total sales volume variances for June 2009.
the jinwa corporation sells two brands of wine glasses: Plain and Chic. jinwa provides the following information for sales in the month of June 2009:
Static budget total contribution margin $5,600
Budgeted units to be sold of all glasses 2,000 units
Budgeted contribution margin per unit of Plain $2 per unit
Budgeted contribution margin per unit of Chic $6 per unit
Total Sales quantity variance $1400 U
Actual sales mix % of Plain 60%
All variances are to be computed in contribution margin terms
Required:
1. Calculate the sales quantity variance for each product for june 2009
2. Calculate the individual product and total sales mix variances for june 2009. Calculate the individual product and total sales volume variances for June 2009.
| BANNER MANUFACTURING INC. |
| You are well aware of the importance of budgeting in managing a |
| business enterprise successfully. Consequently, you have decided to |
| prepare an operating budget for the Banner Company for the year 2013. |
| You have already gathered valuable information about the Company |
| through the application of regression and Linear Programming models. |
| You know the behavior of various costs as summerized below. |
| OH = 100,000 + 8 per unit X + 10 per unit Y |
| OR |
| OH = 100,000 + 0.40 per DL$ X + 0.40 per DL$ Y |
| Sales Discount = .01 Gross Sales |
| AD = 0.10 gross $ sales of prior month |
| Bad Debt = 0.04 gross $ sales |
| Salaries & Commission = 100,000 + 0.04 gross $ sales |
| Purchasing Expense = 4000 +0.025 per DM $ |
| Since the unit contribution margin for product Y is higher than product X |
| Y: (CM for X =$15.21 and CM for y=16.045 ), then |
| Let us use the following sales mix: |
| Product x Product Y |
| Budgeted Sales 132000 216000 |
| REQUIREMENT |
| Prepare a master budget by completing the schedules presented in |
| appendix F. (Data Section). |
Attachments:
On December 31, 20XX, LBI,
Incorporated’s records indicate the following sales results for the
year:
Cash sales: $1,025,000
Credit sales: $1,342,000
In addition, its unadjusted trial
balance at December 31, 20XX includes the following accounts:
Account receivable: $575,000 debit
balance
Allowance for doubtful accounts:
$7,500 credit balance
A. Prepare the adjusting entry for
LBI, Incorporated to recognize bad debts under each of the
followingAfA?Ac€A!
“text decoration:underline;”>independent
AfA?Ac€A! assumptions:
a. Bad debts are estimated to be 2.5%
of credit sales.
b. Bad debts are estimated to be 1.5%
of total sales.
c. 6% of accounts receivable at
year end are uncollectible.
d. Show the December 31, 20XX balance
sheet presentation of the Company’s accounts receivable and related
accounts for part (a) above.
B. Assume the LBI’s accounts
receivable balance $575,000, with no allowance for doubtful
accounts, and uses the direct write off method of accounting for
uncollectible accounts receivable. AfA?Ac€A! A review of the
Company’s December 31, 20XX accounts receivable revealed that
accounts totaling $19,975 would not be collected.
a. Prepare the adjusting entry to
recognize bad debts under this assumption.
b. Show the December 31, 20XX balance
sheet presentation of the Company’s accounts receivable and related
accounts for this assumption.
Transaction Analysis: Expanded Accounting Equation
The following transactions were recorded by May G&M Retail Stores:
1. Merchandise inventory was sold on account for $120,000.
2. The cost of merchandise sold in transaction 1 was $62,500.
3. Collections from customers were $125,000.
4. A $900,000 long term note payable was paid by check.
5. A $10,000 loan to the company’s president was due, but not yet paid.
6. One hundred thousand dollars was invested in short term certificates of deposit.
7. Merchandise inventory was purchased on account for $65,000.
8. Payments of $62,500 were made to suppliers.
9. Interest of $9,000 is due on a long term note payable.
10. Paid half the interest (transaction 9).
11. A $45,000 refund from a supplier was received unexpectedly.
12. Land was purchased for $95,000 cash and a $300,000 note.
13. Salaries and wages due at the end of the fiscal period were accrued at $7,800.
14. Recorded depreciation of $4,650 on equipment.
Required
Classify each transaction into the following balance sheet equation and, if an item affects cash, note next to the cash item where it would appear in the statement of cash flows (using the direct method).
CASH + OTHER ASSETS =LIABILITIES + SHAREHOLDER’EQUITY
Recording Transactions and Preparing a Simple Income
Statement and Partial Cash Flow Statement
The following transactions were made by Manning, Inc.:
1. Merchandise was purchased for $180,000 cash.
2. Sales during the year (half received in cash) were $250,000.
3. Cost of goods sold in transaction 2 was $130,000.
4. Wages earned by employees was $42,000, of which $20,000 was still unpaid at year end.
5. Prepaid rent at the beginning of the year was $36,000.This represented rent for 18 months.
6. Utilities incurred during the year totaled $8,500. Three fourths of this was paid by year end.
Required
a. Record these transactions using the accounting equation. Set up separate columns for assets, liabilities, and shareholders’ equity.
b. Prepare an income statement.
c. Prepare the operating activities section of the statement of cash flows (using the direct method).
d. Comment on any differences in net income and cash flow from operating activities.
Transaction Analysis
The following transactions were recorded by Macintosh Corporation:
1. Purchased a building and took on a mortgage for $150,000.
2. Purchased merchandise for $12,000 cash.
3. Collected an account receivable of $4,000.
4. Recorded depreciation of $20,000.
5. Paid dividends of $8,000 to shareholders.
6. Received $15,000 cash from the sale of a short term investment, and recorded
a loss of $2,000 on the sale.
7. Issued additional common stock and received $5,000.
8. Paid interest of $11,000 on the mortgage.
Required
Classify these transactions in terms of the balance sheet equation given below and indicate which transactions would be reported on the statement of cash flows by labeling the transaction as an operating, investing, or financing activity.
CASH + OTHER ASSETS =LIABILITIES + SHAREHOLDER’EQUITY
Preparing a Cash Flow Statement from a Listing of Transactions
Haywire Systems had the following cash receipts and payments during 2000 (dollars in millions):
|
1. Cash received from customers |
$130 |
|
2. Cash paid to inventory suppliers |
42 |
|
3. Cash paid to employees as wages |
38 |
|
4. Paid income taxes |
31 |
|
5. Cash paid for other operating expenses |
17 |
|
6. Cash dividends paid to shareholders |
10 |
|
7. Cash paid to acquire equipment and vehicles |
75 |
|
8. Cash paid to retire bank loans |
25 |
|
9. Cash received from sale of land |
8 |
|
10. Cash received by a company issuing common stock |
85 |
Required
Based on the above information, using the direct method:
a. Determine cash flow from operations.
b. Determine cash flow from investments.
c. Determine cash flow from financing.
d. Calculate Haywire’s net income for 2000. If this is not possible, identify additional information that would be needed to determine net income.
Computing Quality of Sales Ratios
Consider the following information for two hi tech companies:
|
Oxford, LTD |
Kendall, LTD |
|
|
(Dollars in thousands) |
||
|
Accounts receivable |
||
|
Beginning of year |
$ 9,915 |
$ 408 |
|
End of year |
11,250 |
7,258 |
|
Sales for year |
21,891 |
11,606 |
Required
a. Calculate the cash collected from customers for each firm.
b. Compute the quality of sales ratio for each firm.
c. What do these ratios indicate?
Computing Cash Based Ratios
Consider the following information:
|
Windbag International, Inc. Selected Financial Statement Information (Dollars in Millions) |
||
|
2000 |
1999 |
|
|
Total assets |
$1,086 |
$ 996 |
|
Total owners’ equity |
681 |
660 |
|
Debt |
145 |
201 |
|
Sales |
1,256 |
1,199 |
|
Accounts receivable |
28 |
27 |
|
Depreciation expense |
74 |
69 |
|
Interest paid |
19 |
22 |
|
Taxes paid |
53 |
42 |
|
Purchases of property, plant, and equipment |
142 |
117 |
|
Net cash outflow from investing activities |
95 |
107 |
|
Cash flow from operating activities |
166 |
147 |
|
Net income |
97 |
79 |
Required
a. Calculate the following ratios, for each year:
1. Cash return on assets (2000 only)
2. Quality of sales
3. Quality of income
4. Cash interest coverage
b. Based on your ratios, evaluate Windbag’s performance. In what areas do the cash flow ratios indicate positive or negative performances?
Interpreting Cash Flow Statement
The following cash flow statement was prepared by the Brainard Music Company for the year ended December 31, 2000:
|
Cash flow from operating activities |
$(346,000) |
|
|
Cash flow from investing activities: |
||
|
Purchase of Music box, Ltd. |
$(280,000) |
|
|
Purchase of property and equipment |
(120,000) |
|
|
Total from investing activities |
(400,000) |
|
|
Cash flow from financing activities: |
||
|
Proceeds from issuance of stock |
130,000 |
|
|
Proceeds from short term bank loans |
540,000 |
|
|
Payment of dividends |
(110,000) |
|
|
Total from financing activities |
560,000 |
|
|
Net decrease in cash |
$(186,000) |
Required
a. Give three reasons why Brainard engaged in these investing and financing activities.
b. Assume that Brainard received dividends from Music box, Ltd. Why aren’t they reported as part of investing activities?
c. Discuss the concept of depreciation as it affects cash flows and as it affects Brainard Music Co.
d. Do you think the future outlook for this company is optimistic? Why or why not?
Interpreting Financial Statements: Cash Flow Effects
The following statement of cash flows has been provided by Davo’s Surf Shop of Malibu, California:
|
Davo’s Surf Shop Statement of Cash Flows For the Year Ended December 31, 2000 |
||
|
Cash flows from operating activities |
$ 225,000 |
|
|
Cash flows from investing activities: |
||
|
Investment in Susie’s Swim Wear, Ltd. |
$ (215,000) |
|
|
Purchase of marketable securities |
(550,000) |
|
|
Proceeds from sale of building |
1,000,000 |
|
|
Cash flows from financing activities: |
235,000 |
|
|
Proceeds from debt issuance |
$ 600,000 |
|
|
Gift from friends and family |
400,000 |
|
|
Payment of dividends |
(200,000) |
800,000 |
|
Net increase in cash |
$1,260,000 |
|
Required
a. Explain and discuss each item that resulted in a change in cash for Davo’s Surf Shop.
b. Based on this limited information for only one year, evaluate Davo’s future prospects.
c. What other information would be helpful in evaluating Davo’s prospects?
Interpreting Financial Statements: Cash Flow Effects
Byte City, Inc., provided the following cash flow information in the form of subtotals on its cash flow statements:
|
2000 |
1999 |
|
|
Net cash provided by operating activities |
$ 2,956,020 |
$ 587,249 |
|
Net cash used in investing activities |
(8,123,648) |
(33,942,808) |
|
Net cash provided by financing activities |
3,880,973 |
31,672,955 |
|
Net decrease in cash and cash equivalents |
$(1,286,655) |
$ (1,682,604) |
Required
a. Did Byte City’s cash and cash equivalents increase or decrease in 1999? In 2000? Why?
b. How would you assess Byte City’s cash flows from operating activities?
c. What financing and investing strategies was Byte City apparently following in 1999? How did this strategy change in 2000?
d. If Byte City purchased other companies in 1999 for more than $47 million, and borrowed almost $37 million, what does this new information indicate about its financing and investing strategies.
e. If Byte City made zero payments on long term debt in 1999,but its payments in 2000 totaled more than $26 million, reevaluate its financing strategies?
f. What other information would be helpful in answering these types of questions?
Calculate Cash Flow Ratios
Given the following information extracted from Byte City’s financial statements, calculate and evaluate its cash flow ratios:
|
2000 |
1999 |
|
|
Interest paid |
$ 4,186,532 |
$ 3,695,431 |
|
Interest received |
718,574 |
1,218,940 |
|
Income taxes paid |
150,000 |
1,997,600 |
|
Total assets |
107,219,075 |
103,542,717 |
|
Long term debt |
58,742,916 |
62,671,335 |
|
Shareholders’ equity |
42,827,531 |
35,912,651 |
|
Net income (loss) |
7,459,828 |
(32,818,050) |
|
Net revenues |
129,485,952 |
109,948,716 |
|
Net cash provided by operations |
2,956,020 |
587,249 |
|
Cash received from customers |
118,158,941 |
101,879,383 |
Required
a. Discuss the differences between net cash provided by operations and cash received from customers.
b. Discuss the differences between net revenues and cash received from customers.
c. Using the previous data, estimate Byte City’s overall cash flows or cash balances at the end of each year. Justify your conclusions.
d. Refer to the data in the previous problem (5 37). Revise your conclusions about Byte City’s overall cash flows or cash balances at the end of each year. Again, justify your revised answer.
e. Calculate the following ratios for each year:
1. Cash return on assets (2000 only)
2. Quality of sales
3. Quality of income
4. Cash interest coverage
f. Based on these ratios, evaluate Byte City’s performance each year. In what areas do the cash flow ratios indicate positive or negative performances?
g. What additional information would be useful in evaluating Byte City’s performance?
Interpreting Financial Statements: Cash Flow Effects
United States Surgical Corporation (USSC) provided the following consolidated statement of cash flows, as abbreviated:
|
Year Ended December 31, |
||
|
1993 |
1992 |
|
|
Cash flows from operating activities: |
||
|
Cash received from customers |
$1,103,300 |
$1,087,700 |
|
Cash paid to suppliers and employees |
(941,200) |
(905,900) |
|
Interest paid |
(18,300) |
(15,600) |
|
Income taxes paid |
(12,800) |
(18,400) |
|
Net cash provided by operating activities |
131,000 |
147,800 |
|
Cash flows from investing activities: |
||
|
Property, plant, and equipment purchases |
(216,400) |
(270,700) |
|
Other asset purchases |
(31,100) |
(31,100) |
|
Net cash used in investing activities |
(247,500) |
(301,800) |
|
Cash flows from financing activities: |
||
|
Long term debt borrowings |
2,614,400 |
1,840,800 |
|
Long term debt repayments |
(2,495,900) |
(1,696,000) |
|
Common stock issued |
8,100 |
35,200 |
|
Dividends paid |
(13,700) |
(16,400) |
|
Repurchases of common stock |
— |
(16,100) |
|
Net cash provided by financing activities |
112,900 |
147,500 |
|
Net decrease in cash |
$ (3,600) |
$ (6,500) |
Required
a. Identify and discuss any unfamiliar terms or unusual treatments in USSC’s cash flow statement.
b. Discuss the differences between net cash provided by operating activities and cash received from customers.
c. From the data above, evaluate USSC’s overall cash flows or cash balances at the end of each year.
d. What part of the balance sheet or cash flow statement would help you better evaluate USSC’s overall cash flows or cash balances at the end of either year? Why?
e. Given the following additional balance sheet and income statement data:
|
1993 |
1992 |
|
|
Net sales |
$1,037,200 |
$1,197,200 |
|
Net income (loss) |
(138,700) |
138,900 |
|
Interest expense |
18,500 |
14,700 |
|
Income taxes |
1,300 |
54,000 |
|
Total assets |
1,170,500 |
1,168,000 |
|
Long term debt |
137,500 |
110,700 |
|
Stockholders’ equity |
443,900 |
590,000 |
Calculate the following ratios, for each year:
1. cash return on assets (1993 only)
2. quality of sales
3. quality of income
4. cash interest coverage
f. Based on these ratios, evaluate USSC’s performance. In what areas do the cash flow ratios represent positive or negative performances?
g. What additional information would be useful in evaluating USSC’s performance?
Interpreting Financial Statements: Cash Flow Effects
StorageTek’s consolidated statement of cash flows contained the following information, as abbreviated (dollars in thousands):
|
Year Ended |
||
|
December |
December |
|
|
31, 1993 |
25, 1992 |
|
|
Operating Activities |
||
|
Cash received from customers |
$1,532,183 |
$1,572,892 |
|
Cash paid to suppliers and employees |
(1,446,321) |
(1,456,835) |
|
Interest received |
54,251 |
67,136 |
|
Interest paid |
(40,519) |
(47,751) |
|
Income taxes paid |
(12,048) |
(28,327) |
|
Net cash from operating activities |
87,546 |
107,115 |
|
Investing Activities |
||
|
Short term investments, net |
(15,377) |
40,227 |
|
Purchase of property, plant, and equipment |
(67,720) |
(106,119) |
|
Business acquisitions, net of cash |
— |
(51,761) |
|
Other assets, net |
(6,945) |
(4,136) |
|
Net cash used in investing activities |
(90,042) |
(121,789) |
|
Financing Activities |
||
|
Proceeds from preferred stock offering |
166,479 |
— |
|
Proceeds from nonrecourse borrowings |
87,508 |
114,935 |
|
Repayments of nonrecourse borrowings |
(147,647) |
(169,005) |
|
Proceeds from other debt |
79,740 |
21,320 |
|
Repayments of other debt |
(44,144) |
(27,538) |
|
Other financing activities |
2,009 |
61,050 |
|
Net cash from financing activities |
143,945 |
762 |
|
Effect of exchange rate changes |
(4,341) |
(4,884) |
|
Increase (decrease) in cash |
$ 137,108 |
$ (18,796) |
Required
a. Identify and discuss any unfamiliar terms or unusual treatments in StorageTek’s cash flow statement.
b. Discuss the differences between net cash provided by operating activities and cash received from customers.
c. From the data above, evaluate StorageTek’s overall cash flows or cash balances at the end of each year.
d. What part of the balance sheet or cash flow statement would help you better evaluate StorageTek’s overall cash flows or cash balances at the end of either year? Why?
e. Given the following additional balance sheet and income statement data (dollars in thousands):
|
1993 |
1992 |
|
|
Net sales |
$ 902,482 |
$1,079,130 |
|
Net income (loss) |
(77,796) |
9,334 |
|
Interest expense |
43,670 |
48,706 |
|
Income taxes |
5,000 |
17,700 |
|
Total assets |
1,793,009 |
1,739,043 |
|
Long term debt |
361,718 |
369,988 |
|
Stockholders’ equity |
1,017,303 |
927,913 |
Calculate the following ratios for each year:
1. Cash return on assets (1993 only)
2. Quality of sales
3. Quality of income
4. Cash interest coverage
f. Based on these ratios, evaluate StorageTek’s performance. In what areas do the cash flow ratios indicate positive or negative performances?
g. What additional information would be useful in evaluating StorageTek’s performance?
h. StorageTek’s 1991 fiscal year ended on December 27.Would the difference in the number of days or number of weeks in each fiscal year affects any of the above analyses? Why?
Interpreting Financial Statements: Cash Flow Effects
The following (summary) statement of cash flows has been provided by Sigma Designs, which specializes in diversified graphic systems, document imaging, and multimedia markets.
|
Sigma Designs, Inc. Statement of Cash Flows (abbreviated) For the Years Ended January 31, 1993 and 1992 (Dollars in Thousands) |
|||
|
1993 |
1992 |
||
|
Cash flows from operating activities: |
|||
|
Net loss |
$(7,166) |
$(3,443) |
|
|
Summary of adjustments to net loss activities |
(659) |
4,731 |
|
|
Net cash provided by (used for) operating activities |
(7,825) |
1,288 |
|
|
Cash flows from investing activities: |
|||
|
Purchases of marketable securities |
(25,367) |
(28,598) |
|
|
Sales of marketable securities |
30,518 |
23,189 |
|
|
Equipment additions |
(801) |
(702) |
|
|
Software development costs (capitalized) |
(551) |
(1,070) |
|
|
Other asset transactions |
(339) |
87 |
|
|
Net cash provided by (used for) |
|||
|
investing activities |
3,460 |
(7,094) |
|
|
Cash flows from financing activities: |
|||
|
Common stock sold |
312 |
329 |
|
|
Repayment of long term debt |
(39) |
(35) |
|
|
Other financing transactions |
(105) |
24 |
|
|
Net cash provided by (used for) |
|||
|
financing activities |
168 |
318 |
|
|
Decrease in cash and equivalents |
$(4,197) |
$(5,488) |
|
Required
a. Explain and discuss each item that resulted in a change in cash for Sigma Designs.
b. Based on this information, evaluate Sigma’s future prospects.
c. Indicate whether Sigma used the direct or indirect method to calculate its cash flows from operations. How can you tell?
Interpreting Financial Statements: Cash Flow Effects, Trends in Cash Flow, and Net Income
The following (summary) statement of cash flows has been provided by Sigma Designs, which specializes in diversified graphic systems, document imaging, and multimedia markets.
|
Sigma Designs, Inc. Statement of Cash Flows (abbreviated) For the Years Ended January 31, 1995 and 1994 (Dollars in Thousands) |
||
|
1995 |
1994 |
|
|
Cash flows from operating activities: |
||
|
Net loss |
$(1,000) |
$(2,145) |
|
Summary of adjustments to net loss |
||
|
activities |
2,997 |
2,731 |
|
Net cash provided by (used for) |
||
|
operating activities |
1,997 |
586 |
|
Cash flows from investing activities: |
||
|
Purchases of marketable securities |
(20,547) |
(23,288) |
|
Sales of marketable securities |
35,245 |
32,155 |
|
Equipment additions |
(625) |
(502) |
|
Software development costs (capitalized) |
(300) |
(1,200) |
|
Other asset transactions |
(273) |
215 |
|
Net cash provided by (used for) |
||
|
investing activities |
13,500 |
7,380 |
|
Cash flows from financing activities: |
||
|
Common stock sold |
594 |
450 |
|
Repayment of long term debt |
(47) |
(40) |
|
Other financing transactions |
(252) |
(75) |
|
Net cash provided by (used for) |
||
|
financing activities |
295 |
335 |
|
Decrease in Cash and Equivalents |
$15,792 |
$ 8,301 |
Required
a. Explain and discuss each item that resulted in a change in cash for Sigma Designs.
b. Based on this information, evaluate Sigma’s future prospects.
c. Did Sigma use the direct or indirect method? What evidence indicates which method Sigma used?
d. With reference to the data in this assignment, and in the preceding assignment (5 42),prepare a graph showing the trends in Sigma Designs’ cash flow from operations.On the same graph,show Sigma’s net income (loss).Discuss these trends, along with your estimate of Sigma’s future prospects.
e. Write a short memo to Sigma Designs’ controller regarding the effects of net losses on operating cash flows during the period 1992 through 1995. Evaluate the dramatic turnaround in Sigma’s cash balances. What factors caused this reversal (1992 95)?
Interpreting Financial Statements: Cash Flow Effects
A condensed version of Micro byte Corporation’s consolidated statements of cash flows for 1999 and 2000 are shown below (dollars in thousands):
|
2000 |
1999 |
|
|
Cash flows from operating activities: |
||
|
Cash received from customers |
$164,177 |
$82,152 |
|
Cash paid to suppliers and employees |
(142,336) |
(69,507) |
|
Interest received |
2,622 |
722 |
|
Interest paid |
(87) |
(224) |
|
Income taxes paid |
(16,121) |
(5,187) |
|
Net cash provided by operating activities |
8,255 |
7,956 |
|
Cash flows from investing activities: |
||
|
Sale (purchase) of short term investments |
600 |
(16,200) |
|
Capital expenditures |
(9,740) |
(1,932) |
|
Net cash used for investing activities |
(9,140) |
(18,132) |
|
Cash flows from financing activities: |
||
|
Proceeds from issuing common stock |
496 |
22,114 |
|
Payments under capital leases |
(472) |
(347) |
|
Other |
(9) |
31 |
|
Net cash provided by financing activities |
15 |
21,798 |
|
Net increase (decrease) in cash |
(870) |
11,622 |
|
Cash balances at beginning of year |
14,808 |
3,186 |
|
Cash balances at end of year |
$ 13,938 |
$14,808 |
Required
a. Is Micro byte’s statement of cash flows based on the direct or indirect method? What evidence supports this view?
b. By how much did Micro byte’s cash flow from operations increase?
c. During these two years, how much did Micro byte spend to purchase marketable securities and other short term investments? Did Micro byte buy or sell securities each year? Show any relevant calculations.
d. How much did Micro byte spend on capital expenditures during the two years? Did Micro byte purchase or sell capital assets each year? How do you know?
e. During these two years, how much money did Micro byte receive by issuing common stock? Given these proceeds, what do you suppose Micro byte did with it? Why would Micro byte take these actions?
f. By how much did Micro byte’s collections from customers increase between 1999 and 2000? Does this increase represent modest or significant growth? Is the increase in cash paid to suppliers and employees consistent with this growth? Why?
g. By how much did Micro byte’s cash balances increase between the beginning of 1999 and the end of 2000? Is this increase significant? Does it represent a significant increase in Micro byte’s liquidity? Why?
h. Why do you think the amounts shown for interest payments are so low? Why is interest received so much larger than interest payments? Under what circumstances is this a favorable relationship?
i. During 1999,Microbyte’s cash increased by $11,622,000.On the other hand, during 2000 its cash decreased by $870,000. Is this trend alarming? Does it indicate any problems for Micro byte?
j. How would an analyst evaluate the relationship between Micro byte’s cash provided by operations of $8,255,000 and its cash used for investing activities of $9,140,000? How is this relationship affected by Micro byte’s financing activities? Has Micro byte been a prudent manager of its cash during 2000? Why?
k. Compute the following ratios or amounts for Micro byte Corporation for 2000. Discuss each ratio in the context of Micro byte’s statement of cash flows.
1. Cash flow from operating activities
2. Cash return on assets, assuming average total assets are $81,613,000
3. Cash return on stockholders’ equity, assuming average stockholders’ equity is $60,386,000
4. Quality of sales, assuming sales revenues are $170,290,000
5. Quality of income, assuming net income is $40,513,000
6. Cash interest coverage
l. Compute the following ratios or amounts for Micro byte Corporation for 1999 and discuss each ratio in the context of Micro byte’s statement of cash flows.
1. Cash flow from operating activities
2. Quality of sales, assuming sales revenues are $88,655,000
3. Quality of income, assuming net income is $17,848,000
4. Cash interest coverage
m. Evaluate the trends in these ratios over the two years.
n. Evaluate Micro byte’s future prospects.
Interpreting Financial Statements: Cash Flow Effects
Consider the following (summary) consolidated statements of cash flows from Pioneer Resource, Inc., for 1999 and 2000:
|
Consolidated Statements of Cash Flows Pioneer Resource, Inc. For the years ending December 31, 2000 and 1999 (Dollars in Millions) |
||
|
2000 |
1999 |
|
|
Cash flows from operating activities: |
||
|
Net cash from operating activities |
$ 2,989.5 |
$3,125.7 |
|
Cash flows from investing activities: |
||
|
Acquisitions of property, plant, |
||
|
and equipment |
$(2,454.0) |
(2,111.9) |
|
Acquisitions of new companies |
(796.3) |
(65.4) |
|
Other investing activities, net |
125.8 |
(185.6) |
|
Net cash from investing activities |
(3,124.5) |
(2,362.9) |
|
Cash flows from financing activities: |
||
|
Net change in short term debt |
818.4 |
17.5 |
|
Issuance of long term debt |
97.5 |
32.9 |
|
Retirements of long term debt |
(102.3) |
(89.2) |
|
Dividend payments |
(825.4) |
(776.4) |
|
Repurchase of common stock |
(588.1) |
(807.2) |
|
Other financing activities, net |
205.3 |
895.7 |
|
Net cash from financing activities |
(394.6) |
(726.7) |
|
Net increase (decrease) in cash and |
||
|
temporary investments |
$ (529.6) |
$ 36.1 |
Required
a. Identify and discuss each item that caused a change in Pioneer Resource’s net cash flows for each year.
b. Using only the cash flow statement, evaluate Pioneer Resource’s cash flow prospects for 2001.
c. Describe and evaluate Pioneer Resource’s apparent strategy for financing its acquisitions. How do its dividend payments and its repurchases of common stock affect its financing strategies?
d. If Pioneer Resource’s net income figures for 2000 and 1999 were, respectively, $1,253.8 and $1,238.2 (dollars in millions), write a short essay explaining the relationship between net income and net cash flow provided by operating activities. Draw a simple graph to show how these amounts relate to each other.What conclusions can be drawn from the graph?
e. Compare Pioneer Resource’s net income and cash provided by operating activities with the net income and cash flow trends for another company. Unless your instructor designates another company, use the data from Sigma Designs’ net income (loss) and cash provided (or used) by operating activities Although these are two distinctly different companies how do your conclusions about cash flows differ? Why do you think there are such vast differences?
Interpreting Financial Statements: Cash Flow Effects
Mitronics Corporation reported the following items (which are only partial excerpts) in its 1997 statement of cash flows (dollars in thousands).
|
1997 |
1996 |
|
|
Net earnings |
$788 |
$845 |
|
Increases (decreases) in current liabilities |
(512) |
532 |
|
Cash provided by operating activities |
276 |
1,377 |
In the financial review section of Mitronics’annual report, management reported the following:
Cash provided by operations was $276,000 in 1997 compared with $1,377,000 in 1996.The reduction was primarily due to lower earnings from operations and a reduction in current liabilities.
Required
a. Explain in your own words what Mitronics is communicating in this note. Why might Mitronics’ managers manage its cash in this manner?
b. What else would a financial analyst like to know about Mitronics’ cash flow from operating activities?
Interpreting Financial Statements: Cash Flow Effects
SILLA, Inc., reported the following items (which are partial excerpts) in its 1999 statement of cash flows (dollars in thousands):
|
2000 |
1999 |
|
|
Net loss |
$(81,542) |
$(202,144) |
|
Interest payments, net |
(114,000) |
(132,000) |
|
Debt repayments |
(214,000) |
(7,100) |
|
Cash provided by operating activities |
36,548 |
15,432 |
Included in management’s discussion of SILLA’s annual results was the following: During 1999, cash flows from operating activities included $31 million relating to net reductions in operating receivables and payables relating primarily to property sales of $35 million.Accordingly,operations provided enough cash flow for net interest costs but did not provide substantial additional cash for debt principal repayment or capital expenditures.
Required
a. Has SILLA improved its cash flow in 2000 (versus the prior year)? What actions has it taken that resulted in significant changes in cash flow?
b. On what grounds would you agree, or disagree, with management’s assertions about its cash flow from operating activities?
Interpreting Financial Statements: Cash Flow Effects
Wood way Company reported the following data in its 2000 statement of cash flows (dollars in thousands):
|
2000 |
1999 |
|
|
Net earnings |
$ 1,654 |
$6,215 |
|
Cash provided by operating activities |
26,118 |
1,984 |
Required
a. What are some likely explanations for the trend in cash provided by operating activities relative to the trend in net earnings?
b. Would you expect Wood way’s cash balance at the end of 2000 to be higher or lower than that at the end of 1999? Why? What other information would you need before drawing definitive conclusions in this regard?
Effects of Discounts on Net Income
Assume that you are the controller of a publicly held company called Spring Corporation.The CEO and the CFO are quite concerned about financial analysts’ assessments of Spring’s prospects.Analysts have publicized their doubts about Spring’s ability to generate cash from operating activities. As is common, Spring pays for all of its inventory purchases almost immediately upon receipt of the appropriate bills. Because finance charges in this industry are exorbitant, you, as controller, are careful to make all payments within the allowable interest free period. At year end, the CFO orders you to suspend temporarily all payments to suppliers. The obvious reason for this suspension is to enhance, that is to “window dress,” Spring’s CFOA in its statement of cash flows. It is also obvious that this action will cost Spring substantial future interest charges.
Required
Write a short response to the CFO’s request
Using Ratios to Evaluate Performance
The following balance sheet data are given:
|
2000 |
1999 |
|
|
Cash |
$ 45,000 |
$ 35,000 |
|
Fixed assets |
330,000 |
270,000 |
|
Current liabilities |
95,000 |
45,000 |
|
Long term liabilities |
300,000 |
320,000 |
|
Accounts receivable |
115,000 |
95,000 |
|
Invested capital |
100,000 |
100,000 |
|
Inventories |
100,000 |
80,000 |
|
Retained earnings |
95,000 |
15,000 |
Required
a. Prepare a balance sheet for each year.
b. Compute the liquidity ratios described in this chapter, along with the asset management and debt management ratios. Evaluate the company’s liquidity. Evaluate its asset management and debt management.
c. What strategies does the company seem to be following in managing its finances?
Preparing a Balance Sheet and Ratio Analysis
Given the following data:
|
2001 |
2000 |
|
|
Cash |
$ 30,000 |
$ 40,000 |
|
Retained earnings |
175,000 |
225,000 |
|
Current liabilities |
17,000 |
16,000 |
|
Invested capital |
600,000 |
600,000 |
|
Accounts receivable |
27,500 |
38,000 |
|
Inventories |
45,000 |
47,000 |
|
Fixed assets, net |
? |
? |
Required
a. Rearrange these data into classified balance sheets.
b. Find the missing Fixed Assets amounts necessary to balance each balance sheet.
c. Evaluate the firm’s liquidity, using the ratios described in this chapter.
d. Calculate the firm’s asset management and debt management ratios. Evaluate the results.
Preparing a Balance Sheet and Ratio Analysis
Given the following data:
|
2001 |
2000 |
|
|
Cash |
$300,000 |
$340,000 |
|
Retained earnings |
? |
? |
|
Accounts payable |
20,000 |
11,000 |
|
Wages payable |
7,000 |
5,000 |
|
Interest payable |
10,000 |
30,000 |
|
Bonds payable |
40,000 |
100,000 |
|
Mortgage payable |
60,000 |
300,000 |
|
Invested capital |
500,000 |
600,000 |
|
Accounts receivable |
37,500 |
118,000 |
|
Inventories |
55,000 |
87,000 |
|
Fixed assets, net |
165,000 |
320,000 |
Required
a. Rearrange these data into classified balance sheets.
b. Find the missing Retained Earnings amounts necessary to balance each balance sheet.
c. Evaluate the firm’s liquidity, using the ratios described in this chapter.
d. Calculate the firm’s asset management and debt management ratios. Evaluate the results.
Transaction Analysis: Expanded Accounting Equation
Consider these transactions:
1. Investors purchased $900,000 of common stock from the firm.
2. The firm purchased land, buildings, and equipment valued at $1,300,000; paid $300,000 in cash; and signed a mortgage for the balance due.
3. Paid rent of $10,000 for five automobiles.
4. The auto rental covers two months, one of which is the current month.
5. Purchased supplies on account for $55,000.
6. Provided services on account to customers at a retail value of $3,200,000.
7. Collected $3,000,000 from customers on account.
8. Paid its supplies.
9. Recorded monthly depreciation of $22,000.
10. Accrued one month’s (mortgage) interest at 12% per annum.
Required
a. Arrange columns in a spreadsheet, corresponding to the balance sheet equation using these balance sheet accounts: Cash, Accounts Receivable, Prepaid Rent, Supplies, Property Plant and Equipment, Accumulated Depreciation, Accounts Payable, Interest Payable, Mortgage Payable, Common Stock, Retained Earnings. Enter transactions 1 through 10 into the columns. Total each column and verify that the balance sheet equation does indeed balance.
b. Prepare a classified balance sheet, using the column totals from your spreadsheet.
c. Analyze the firm’s liquidity, using the ratios from this chapter.
d. Evaluate the firm’s asset management and debt management. Provide an overall performance assessment.
e. What important information is missing that would further assist in evaluating these results? Even though the firm’s performance seems spectacularly good, could the missing information change your opinion? Why?
Transaction Analysis: Expanded Accounting Equation
Given these transactions:
1. An engineering firm was formed when three engineers each invested $50,000 (cash).
2. Each founder also invested an assortment of utility trucks, inclinometers, and other specialty equipment, valued at $10,000 (each).
3. Borrowed $50,000 to provide additional operating funds.
4. Rented office space at $1,000 per month.
5. Paid the first month’s rent.
6. Paid a security deposit of $2,000.
7. A wealthy individual also wanted to invest in the firm, but not as an owner, so the firm borrowed $500,000 from this individual at 18% per year.
8. Two additional staff members were hired at $6,000 per month.
9. The staff earned their first month’s salary of $6,000 but were not yet paid.
10. Supplies costing $45,000 were purchased.
11. Recorded depreciation for the first month. Assume that the equipment (in transaction 2) has useful lives of five years.
12. Accrued interest on the loan for one month.
Required
1.Arrange five columns in a worksheet or spreadsheet, corresponding to the following expanded balance sheet equation (assume zero beginning balances):
CURRENT ASSETS + FIXED ASSETS = CURRENT LIABILITIES+
LONG TERM LIABILITIES + OWNERS’ EQUITY
Enter transactions 1 through 12 in the five columns. Total each column and verify that the balance sheet does indeed balance. Prepare a classified balance sheet, using the column totals from your spreadsheet.
b. Evaluate the firm’s liquidity, using the ratios described in this chapter.
c. Evaluate the firm’s asset management and debt management.
d. On an overall basis, evaluate the firm’s performance. What important information is missing? Even though the firm’s performance seems somewhat questionable, could the missing information change your opinion? Why?
Interpreting Financial Statements: Ratio Analysis
Comparative balance sheets for Creative Cabinetry, Inc. are shown below:
|
Assets |
12 31 01 |
12 31 00 |
|
Cash |
$ 95,000 |
$ 33,000 |
|
Accounts receivable |
23,160 |
22,500 |
|
Inventory |
30,000 |
123,650 |
|
Prepaid rent |
3,840 |
5,850 |
|
Total current assets |
152,000 |
185,000 |
|
Land |
83,000 |
72,000 |
|
Equipment |
800,000 |
600,000 |
|
Accumulated depreciation |
(140,000) |
(90,000) |
|
Total long term assets |
743,000 |
582,000 |
|
Total assets |
$895,000 |
$767,000 |
|
Liabilities and Shareholders’ Equity |
||
|
Current Liabilities |
||
|
Accounts payable |
$ 83,300 |
$ 48,100 |
|
Accrued liabilities |
23,500 |
24,200 |
|
Short term notes payable |
62,000 |
51,000 |
|
Total current liabilities |
168,800 |
123,300 |
|
Mortgage payable |
547,200 |
383,500 |
|
Shareholders’ Equity |
||
|
Common stock |
150,000 |
150,000 |
|
Retained earnings |
29,000 |
110,200 |
|
Total shareholders’ equity |
179,000 |
260,200 |
|
Total liabilities and shareholders’ |
||
|
equity |
$895,000 |
$767,000 |
Required
a. Conduct a vertical analysis (common size) of Creative Cabinetry’s balance sheets for each year.
b. Calculate the liquidity ratios for each year.
c. Calculate asset management and debt management ratios for each year.
d. What conclusions can be drawn about Creative Cabinetry’s financial management?
Transaction Analysis: Expanded Equation Including Fund Balances (non profit hospital)
Given these transactions:
1. Community donations of $150,000 are received.
2. A mortgage of $1.5M is secured and a hospital is constructed.
3. Donated land worth $1M is received.
4. Short term lines of credit are used to acquire supplies of $50,000.
5. Obstetrics clients pay $20,000 in advance as a deposit.
6. Operating lease payments of $30,000 on x ray equipment are made.
7. Donations of $1,000 by the hospital to the American Cancer Society are recorded.
8. Half of the land is sold for $2M.
9. Depreciation expense of $6,250 on the hospital building is recorded.
Required
a.Arrange five columns corresponding to the following expanded balance sheet equation for a nonprofit hospital (assume zero beginning balances), where FUND BALANCES is used instead of OWNERS’EQUITY:
CURRENT ASSETS +FIXED ASSETS = CURRENT LIABILITIES+
LONG TERM LIABILITIES +FUND BALANCES
Enter transactions 1 through 9 into the five columns. Total each column and verify that the balance sheet does balance. Note that FUND BALANCES can be used in the same manner as OWNERS’EQUITY for a commercial firm. Prepare
a simple balance sheet from the totals of your spreadsheet.
b. Calculate appropriate liquidity ratios. Evaluate the results.
c. Evaluate the hospital’s asset management and debt management.
d. What conclusions can be drawn about the overall financial condition of this hospital ?
Composition of Current Assets
The following schedule summarizes the current assets reported in the year end balance sheets of Costello Laboratories, a company that develops, manufactures, and markets health care products, and Triangle Air Lines, a major provider of passenger, freight, and mail air transportation:
|
Costello Laboratories |
Triangle Air Lines |
|
|
(Dollars in thousands) |
||
|
Current Assets |
||
|
Cash and equivalents |
$ 300,676 |
$ 1,180,364 |
|
Investment securities |
78,149 |
— |
|
Accounts receivable, |
||
|
net of allowance |
1,336,222 |
1,024,869 |
|
Supplies |
— |
90,593 |
|
Inventories |
940,533 |
— |
|
Prepaids and other |
929,955 |
526,094 |
|
Total current assets |
3,585,535 |
2,821,920 |
|
Noncurrent, total |
4,103,034 |
9,049,103 |
|
Total assets |
$7,688,569 |
$11,871,023 |
Required
a. Identify the major differences between these two firms in the composition of current assets. Try to explain these differences in terms of the types of goods and services that each company produces.
b. Based solely on the information provided here, which company appears to be more liquid?
Composition of Noncurrent Assets
The following schedule summarizes the noncurrent assets reported in the yearend balance sheets of Packard Computers, a company that designs and manufactures electronic data and communications systems, and Nazareth Steel, a major steel fabricator:
|
Packard Computers |
Nazareth Steel |
|
|
(Dollars in millions) |
||
|
Current assets (total) |
$10,236 |
$1,591 |
|
Noncurrent assets |
||
|
Property, plant, and equipment (at cost) |
7,527 |
6,741 |
|
Less: Accumulated depreciation |
(3,347) |
(4,107) |
|
Net |
4,180 |
2,634 |
|
Other long term receivables and other |
2,320 |
1,652 |
|
Total noncurrent assets |
6,500 |
4,286 |
|
Total assets |
$16,736 |
$5,877 |
Required
a. Identify the major differences between these two firms in the composition of noncurrent assets. Try to explain these differences based on the types of products that each company produces.
b. Based solely on the information provided here, which company appears to have the older assets? Calculate the asset management ratios. Evaluate the results.
Composition of Noncurrent Assets
The following schedule summarizes the noncurrent assets reported in the 1997 balance sheets of Wendy’s and Reebok:
|
Current assets (total) |
$ 382 |
$1,465 |
|
Noncurrent assets |
||
|
Property, plant, and equipment (at cost) |
1,803 |
354 |
|
Less: Accumulated depreciation |
(538) |
(197) |
|
Net |
1,265 |
157 |
|
Other long term receivables |
179 |
— |
|
Goodwill, net |
51 |
68 |
|
Other noncurrent assets |
65 |
66 |
|
Total noncurrent assets |
1,560 |
291 |
|
Total assets |
$1,942 |
$1,756 |
Required
a. Identify the major differences between these two firms in their composition of noncurrent assets. Try to explain these differences based on the types of products that each company produces.
b. Based solely on the information provided here, which company appears to have the older assets? Calculate the asset management ratios. Evaluate the results.
Composition of Shareholders’ Equity
The following schedule summarizes the components of shareholders’ equity reported in the 1997 balance sheets of Wendy’s and Reebok:
|
Wendy’s |
Reebok |
|
|
(Dollars in millions) |
||
|
Shareholders’ equity: |
||
|
Invested capital |
$1 |
$365 |
|
Retained earnings |
1,145 |
839 |
|
Other |
(639) |
(20) |
|
Total shareholders’ equity |
$ 507 |
$1,184 |
Required
a. Which firm has obtained the larger amount of capital through sale of stock to investors?
b. Which firm has obtained the larger amount of capital through reinvestment of earnings?
c. Explain why Wendy’s reports a much higher balance in retained earnings at the end of 1997.
d. Suppose that Reebok earns $250 and pays dividends of $95 during 1998. What would be the firm’s ending balance in retained earnings? (All dollars are in millions.)
Evaluating the Composition of Shareholders’ Equity
The following schedule summarizes the components of shareholders’ equity reported in the year end balance sheets of Nuclear Holdings and Hellmorgen:
|
Nuclear Holdings |
Hellmorgen |
|
|
(Dollars in millions) |
||
|
Shareholders’ equity: |
||
|
Paid in capital |
$13,905 |
$50,322 |
|
Retained earnings (deficit) |
29,132 |
(30,166) |
|
Other |
— |
(12,571) |
|
Total shareholders’ equity |
$43,037 |
$ 7,585 |
Required
a. Which firm has obtained the larger amount of capital through sale of stock to investors?
b. Which firm has obtained the larger amount of capital through reinvestment of earnings?
c. Explain why Hellmorgen reports a negative (deficit) balance in retained earnings at the end of the year.
d. Suppose Nuclear Holdings earns $15,000 and pays dividends of $9,000 during the next year. What would be the firm’s ending balance in retained earnings? (All dollars are in thousands.)
Using Vertical Analysis Data to Reconstruct a Balance Sheet
A vertical analysis was previously conducted, using the Edgar Elgar, Inc. balance sheet. The results are shown below.
|
Assets |
Liabilities and Owners’ Equity |
|||
|
Current assets |
Current liabilities |
|||
|
Cash |
5.3% |
Accounts payable |
22.6% |
|
|
Accounts receivable |
12.6 |
Notes payable |
16.3 |
|
|
Inventories |
39.5 |
Accrued expenses |
3.6 |
|
|
Prepaid expenses |
1.6% |
Taxes payable |
1.3% |
|
|
Total current assets |
59.0% |
Total current liabilities |
43.8% |
|
|
Property, plant, and equipment |
Noncurrent liabilities |
|||
|
Land |
14.1% |
Bonds payable |
17.1 |
|
|
Mortgage payable |
7.3% |
|||
|
Buildings and equipment |
42.0 |
Total noncurrent liabilities |
24.4% |
|
|
Less: Accumulated |
Total liabilities |
68.2% |
||
|
depreciation |
15.1% |
Shareholders’ equity |
||
|
Net book value |
26.9% |
Invested capital |
29.3% |
|
|
Total property, plant, and |
Retained earnings |
2.5% |
||
|
equipment assets |
41.0% |
Total shareholders’ equity |
31.8% |
|
|
Total assets |
100.0% |
Total liabilities and |
||
|
shareholders’ equity |
100.0% |
|||
Required
Using these results, reconstruct Edgar Elgar’s balance sheet, assuming that the total assets are known to be $4M.
Reconstructing a Balance Sheet
Van Gogh’s fragmentary balance sheet is shown below.
|
Assets |
Liabilities and Owners’ Equity |
||
|
Current assets |
Current liabilities |
||
|
Cash |
$ 210,000 |
Accounts payable |
$ 250,000 |
|
Accounts receivable |
466,000 |
Notes payable |
? |
|
Inventories |
812,000 |
Accrued expenses |
275,000 |
|
Prepaid expenses |
? |
Total current liabilities |
? |
|
Total current assets |
1,520,000 |
Noncurrent liabilities |
|
|
Property, plant, and |
Bonds payable |
350,000 |
|
|
equipment |
Mortgage payable |
250,000 |
|
|
Land |
? |
Total noncurrent |
|
|
Buildings and |
865,000 |
liabilities |
? |
|
equipment |
Total liabilities |
1,600,000 |
|
|
Less: Accumulated |
Shareholders’ equity |
||
|
depreciation |
313,0000 |
Invested capital |
500,000 |
|
Net book value |
552,000 |
Retained earnings |
? |
|
Total property, plant, |
Total shareholders’ |
||
|
and equipment |
938,000 |
equity |
858,000 |
|
Total assets |
? |
Total liabilities and |
|
|
shareholders’ |
|||
|
equity |
? |
||
Required
Determine the missing figures and reconstruct the balance sheet in its proper format.
Identifying Transactions from Worksheet Entries
The following worksheet entries have been retrieved from a corrupt data file.
|
Cash |
Inventory |
Buildings |
Trucks |
Accts. Pay |
Mortgage |
Inv. Cap. |
|
|
a. |
1,000 |
1,000 |
|||||
|
b. |
2,000 |
2,000 |
|||||
|
c. |
8,000 |
8,000 |
|||||
|
d. |
4,000 |
4,000 |
|||||
|
e. |
22,000 |
22,000 |
|||||
|
f. |
4,000 |
4,000 |
|||||
|
g. |
8,000 |
6,000 |
2,000 |
||||
|
h. |
18,000 |
18,000 |
|||||
|
i. |
6,000 |
6,000 |
|||||
|
h. |
12,000 |
12,000 |
Required:
Identify the transactions that correspond to each entry in the worksheet. Discuss the underlying business reasons associated with each transaction.
Interpreting Financial Statements
XYZ Corporation’s 2000 and 1999 balance sheets are summarized below (dollars in millions):
|
Current Assets |
12 31 00 |
12 31 99 |
|
Cash and temporary investments |
$ 535 |
$ 499 |
|
Receivables, less allowances |
706 |
668 |
|
Materials and supplies |
211 |
199 |
|
Prepaid and other |
213 |
215 |
|
Total current assets |
1,665 |
1,581 |
|
Property, plant, and equipment |
||
|
Net property, plant and equipment |
11,044 |
10,778 |
|
Investment in affiliates and other companies |
302 |
268 |
|
Other assets and deferred charges |
713 |
793 |
|
Total assets |
$13,724 |
$13,420 |
|
Current Liabilities |
||
|
Debt maturing within one year |
312 |
146 |
|
Accounts payable and other current |
||
|
liabilities |
1,992 |
1,965 |
|
Short term debt |
201 |
164 |
|
Total current liabilities |
2,505 |
2,275 |
|
Long term debt |
2,618 |
3,133 |
|
Deferred income taxes |
2,570 |
2,341 |
|
Long term liabilities and deferred gains |
2,300 |
2,491 |
|
Shareowners’ equity |
||
|
Common stock and retained earnings |
3,731 |
3,180 |
|
Total liabilities and shareowners’ equity |
$13,724 |
$13,420 |
Required
a. With regard to XYZ’s balance sheet, identify any unusual or unfamiliar terms. Describe your understanding of each new or unfamiliar term.
b. Calculate the current and quick ratios for each year and analyze XYZ’s liquidity.
c. What recommendations would you suggest to XYZ about its liquidity?
d. Calculate and evaluate XYZ’s debt to asset ratios for each year. Calculate any other appropriate asset management or debt management ratios.
e. How has XYZ changed its financial management strategies? Do these changes seem to be appropriate? Why?
Interpreting Financial Statements: Ratio Analysis
Consider Sigma Designs’ balance sheets for 1993 and 1992 (dollars in thousands). Sigma Designs is a high tech software development company specializing in imaging and multimedia computer applications.
|
Assets |
1993 |
1992 |
|
Current Assets |
||
|
Cash and equivalents |
$ 5,086 |
$ 9,283 |
|
Marketable securities |
14,326 |
19,537 |
|
Accounts receivable, net of allowances |
6,471 |
2,987 |
|
Inventories |
12,275 |
10,066 |
|
Prepaid expenses and other |
435 |
753 |
|
Income taxes receivable |
1,582 |
2,428 |
|
Total current assets |
40,175 |
45,054 |
|
Equipment, net |
1,626 |
1,607 |
|
Other assets |
2,466 |
2,388 |
|
Total assets |
$44,267 |
$49,049 |
|
Liabilities and Shareholders’ Equity |
||
|
Current liabilities |
||
|
Accounts payable |
$ 4,933 |
$ 1,826 |
|
Accrued salary and benefits |
809 |
594 |
|
Other accrued liabilities |
737 |
1,119 |
|
Total current liabilities |
6,479 |
3,539 |
|
Other long term liabilities |
— |
755 |
|
Total liabilities |
6,479 |
4,294 |
|
Shareholders’ Equity |
||
|
Common stock |
19,287 |
19,088 |
|
Retained earnings |
18,501 |
25,667 |
|
Shareholders’ equity |
37,788 |
44,755 |
|
Total liabilities and shareholders’ equity |
$44,267 |
$49,049 |
Required
a. Conduct a vertical analysis of Sigma Designs’ balance sheets. What conclusions can be drawn from these ratios?
b. Calculate the current and quick ratios for each year.
c. Does it seem that Sigma Designs has any liquidity problems? What major changes in current assets and current liabilities may contribute to these liquidity comparisons?
d. Calculate and evaluate the debt to assets ratio for Sigma Designs.
e. Concentrate on the equity section of the balance sheet. What may have caused the changes shown, as in the decrease in Retained Earnings and in Shareholders’ Equity?
f. Examine the Income Taxes Receivable section. How can a company have income taxes that are receivable and not payable? How are such receivables usually satisfied? Will the government just issue a refund check to Sigma Designs?
Evaluate the following conventions in preparing a statement of cash flows:
a. Dividend payments to shareholders are reported as a financing activity, and interest payments on debt are reported as an operating activity.
b. Purchases of inventory are operating activities, but purchases of plant and equipment are investing activities.
c. Accounts payable transactions are operating activities, but most other liability transactions are treated as financing activities.
5 15 In each of the following cases, indicate whether the amount of cash inflow (or outflow) is greater or less than the related revenue (or expense):
a. A firm’s accounts receivable balance has increased during the period.
b. A firm’s salaries payable balance has increased during the period.
c. A firm’s accumulated depreciation balance has increased during the period.
d. A firm’s inventory balance has increased during the period, and the supplier accounts payable balance has also increased by a greater amount.
Effects of Transactions: Cash Versus Accrual
Consider the following transactions or events:
1. Sold merchandise on account.
2. Sold a used computer for cash.
3. Paid a supplier’s overdue account.
4. Recorded depreciation expense on a building.
5. Signed a mortgage and received cash.
6. Purchased inventory on account.
7. Gave a refund after hearing a customer’s complaint.
8. Received payment from a customer.
9. Sold shares of IBM stock for cash and recorded a gain.
10. Recorded a loss after discarding obsolete inventory.
11. Received a personal cash gift from a friend.
12. Made an “even” swap of a used truck for another truck.
13. Paid quarterly unemployment taxes.
14. Received a tax refund after sending duplicate checks to the IRS.
Required
a. Show the effects on cash of each transaction or event, using the format below:
|
Effects on Cash |
||
|
Increase |
Decrease |
No Change |
b.Show the effects of each transaction or event on net income, using a similar format:
|
Effects on Net Income |
||
|
Increase |
Decrease |
No Change |
Effects of Transactions on Cash Flows
The following transactions were reported by Colorado Company in its statement of cash flows. Indicate whether each transaction is an operating (O), a financing (F), an investing (I), or a transaction that has no effect on cash flows (X) activity.
1. Office supplies were purchased and paid for.
2. Land was sold for cash.
3. Employees’ salaries and wages were paid.
4. The firm made a short term loan to its president.
5. A short term bank loan was obtained.
6. Interest on this loan was paid.
7. The maturity date on this loan was extended.
8. Depreciation for the year was recorded.
9. The firm’s tax return was filed with a request for a refund.
10. The firm paid its unemployment taxes to the state.
This financial information is available for Hoyle Corporation.
|
2010 |
2009 |
|
|
Average common stockholders’ equity |
$1,800,000 |
$1,900,000 |
|
Dividends paid to common stockholders |
90,000 |
70,000 |
|
Dividends paid to preferred stockholders |
20,000 |
20,000 |
|
Net income |
290,000 |
248,000 |
|
Market price of common stock |
20 |
25 |
The weighted average number of shares of common stock outstanding was 180,000 for 2009 and 150,000 for 2010.
Instructions
Calculate earnings per share and return on common stockholders’ equity for 2010 and 2009.
On January 1, 2010, Carolinas Corporation had the following stockholders’ equity accounts.
|
Common Stock (no par value, 90,000 shares issued and outstanding) |
$1,400,000 |
|
Retained Earnings |
500,000 |
During the year, the following transactions occurred.
|
Feb. 1 |
Declared a $1 cash dividend per share to stockholders of record on February 15, payable March 1. |
|
Mar. 1 |
Paid the dividend declared in February. |
|
Apr. 1 |
Announced a 4 for 1 stock split. Prior to the split, the market price per share was $36. |
|
July 1 |
Declared a 5% stock dividend to stockholders of record on July 15, distributable July 31.On July 1, the market price of the stock was $13 per share. |
|
31 |
Issued the shares for the stock dividend. |
|
Dec. 1 |
Declared a $0.50 per share dividend to stockholders of record on December 15, payable January 5, 2011. |
|
31 |
Determined that net income for the year was $350,000. |
Instructions
Prepare the stockholders’ equity section of the balance sheet at: (a) March 31, (b) June 30,(c) September 30, and (d) December 31, 2010.
On January 1, 2010,Yadier Inc. had the following stockholders’ equity account balances.
|
Common Stock, no par value (500,000 shares issued) |
$1,500,000 |
|
Common Stock Dividends Distributable |
200,000 |
|
Retained Earnings |
600,000 |
During 2010, the following transactions and events occurred.
1. Issued 50,000 shares of common stock as a result of a 10% stock dividend declared on
December 15, 2009.
2. Issued 30,000 shares of common stock for cash at $6 per share.
3. Corrected an error that had understated the net income for 2008 by $70,000.
4. Declared and paid a cash dividend of $80,000.
5. Earned net income of $300,000.
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.
The stockholders’ equity accounts of Holmes Inc., at January 1, 2010, are as follows.
|
Preferred Stock, $100 par, 7% |
$600,000 |
|
Common Stock, $10 par |
900,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
100,000 |
|
Paid in Capital in Excess of Par Value—Common Stock |
200,000 |
|
Retained Earnings |
500,000 |
There were no dividends in arrears on preferred stock. During 2010, the company had the following transactions and events.
|
July 1 |
Declared a $0.50 cash dividend on common stock. |
|
Aug. 1 |
Discovered a $72,000 overstatement of 2009 depreciation. Ignore income taxes. |
|
Sept. 1 |
Paid the cash dividend declared on July 1. |
|
Dec. 1 |
Declared a 10% stock dividend on common stock when the market value of the stock was $16 per share. |
|
15 |
Declared a 7% cash dividend on preferred stock payable January 31, 2011. |
|
31 |
Determined that net income for the year was $350,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts and post to the stockholders’ equity accounts.
(Note: Open additional stockholders’ equity accounts as needed.)
(c) Prepare a retained earnings statement for the year.
(d) Prepare a stockholders’ equity section at December 31, 2010.
The ledger of Yakima Corporation at December 31, 2010, after the books have been closed, contains the following stockholders’ equity accounts.
|
Preferred Stock (10,000 shares issued) |
$1,000,000 |
|
Common Stock (400,000 shares issued) |
2,000,000 |
|
Paid in Capital in Excess of Par Value—Preferred |
200,000 |
|
Paid in Capital in Excess of Stated Value—Common |
1,180,000 |
|
Common Stock Dividends Distributable |
200,000 |
|
Retained Earnings |
2,560,000 |
A review of the accounting records reveals the following.
1. No errors have been made in recording 2010 transactions or in preparing the closing entry for net income.
2. Preferred stock is 6%, $100 par value, noncumulative, and callable at $125. Since January 1,
2009, 10,000 shares have been outstanding; 20,000 shares are authorized.
3. Common stock is no par with a stated value of $5 per share; 600,000 shares are authorized.
4. The January 1 balance in Retained Earnings was $2,450,000.
5. On October 1, 100,000 shares of common stock were sold for cash at $8 per share.
6. A cash dividend of $500,000 was declared and properly allocated to preferred and common stock on November 1. No dividends were paid to preferred stockholders in 2009.
7. On December 31, a 10% common stock dividend was declared out of retained earnings on common stock when the market price per share was $9.
8. Net income for the year was $970,000.
9. On December 31, 2010, the directors authorized disclosure of a $100,000 restriction of retained earnings for plant expansion. (Use Note A.)
Instructions
(a) Reproduce the Retained Earnings account (T account) for 2010.
(b) Prepare a retained earnings statement for 2010.
(c) Prepare a stockholders’ equity section at December 31, 2010.
(d) Compute the allocation of the cash dividend to preferred and common stock.
(e) Compute the earnings per share of common stock using 325,000 as the weighted average shares outstanding for the year.
On January 1, 2010, Carne Corporation had the following stockholders’ equity accounts.
|
Common Stock (no par value, 100,000 shares issued and outstanding) |
$2,800,000 |
|
Retained Earnings |
1,000,000 |
During the year, the following transactions occurred.
|
Feb. 1 |
Declared a $1 cash dividend per share to stockholders of record on February 15, payable March 1. |
|
Mar. 1 |
Paid the dividend declared in February. |
|
Apr. 1 |
Announced a 4 for 1 stock split. Prior to the split, the market price per share was $36. |
|
July 1 |
Declared a 5% stock dividend to stockholders of record on July 15, distributable July 31. On July 1, the market price of the stock was $13 per share. |
|
31 |
Issued the shares for the stock dividend. |
|
Dec. 1 |
Declared a $0.50 per share dividend to stockholders of record on December 15, payable January 5, 2011. |
|
31 |
Determined that net income for the year was $700,000. |
Instructions
Prepare the stockholders’ equity section of the balance sheet at: (a) March 31, (b) June 30, (c) September 30, and (d) December 31, 2010.
On January 1, 2010, Garcia Inc. had the following shareholders’ equity balances.
|
Common Stock, no par value (1,000,000 shares issued) |
$3,000,000 |
|
Common Stock Dividends Distributable |
400,000 |
|
Retained Earnings |
1,200,000 |
During 2010, the following transactions and events occurred.
1. Issued 100,000 shares of common stock as a result of a 10% stock dividend declared on
December 15, 2009.
2. Issued 60,000 shares of common stock for cash at $5 per share.
3. Corrected an error that had understated the net income for 2008 by $140,000.
4. Declared and paid a cash dividend of $300,000.
5. Earned net income of $600,000.
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.
The stockholders’ equity accounts of Fernandez, Inc., at January 1, 2010, are as follows.
|
Preferred Stock, no par, 4,000 shares issued |
$400,000 |
|
Common Stock, no par, 140,000 shares issued |
700,000 |
|
Retained Earnings |
500,000 |
During 2010, the company had the following transactions and events.
|
July 1 |
Declared a $0.50 cash dividend on common stock. |
|
Aug. 1 |
Discovered a $72,000 overstatement of 2009 depreciation expense. (Ignore income taxes.) |
|
Sept. 1 |
Paid the cash dividend declared on July 1. |
|
Dec. 1 |
Declared a 10% stock dividend on common stock when the market value of the stock was $12 per share. |
|
15 |
Declared a $9 per share cash dividend on preferred stock, payable January 31, 2011. |
|
31 |
Determined that net income for the year was $320,000. |
Instructions
With the class divided into groups, answer the following questions.
(a) Prepare a retained earnings statement for the year. There are no preferred dividends in arrears.
(b) Discuss why the overstatement of 2009 depreciation expense is not treated as an adjustment of the current year’s income.
(c) Discuss the reasons why a company might decide to issue a stock dividend rather than a cash dividend.
Garcia Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months, however, have been a cash drain on the company, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day to day operating needs, the president,Tom Henson, has decided that a stock dividend instead of a cash dividend should be declared. He tells Garcia’s financial vice president, Andrea Lane, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”
Instructions
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about Henson’s intentions or actions?
(c) What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why?
Snyder Software Inc. has successfully developed a new spreadsheet program.To produce and market the program, the company needed $2 million of additional financing. On January 1, 2011, Snyder borrowed money as follows.
1. Snyder issued $500,000, 11%, 10 year convertible bonds. The bonds sold at face value and pay semiannual interest on January 1 and July 1. Each $1,000 bond is convertible into 30 shares of Snyder’s $20 par value common stock.
2. Snyder issued $1 million, 10%, 10 year bonds at face value. Interest is payable semiannually on January 1 and July 1.
3. Snyder also issued a $500,000, 12%, 15 year mortgage note payable. The terms provide for semiannual installment payments of $36,324 on June 30 and December 31.
Instructions
1. For the convertible bonds, prepare journal entries for:
(a) The issuance of the bonds on January 1, 2011.
(b) Interest expense on July 1 and December 31, 2011.
(c) The payment of interest on January 1, 2012.
(d) The conversion of all bonds into common stock on January 1, 2012, when the market value of the common stock was $67 per share.
2. For the 10 year, 10% bonds:
(a) Journalize the issuance of the bonds on January 1, 2011.
(b) Prepare the journal entries for interest expense in 2011. Assume no accrual of interest on July 1.
(c) Prepare the entry for the redemption of the bonds at 101 on January 1, 2014, after paying the interest due on this date.
3. For the mortgage note payable:
(a) Prepare the entry for the issuance of the note on January 1, 2011.
(b) Prepare a payment schedule for the first four installment payments.
(c) Indicate the current and noncurrent amounts for the mortgage note payable at December 31, 2011.
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
|
Lease A |
Lease B |
|
a. Operating lease |
Capital lease |
|
b. Operating lease |
Operating lease |
|
c. Capital lease |
Operating lease |
|
d. Capital lease |
Capital lease |
Sorting Balance Sheet Information
The account balances given below are shown on the balance sheet of a corporation.
|
Marketable securities |
$ 20,000 |
|
Invested capital |
200,000 |
|
Buildings and equipment |
400,000 |
|
Accounts receivable |
80,000 |
|
Prepaid rent |
17,000 |
|
Bonds payable |
230,000 |
|
Inventories |
85,000 |
|
Taxes payable |
30,000 |
|
Accounts payable |
16,000 |
|
Advance payments from customers |
3,000 |
|
Interest payable |
9,000 |
|
Land |
19,000 |
|
Retained earnings |
133,000 |
Required
Arrange three columns corresponding to the balance sheet equation:
ASSETS = LIABILITIES +OWNERS’ EQUITY
Finding Missing Balance Sheet Information
The following balances appear in the records of May Co. at the end of its first month of operations:
|
Cash |
$12,000 |
Land |
$100,000 |
|
Equipment |
6,500 |
Accounts payable |
3,400 |
|
Supplies |
2,700 |
Accounts receivable |
7,500 |
|
Taxes payable |
2,110 |
Truck |
22,500 |
|
Mortgage |
80,000 |
Owners’ equity |
? |
Required
a. Determine the missing item by preparing a balance sheet.
b. Identify two other typical accounts that might appear on May’s balance sheet but are not shown here.;
Preparing a Balance Sheet with Missing or Inconsistent Information
The following information is provided for Tom’s Track Shoe Store at the end of 2000:
|
Accounts receivable |
$ 6,500 |
|
Accounts payable |
106,500 |
|
Bonds payable |
180,000 |
|
Invested capital |
300,000 |
|
Cash |
14,500 |
|
Equipment |
88,000 |
|
Income taxes payable |
11,500 |
|
Inventory |
497,500 |
|
Other long term assets |
110,000 |
|
Notes payable |
50,000 |
|
Prepaid rent |
54,000 |
|
Retained earnings, 12 31 99 |
94,500 |
|
Retained earnings, 12 31 00 |
? |
Required
a. Prepare a balance sheet, and make it balance. Discuss the steps necessary to balance it along with any necessary assumptions.
b. What conclusions can be drawn regarding this business? Why?
Preparing and Evaluating Balance Sheet Information
The following data are available:
|
Cash |
$100,000 |
|
Accounts payable |
55,000 |
|
Retained earnings |
? |
|
Invested capital |
150,000 |
|
Buildings and equipment |
600,000 |
|
Mortgage payable |
400,000 |
Required
a. Prepare a balance sheet.
b. Would most businesses, in reality, have such a limited balance sheet? Why not?
c. What other accounts might usually be found in a balance sheet for a service company? Discuss the differences between balance sheets for companies providing services versus those manufacturing products. Why are these differences essential? How are they useful to the financial analyst?
Effects of Transactions on Balance Sheet
The following transactions are given:
a. A corporation issued common stock for cash.
b. The firm bought land with part of the cash.
c. The firm issued common stock in exchange for a building and equipment.
d. The firm purchased inventory on account.
e. The firm collected cash from a customer for merchandise sold several months previously.
f. A corporation issued some of its common stock in exchange for a parcel of land.
g. The firm paid cash to its creditors.
h. The firm sells obsolete equipment at its net book value.
Required:
Indicate the effects of the transactions on the balance sheet equation:
ASSETS = LIABILITIES+ OWNERS’ EQUITY
Transaction Analysis
The following transactions are given:
a. A corporation issued capital stock in exchange for land valued at $300,000.
b. A corporation issued capital stock for $200,000.
c. The corporation hired a chief executive officer (CEO) at $180,000 per year.
d. The firm agreed to rent office space at $2,000 per month.
e. The firm paid the first month’s rent.
f. The firm paid the last month’s rent as a security deposit.
g. The firm bought supplies for $2,500.
h. The firm ordered office equipment costing $15,000 (assume no obligation has occurred yet).
i. The CEO finished her first month’s work.
j. The firm paid the CEO her first month’s salary.
k. The firm received the office equipment and the bill. The equipment is expected to last five years.
l. The firm recorded depreciation for the first month, using straight line depreciation.
Required:
Analyze the transactions, using the balance sheet equation, and prepare a simple balance sheet:
ASSETS = LIABILITIES + OWNERS’ EQUITY
Transaction Analysis
The following transactions are given:
a. A law firm was formed by 10 lawyers, each investing $200,000.
b. The firm charged its clients $1,200,000 for services rendered in May. Integration
c. The law firm collected $900,000 from its clients.
d. One disgruntled client sued the law firm for malfeasance in the amount of $5,000,000. The firm believes the lawsuit is frivolous.
e. The law firm paid its lawyers $333,000 for work performed in May.
f. The law firm ordered and received supplies costing $33,000 on account.
However, 10% of the order was damaged, so the firm returned the damaged supplies for credit.
g. The law firm paid $155,000 for rent and other administrative costs.
h. The law firm settled the suit by paying the disgruntled client $10,000.
Required:
Analyze the transactions, using the balance sheet equation, and prepare a simple balance sheet:
ASSETS =LIABILITIES + OWNERS’ EQUITY
Calculating Liquidity Ratios
The following schedule summarizes the composition of current assets and current liabilities reported in the year end balance sheets from Triangle Air Lines and Nazareth Steel:
|
Triangle Air Lines |
Nazareth Steel |
|
|
(Dollars in millions) |
||
|
Total current assets |
$2,821,920 |
$1,591,100 |
|
Inventories included in |
||
|
current assets |
0 |
852,500 |
|
Prepayment and supplies |
||
|
included in current assets |
586,751 |
6,500 |
|
Total current liabilities |
2,972,831 |
914,200 |
Required
a. Based on the information given here, determine each firm’s current ratio and quick ratio at the end of the year.
b. Which firm do you consider to be in better financial condition? Explain.
Liquidity Analysis: Current Ratio and Quick Ratio
Wesfarmers Limited is a major diversified Australian public company with interests in fertilizer and chemicals manufacturing, gas processing and distribution, coal mining and production, building materials, hardware and forest products, rural and country services, transport, country supermarkets, and insurance. The following schedule summarizes the composition of current assets and current liabilities reported on its June 30, 1996 and June 30, 1997 balance sheets:
|
Wesfarmers Limited |
||
|
1997 |
1996 |
|
|
(Dollars in millions) |
||
|
Total current assets |
$761 |
$688 |
|
Inventories included in |
||
|
current assets |
368 |
1 |
|
Receivables |
||
|
included in current assets |
362 |
685 |
|
Total current liabilities |
822 |
155 |
Required
a. Based on the information given here, determine the firm’s current ratio and quick ratio at the end of 1997 and 1996.
b. In which year do you consider the firm to be in better financial condition? Explain
The stockholders’ equity accounts of Neer Corporation on January 1, 2010, were as follows.
|
Preferred Stock (8%, $50 par, cumulative, 10,000 shares authorized) |
$ 400,000 |
|
Common Stock ($1 stated value, 2,000,000 shares authorized) |
1,000,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
100,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,450,000 |
|
Retained Earnings |
1,816,000 |
|
Treasury Stock—Common (10,000 shares) |
50,000 |
During 2010, the corporation had the following transactions and events pertaining to its stockholders’ equity.
|
Feb. 1 |
Issued 25,000 shares of common stock for $120,000. |
|
Apr. 14 |
Sold 6,000 shares of treasury stock—common for $33,000. |
|
Sept. 3 |
Issued 5,000 shares of common stock for a patent valued at $35,000. |
|
Nov. 10 |
Purchased 1,000 shares of common stock for the treasury at a cost of $6,000. |
|
Dec. 31 |
Determined that net income for the year was $452,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J5 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2010, including the disclosure of the preferred dividends in arrears.
Vargas Corporation is authorized to issue 20,000 shares of $50 par value, 10% preferred stock and 125,000 shares of $3 par value common stock. On January 1, 2010, the ledger contained the following stockholders’ equity balances.
|
Preferred Stock (10,000 shares) |
$500,000 |
|
Paid in Capital in Excess of Par Value—Preferred |
75,000 |
|
Common Stock (70,000 shares) |
210,000 |
|
Paid in Capital in Excess of Par Value—Common |
700,000 |
|
Retained Earnings |
300,000 |
During 2010, the following transactions occurred.
|
Feb. 1 |
Issued 2,000 shares of preferred stock for land having a fair market value of $125,000. |
|
Mar. 1 |
Issued 1,000 shares of preferred stock for cash at $65 per share. |
|
July 1 |
Issued 16,000 shares of common stock for cash at $7 per share. |
|
Sept. 1 |
Issued 400 shares of preferred stock for a patent. The asking price of the patent was $30,000. Market values were preferred stock $70 and patent indeterminable. |
|
Dec. 1 |
Issued 8,000 shares of common stock for cash at $7.50 per share. |
|
Dec. 31 |
Net income for the year was $260,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2010.
The following stockholders’ equity accounts arranged alphabetically are in the ledger of Tyner Corporation at December 31, 2010.
|
Common Stock ($5 stated value) |
$2,000,000 |
|
Paid in Capital from Treasury Stock |
10,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,600,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
679,000 |
|
Preferred Stock (8%, $50 par, noncumulative) |
800,000 |
|
Retained Earnings |
1,748,000 |
|
Treasury Stock—Common (10,000 shares) |
130,000 |
Instructions
Prepare a stockholder equity section at December 31, 2010.
Palmaro Corporation has been authorized to issue 20,000 shares of $100 par value, 10%, noncumulative preferred stock and 1,000,000 shares of no par common stock. The corporation assigned a $2.50 stated value to the common stock. At December 31, 2010, the ledger contained the following balances pertaining to stockholders’ equity.
|
Preferred Stock |
$120,000 |
|
Paid in Capital in Excess of Par Value—Preferred |
20,000 |
|
Common Stock |
1,000,000 |
|
Paid in Capital in Excess of Stated Value—Common |
1,800,000 |
|
Treasury Stock—Common (1,000 shares) |
13,000 |
|
Paid in Capital from Treasury Stock |
500 |
|
Retained Earnings |
82,000 |
The preferred stock was issued for land having a fair market value of $140,000.All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $13. In December, 500 shares of treasury stock were sold for $14 per share. No dividends were declared in 2010.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2010.
Donelson Corporation was organized on January 1, 2010. It is authorized to issue 20,000 shares of 6%, $40 par value preferred stock, and 500,000 shares of no par common stock with a stated value of $2 per share.The following stock transactions were completed during the first year.
|
Jan. 10 |
Issued 100,000 shares of common stock for cash at $3 per share. |
|
Mar. 1 |
Issued 10,000 shares of preferred stock for cash at $55 per share. |
|
Apr. 1 |
Issued 25,000 shares of common stock for land.The asking price of the land was $90,000.The company’s estimate of fair market value of the land was $75,000. |
|
May 1 |
Issued 75,000 shares of common stock for cash at $4 per share. |
|
Aug. 1 |
Issued 10,000 shares of common stock to attorneys in payment of their bill for $50,000 for services provided in helping the company organize. |
|
Sept. 1 |
Issued 5,000 shares of common stock for cash at $6 per share. |
|
Nov. 1 |
Issued 2,000 shares of preferred stock for cash at $60 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare the paid in capital section of stockholders’ equity at December 31, 2010.
Gentry Corporation had the following stockholders’ equity accounts on January 1, 2010: Common Stock ($1 par) $400,000, Paid in Capital in Excess of Par Value $500,000, and Retained Earnings $100,000. In 2010, the company had the following treasury stock transactions.
|
Mar. 1 |
Purchased 5,000 shares at $7 per share. |
|
June 1 |
Sold 1,000 shares at $10 per share. |
|
Sept. 1 |
Sold 2,000 shares at $9 per share. |
|
Dec. 1 |
Sold 1,000 shares at $5 per share. |
Gentry Corporation uses the cost method of accounting for treasury stock. In 2010, the company reported net income of $80,000.
Instructions
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2010, for net income.
(b) Open accounts for (1) Paid in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J12 as the posting reference.
(c) Prepare the stockholders’ equity section for Gentry Corporation at December 31, 2010.
The stockholders’ equity accounts of Miles Corporation on January 1, 2010, were as follows.
|
Preferred Stock (10%, $100 par, noncumulative, 5,000 shares authorized) |
$ 300,000 |
|
Common Stock ($5 stated value, 300,000 shares authorized) |
1,000,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
20,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
425,000 |
|
Retained Earnings |
488,000 |
|
Treasury Stock—Common (5,000 shares) |
40,000 |
During 2010, the corporation had the following transactions and events pertaining to its stockholders’ equity.
|
Feb. 1 |
Issued 3,000 shares of common stock for $25,500. |
|
Mar. 20 |
Purchased 1,500 additional shares of common treasury stock at $8 per share. |
|
June 14 |
Sold 4,000 shares of treasury stock—common for $36,000. |
|
Sept. 3 |
Issued 2,000 shares of common stock for a patent valued at $19,000. |
|
Dec. 31 |
Determined that net income for the year was $350,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2010.
Molina Corporation is authorized to issue 10,000 shares of $40 par value, 10% preferred stock and 200,000 shares of $5 par value common stock. On January 1, 2010, the ledger contained the following stockholders’ equity balances.
|
Preferred Stock (5,000 shares) |
$200,000 |
|
Paid in Capital in Excess of Par Value—Preferred |
60,000 |
|
Common Stock (70,000 shares) |
350,000 |
|
Paid in Capital in Excess of Par Value—Common |
700,000 |
|
Retained Earnings |
300,000 |
During 2010, the following transactions occurred.
|
Feb. 1 |
Issued 1,000 shares of preferred stock for land having a fair market value of $65,000. |
|
Mar. 1 |
Issued 2,000 shares of preferred stock for cash at $60 per share. |
|
July 1 |
Issued 20,000 shares of common stock for cash at $5.80 per share. |
|
Sept. 1 |
Issued 800 shares of preferred stock for a patent. The asking price of the patent was $60,000. Market values were preferred stock $65 and patent, indeterminable. |
|
Dec. 1 |
Issued 10,000 shares of common stock for cash at $6 per share. |
|
Dec. 31 |
Net income for the year was $210,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2010.
|
Common Stock ($10 stated value) |
$1,200,000 |
|
Paid in Capital from Treasury Stock |
6,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
690,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
288,400 |
|
Preferred Stock (8%, $100 par, noncumulative) |
300,000 |
|
Retained Earnings |
826,000 |
|
Treasury Stock—Common (8,000 shares) |
88,000 |
Instructions
Prepare a stockholders’ equity section at December 31, 2010.
Steven Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2010, the ledger contained the following balances pertaining to stockholders’ equity.
|
Preferred Stock |
$ 240,000 |
|
Paid in Capital in Excess of Par Value—Preferred |
56,000 |
|
Common Stock |
2,000,000 |
|
Paid in Capital in Excess of Stated Value—Common |
4,400,000 |
|
Treasury Stock—Common (1,000 shares) |
22,000 |
|
Paid in Capital from Treasury Stock |
3,000 |
|
Retained Earnings |
560,000 |
The preferred stock was issued for land having a fair market value of $296,000.All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2010.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2010.
The stockholders’ meeting for Strauder Corporation has been in progress for some time. The chief financial officer for Strauder is presently reviewing the company’s financial statements and is explaining the items that comprise the stockholders’ equity section of the balance sheet for the current year. The stockholders’ equity section of Strauder Corporation at December 31, 2010, is as follows.
|
STRAUDER CORPORATION |
||
|
Paid in capital |
||
|
Capital stock |
||
|
Preferred stock, authorized 1,000,000 shares |
||
|
cumulative, $100 par value, $8 per share, 6,000 |
||
|
shares issued and outstanding |
$ 600,000 |
|
|
Common stock, authorized 5,000,000 shares, $1 par |
||
|
value, 3,000,000 shares issued, and 2,700,000 |
||
|
outstanding |
3,000,000 |
|
|
Total capital stock |
3,600,000 |
|
|
Additional paid in capital |
||
|
In excess of par value—preferred stock |
$ 50,000 |
|
|
In excess of par value—common stock |
25,000,000 |
|
|
Total additional paid in capital |
25,050,000 |
|
|
Total paid in capital |
28,650,000 |
|
|
Retained earnings |
900,000 |
|
|
Total paid in capital and retained earnings |
29,550,000 |
|
|
Less: Common treasury stock (300,000 shares) |
9,300,000 |
|
|
Total stockholders’ equity |
$20,250,000 |
|
At the meeting, stockholders have raised a number of questions regarding the stockholders’ equity section.
Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Strauder Corporation.
(a) “What does the cumulative provision related to the preferred stock mean?”
(b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?”
(c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders’ equity. Why is treasury stock not reported as an asset if it has a debit balance?
The R&D division of Marco Chemical Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern states of the United States.The president of Marco is anxious to get the chemical on the market to boost Marco’s profits. He believes his job is in jeopardy because of decreasing sales and profits. Marco has an opportunity to sell this chemical in Central American countries, where the laws are much more relaxed than in the United States.
The director of Marco’s R&D division strongly recommends further testing in the laboratory for side effects of this chemical on other insects, birds, animals, plants, and even humans.
He cautions the president, “We could be sued from all sides if the chemical has tragic sideeffects that we didn’t even test for in the labs.” The president answers, “We can’t wait an additional year for your lab tests.We can avoid losses from such lawsuits by establishing a separate wholly owned corporation to shield Marco Corp. from such lawsuits. We can’t lose any more than our investment in the new corporation, and we’ll invest just the patent covering this chemical.
We’ll reap the benefits if the chemical works and is safe, and avoid the losses from lawsuits if it’s a disaster.” The following week Marco creates a new wholly owned corporation called Brecht Inc., sells the chemical patent to it for $10, and watches the spraying begin.
Instructions
(a) Who are the stakeholders in this situation?
(b) Are the president’s motives and actions ethical?
(c) Can Marco shield itself against losses of Brecht Inc.?
A high percentage of Americans own stock in corporations. As a shareholder in a corporation, you will receive an annual report. One of the goals of this course is for you to learn how to navigate your way around an annual report.
Instructions
Use the annual report provided in Appendix A to answer the following questions.
(a) What CPA firm performed the audit of PepsiCo financial statements?
(b) What was the amount of PepsiCo’s earnings per share in 2007?
(c) What was net revenue in 2007?
(d) How many shares of treasury stock did the company have at the end of 2007?
(e) How much cash did PepsiCo spend on capital expenditures in 2007?
(f) Over what life does the company depreciate its buildings?
(g) What was the total amount of dividends paid in 2007?
On January 1, 2010, Sienna Corporation purchased 2,000 shares of treasury stock. Other information regarding Siena Corporation is provided below.
|
2009 |
2010 |
|
|
Net income |
$110,000 |
$110,000 |
|
Dividends on preferred stock |
$10,000 |
$10,000 |
|
Dividends on common stock |
$2,000 |
$1,600 |
|
Weighted average number of shares outstanding |
10,000 |
8,000* |
|
Common stockholders’ equity, beginning of year |
$500,000 |
$400,000* |
|
Common stockholders’ equity, end of year |
$500,000 |
$400,000 |
Adjusted for purchase of treasury stock.
Compute (a) return on common stockholders’ equity for each year and (b) earnings per share for each year, and (c) discuss the changes in each.
On January 1, 2010, Hayslett Corporation had the following stockholders’ equity accounts.
|
Common Stock ($10 par value, 260,000 shares issued and |
|
|
outstanding) |
$2,600,000 |
|
Paid in Capital in Excess of Par Value |
1,500,000 |
|
Retained Earnings |
3,200,000 |
During the year, the following transactions occurred.
|
April 1 |
Declared a $1.50 cash dividend per share to stockholders of record on April 15, payable May 1. |
|
May 1 |
Paid the dividend declared in April. |
|
June 1 |
Announced a 2 for 1 stock split. Prior to the split, the market price per share was $24. |
|
Aug. 1 |
Declared a 10% stock dividend to stockholders of record on August 15, distributable August 31. On August 1, the market price of the stock was $10 per share. |
|
31 |
Issued the shares for the stock dividend. |
|
Dec. 1 |
Declared a $1.50 per share dividend to stockholders of record on December 15, payable January 5, 2009. |
|
31 |
Determined that net income for the year was $600,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Prepare a stockholders’ equity section at December 31.
On January 1, 2010, Tuscany Corporation purchased 1,000 shares of treasury stock. Other information regarding Tuscany Corporation is provided below.
|
2009 |
2010 |
|
|
Net income |
$200,000 |
$210,000 |
|
Dividends on preferred stock |
$30,000 |
$30,000 |
|
Dividends on common stock |
$20,000 |
$25,000 |
|
Weighted average number of common shares outstanding |
10,000 |
9,000 |
|
Common stockholders’ equity beginning of year |
$600,000 |
$750,000 |
|
Common stockholders’ equity end of year |
$750,000 |
$830,000 |
Compute (a) return on common stockholders’ equity for each year and (b) earnings per share for each year, and (c) discuss the changes in each.
On January 1, Molini Corporation had 95,000 shares of no par common stock issued and outstanding.The stock has a stated value of $5 per share. During the year, the following occurred.
|
Apr. 1 |
Issued 25,000 additional shares of common stock for $17 per share. |
|
June 15 |
Declared a cash dividend of $1 per share to stockholders of record on June 30. |
|
July 10 |
Paid the $1 cash dividend. |
|
Dec. 1 |
Issued 2,000 additional shares of common stock for $19 per share. |
|
15 |
Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of record on December 31. |
Instructions
(a) Prepare the entries, if any, on each of the three dividend dates.
(b) How are dividends and dividends payable reported in the financial statements prepared at December 31?
On October 1, Kosko Corporation’s stockholders’ equity is as follows.
|
Common stock, $5 par value |
$400,000 |
|
Paid in capital in excess of par value |
25,000 |
|
Retained earnings |
155,000 |
|
Total stockholders’ equity |
$580,000 |
On October 1, Kosko declares and distributes a 10% stock dividend when the market value of the stock is $15 per share.
Instructions
(a) Compute the par value per share (1) before the stock dividend and (2) after the stock dividend.
(b) Indicate the balances in the three stockholders’ equity accounts after the stock dividend shares have been distributed.
E14 6 During 2010, Jester Corporation had the following transactions and events.
1. Declared a cash dividend.
2. Issued par value common stock for cash at par value.
3. Completed a 2 for 1 stock split in which $10 par value stock was changed to $5 par value stock.
4. Declared a small stock dividend when the market value was higher than par value.
5. Made a prior period adjustment for overstatement of net income.
6. Issued the shares of common stock required by the stock dividend declaration in item no. 4 above.
7. Paid the cash dividend in item no. 1 above.
8. Issued par value common stock for cash above par value.
Instructions
Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity.
Present your answer in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect. Item no. 1 is given as an example.
|
Paid in Capital |
|||
|
Capital |
Retained |
||
|
Item |
Stock |
Additional |
Earnings |
|
1 |
NE |
NE |
D |
Before preparing financial statements for the current year, the chief accountant for Reynolds Company discovered the following errors in the accounts.
1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest Expense $50,000 and a credit to Cash $50,000.
2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the market value per share was $18.The only entry made was: Retained Earnings (Dr.) $10,000 and Dividend Payable (Cr.) $10,000.The shares have not been issued.
3. A 4 for 1 stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.
Instructions
Prepare the correcting entries at December 31.
The following accounts appear in the ledger of Ortiz Inc. after the books are closed at December 31.
|
Common Stock, no par, $1 stated value, 400,000 shares authorized; |
|
|
300,000 shares issued |
$ 300,000 |
|
Common Stock Dividends Distributable |
30,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,200,000 |
|
Preferred Stock, $5 par value, 8%, 40,000 shares authorized; |
|
|
30,000 shares issued |
150,000 |
|
Retained Earnings |
800,000 |
|
Treasury Stock (10,000 common shares) |
74,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
344,000 |
Instructions
Prepare the stockholders’ equity section at December 31, assuming retained earnings is restricted for plant expansion in the amount of $100,000.
The following financial information is available for Cheney Corporation.
|
2010 |
2009 |
|
|
Average common stockholders’ equity |
$1,200,000 |
$900,000 |
|
Dividends paid to common stockholders |
50,000 |
30,000 |
|
Dividends paid to preferred stockholders |
20,000 |
20,000 |
|
Net income |
290,000 |
200,000 |
|
Market price of common stock |
20 |
15 |
The weighted average number of shares of common stock outstanding was 80,000 for 2009 and 100,000 for 2010.
Instructions
Calculate earnings per share and return on common stockholders’ equity for 2010 and 2009.
On December 31,the capital balances and income ratios in FAD Company are as follows.
|
Partner |
Capital Balance |
Income Ratio |
|
J. Fagan |
$60,000 |
50% |
|
P.Ames |
40,000 |
30% |
|
K. Durham |
26,000 |
20% |
Instructions
(a) Journalize the withdrawal of Durham under each of the following assumptions.
(1) Each of the continuing partners agrees to pay $18,000 in cash from personal funds to purchase Durham’s ownership equity. Each receives 50% of Durham’s equity.
(2) Ames agrees to purchase Durham’s ownership interest for $25,000 cash.
The post closing trial balances of two proprietorships on January 1, 2010, are presented below.
|
John Company |
Calvin Company |
|||
|
Cash |
$ 10,000 |
$ 8,000 |
||
|
Accounts receivable |
18,000 |
30,000 |
||
|
Allowance for doubtful accounts |
$ 2,000 |
$ 3,000 |
||
|
Merchandise inventory |
35,000 |
20,000 |
||
|
Equipment |
60,000 |
35,000 |
||
|
Accumulated depreciation—equipment |
28,000 |
15,000 |
||
|
Notes payable |
20,000 |
|||
|
Accounts payable |
30,000 |
40,000 |
||
|
John, Capital |
43,000 |
|||
|
Calvin, Capital |
35,000 |
|||
|
$123,000 |
$123,000 |
$93,000 |
$93,000 |
|
John and Calvin decide to form a partnership, John Calvin Company, with the following agreed upon valuations for noncash assets.
|
John Company |
Calvin Company |
|
|
Accounts receivable |
$18,000 |
$30,000 |
|
Allowance for doubtful accounts |
2,500 |
4,000 |
|
Merchandise inventory |
38,000 |
25,000 |
|
Equipment |
40,000 |
22,000 |
All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that John will invest an additional $3,500 in cash, and Calvin will invest an additional $16,000 in cash.
Instructions
(a) Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership.
(b) Journalize the additional cash investment by each partner.
(c) Prepare a classified balance sheet for the partnership on January 1, 2010.
At the end of its first year of operations on December 31, 2010, KAT Company’s accounts show the following.
|
Partner |
Drawings |
Capital |
|
H. Krik |
$15,000 |
$40,000 |
|
N. Andres |
10,000 |
25,000 |
|
S.Thabo |
5,000 |
15,000 |
The capital balance represents each partner’s initial capital investment.Therefore, net income or net loss for 2010 has not been closed to the partners’ capital accounts.
Instructions
(a) Journalize the entry to record the division of net income for 2010 under each of the independent assumptions shown on the.
(1) Net income is $50,000. Income is shared 5:3:2.
(2) Net income is $40,000. Kirk and Andres are given salary allowances of $15,000 and $10,000, respectively.The remainder is shared equally.
(3) Net income is $37,000. Each partner is allowed interest of 10% on beginning capital balances. Kirk is given an $20,000 salary allowance.The remainder is shared equally.
(b) Prepare a schedule showing the division of net income under assumption (3) above.
(c) Prepare a partners’ capital statement for the year under assumption (3) above.
The partners in Apache Company decide to liquidate the firm when the balance sheet shows the following.
|
APACHE COMPANY |
|||
|
Assets |
Liabilities and Owners’ Equity |
||
|
Cash |
$30,000) |
Notes payable |
$20,000 |
|
Accounts receivable |
25,000) |
Accounts payable |
30,000 |
|
Allowance for doubtful accounts |
(2,000) |
Wages payable |
2,500 |
|
Merchandise inventory |
35,000) |
Scottie, Capital |
28,000 |
|
Equipment |
20,000) |
Spock, Capital |
13,650 |
|
Accumulated depreciation—equipment |
(8,000) |
Kirk, Capital |
5,850 |
|
Total |
$100,000) |
Total |
$100,000 |
The partners share income and loss 5:3:2. During the process of liquidation, the transactions below were completed in the following sequence.
1. A total of $57,000 was received from converting noncash assets into cash.
2. Gain or loss on relization was allocated to partners.
3. Liabilities were paid in full.
4. Cash was paid to the partners with credit balances.
Instructions
(a) Prepare a schedule of cash payments.
(b) Prepare the entries to record the transactions.
(c) Post to the cash and capital accounts.
At April 30, partners’ capital balances in BAB Company are: Barney $30,000. Andy $16,000, and Bea $15,000.The income sharing ratios are 5:3:2, respectively. On May 1, the BABE Company is formed by admitting Ellen to the firm as a partner.
Instructions
(a) Journalize the admission of Ellen under each of the following independent assumptions.
(1) Ellen purchases 50% of Bea’s ownership interest by paying Bea $6,000 in cash.
(2) Ellen purchases 50% of Andy’s ownership interest by paying Andy $10,000 in cash.
(3) Ellen invests $29,000 cash in the partnership for a 40% ownership interest that includes a bonus to the new partner.
(4) Ellen invests $24,000 in the partnership for a 20% ownership interest, and bonuses are given to the old partners.
(b) Andy’s capital balance is $24,000 after admitting Ellen to the partnership by investment. If Andy’s ownership interest is 24% of total partnership capital, what were (1) Ellen’s cash investment and (2) the total bonus to the old partners?
On December 31, the capital balances and income ratios in Canasta Company are as follows.
|
Partner |
Capital Balance |
Income Ratio |
|
A. Heart |
$100,000 |
60% |
|
L. Club |
51,000 |
30 |
|
B. Spade |
25,000 |
10 |
Instructions
(a) Journalize the withdrawal of Spade under each of the following independent assumptions.
(1) Each of the remaining partners agrees to pay $15,000 in cash from personal funds to purchase Spade’s ownership equity. Each receives 50% of Spade’s equity.
(2) Club agrees to purchase Spade’s ownership interest for $22,000 in cash.
(3) From partnership assets, Spade is paid $34,000, which includes a bonus to the retiring partner.
(4) Spade is paid $19,000 from partnership assets. Bonuses to the remaining partners are recognized.
(b) If Club’s capital balance after Spade’s withdrawal is $55,000, what were (1) the total bonus to the remaining partners and (2) the cash paid by the partnership to Spade?
Richard Powers and Jane Keckley, two professionals in the finance area, have worked for Eberhart Leasing for a number of years. Eberhart Leasing is a company that leases high tech medical equipment to hospitals. Richard and Jane have decided that, with their financial expertise, they might start their own company to provide consulting services to individuals interested in leasing equipment. One form of organization they are considering is a partnership.
If they start a partnership, each individual plans to contribute $50,000 in cash. In addition, Richard has a used IBM computer that originally cost $3,700, which he intends to invest in the partnership. The computer has a present market value of $1,500.
Although both Richard and Jane are financial wizards, they do not know a great deal about how a partnership operates. As a result, they have come to you for advice.
Instructions
With the class divided into groups, answer the following.
(a) What are the major disadvantages of starting a partnership?
(b) What type of document is needed for a partnership, and what should this document contain?
(c) Both Richard and Jane plan to work full time in the new partnership. They believe that net income or net loss should be shared equally. However, they are wondering how they can provide compensation to Richard Powers for his additional investment of the computer. What would you tell them?
(d) Richard is not sure how the computer equipment should be reported on his tax return. What would you tell him?
(e) As indicated above, Richard and Jane have worked together for a number of years.
Richard’s skills complement Jane’s and vice versa. If one of them dies, it will be very difficult for the other to maintain the business, not to mention the difficulty of paying the deceased partner’s estate for his or her partnership interest. What would you advise them to do?
Elizabeth and Laurie operate a beauty salon as partners who share profits and losses equally. The success of their business has exceeded their expectations; the salon is operating quite profitably. Laurie is anxious to maximize profits and schedules appointments from 8 a.m. to 6 p.m. daily, even sacrificing some lunch hours to accommodate regular customers. Elizabeth schedules her appointments from 9 a.m. to 5 p.m. and takes long lunch hours. Elizabeth regularly makes significantly larger withdrawals of cash than Laurie does, but, she says, “Laurie, you needn’t worry, I never make a withdrawal without you knowing about it, so it is properly recorded in my drawing account and charged against my capital at the end of the year.” Elizabeth’s withdrawals to date are double Laurie’s.
Instructions
(a) Who are the stakeholders in this situation?
(b) Identify the problems with Elizabeth’s actions and discuss the ethical considerations of her actions.
(c) How might the partnership agreement be revised to accommodate the differences in Elizabeth’s and Laurie’s work and withdrawal habits?
The Rolman Corporation is authorized to issue 1,000,000 shares of $5 par value common stock. In its first year, the company has the following stock transactions.
|
Jan. 10 |
Issued 400,000 shares of stock at $8 per share. |
|
July 1 |
Issued 100,000 shares of stock for land.The land had an asking price of $900,000.The stock is currently selling on a national exchange at $8.25 per share. |
|
Sept. 1 |
Purchased 10,000 shares of common stock for the treasury at $9 per share. |
|
Dec. 1 |
Sold 4,000 shares of the treasury stock at $10 per share. |
Instructions
(a) Journalize the transactions.
(b) Prepare the stockholders’ equity section assuming the company had retained earnings of $200,000 at December 31.
Jeff Lynne has prepared the following list of statements about corporations.
1. A corporation is an entity separate and distinct from its owners.
2. As a legal entity, a corporation has most of the rights and privileges of a person.
3. Most of the largest U.S. corporations are privately held corporations.
4. Corporations may buy, own, and sell property; borrow money; enter into legally binding contracts; and sue and be sued.
5. The net income of a corporation is not taxed as a separate entity.
6. Creditors have a legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts.
7. The transfer of stock from one owner to another requires the approval of either the corporation or other stockholders.
8. The board of directors of a corporation legally owns the corporation.
9. The chief accounting officer of a corporation is the controller.
10. Corporations are subject to less state and federal regulations than partnerships or proprietorships.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Jeff Lynne has studied the information you gave him in that exercise and has come to you with more statements about corporations.
1. Corporation management is both an advantage and a disadvantage of a corporation compared to a proprietorship or a partnership.
2. Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.
3. When a corporation is formed, organization costs are recorded as an asset.
4. Each share of common stock gives the stockholder the ownership rights to vote at stockholder meetings, share in corporate earnings, keep the same percentage ownership when new shares of stock are issued, and share in assets upon liquidation.
5. The number of issued shares is always greater than or equal to the number of authorized shares.
6. A journal entry is required for the authorization of capital stock.
7. Publicly held corporations usually issue stock directly to investors.
8. The trading of capital stock on a securities exchange involves the transfer of already issued shares from an existing stockholder to another investor.
9. The market value of common stock is usually the same as its par value.
10. Retained earnings is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Leone Co. had the following transactions during the current period.
|
Mar. 2 |
Issued 5,000 shares of $5 par value common stock to attorneys in payment of a bill for $30,000 for services provided in helping the company to incorporate. |
|
June 12 |
Issued 60,000 shares of $5 par value common stock for cash of $375,000. |
|
July 11 |
Issued 1,000 shares of $100 par value preferred stock for cash at $110 per share. |
|
Nov. 28 |
Purchased 2,000 shares of treasury stock for $80,000. |
Instructions
Journalize the transactions.
As an auditor for the CPA firm of Bunge and Dodd, you encounter the following situations in auditing different clients.
1. Desi Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $20 par value common stock. The owners’ asking price for the land was $120,000, and the fair market value of the land was $115,000.
2. Lucille Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 20,000 shares of its $10 par value stock. At the time of the exchange, the land was advertised for sale at $250,000.The stock was selling at $12 per share.
Instructions
Prepare the journal entries for each of the situations above.
Roemer Corporation recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review his textbooks on the topic of corporation accounting. During the first month, the accountant made the following entries for the corporation’s capital stock.
|
May 2 |
Cash |
130,000 |
|
|
Capital Stock |
130,000 |
||
|
(Issued 10,000 shares of $10 par value |
|||
|
common stock at $13 per share) |
|||
|
10 |
Cash |
600,000 |
|
|
Capital Stock |
|||
|
(Issued 10,000 shares of $50 par value |
130,000 |
||
|
preferred stock at $60 per share) |
|||
|
15 |
Capital Stock |
15,000 |
|
|
Cash |
15,000 |
||
|
(Purchased 1,000 shares of common stock |
|||
|
for the treasury at $15 per share) |
|||
|
31 |
Cash |
8,000 |
|
|
Capital Stock |
5,000 |
||
|
Gain on Sale of Stock |
3,000 |
||
|
(Sold 500 shares of treasury stock at $16 |
|||
|
per share) |
Instructions
On the basis of the explanation for each entry, prepare the entry that should have been made for the capital stock transactions.
The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Freeze Corporation at December 31, 2010.
|
Common Stock ($5 stated value) |
$1,700,000 |
|
Paid in Capital in Excess of Par Value—Preferred Stock |
280,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
900,000 |
|
Preferred Stock (8%, $100 par, noncumulative) |
500,000 |
|
Retained Earnings |
1,134,000 |
|
Treasury Stock—Common (10,000 shares) |
120,000 |
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.
The stockholders’ equity section of Jarvis Corporation at December 31 is as follows.
|
JARVIS CORPORATION |
|
|
Paid in capital |
|
|
Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued |
|
|
and outstanding |
$ 300,000 |
|
Common stock, no par, 750,000 shares authorized, 600,000 shares issued |
1,200,000 |
|
Total paid in capital |
1,500,000 |
|
Retained earnings |
1,858,000 |
|
Total paid in capital and retained earnings |
3,358,000 |
|
Less: Treasury stock (10,000 common shares) |
(64,000) |
|
Total stockholders’ equity |
$3,294,000 |
Instructions
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
In a recent year, the stockholders’ equity section of Aluminum Company of America (Alcoa) showed the following (in alphabetical order): additional paid in capital $6,101, common stock $925, preferred stock $55, retained earnings $7,428, and treasury stock 2,828.All dollar data are in millions.
The preferred stock has 557,740 shares authorized, with a par value of $100 and an annual $3.75 per share cumulative dividend preference. At December 31, 557,649 shares of preferred are issued and 546,024 shares are outstanding. There are 1.8 billion shares of $1 par value common stock authorized, of which 924.6 million are issued and 844.8 million are outstanding at December 31.
Instructions
Prepare the stockholders’ equity section, including disclosure of all relevant data.
The ledger of Mathis Corporation contains the following accounts: Common Stock, Preferred Stock, Treasury Stock—Common, Paid in Capital in Excess of Par Value—Preferred Stock, Paid in Capital in Excess of Stated Value—Common Stock, Paid in Capital from Treasury Stock, and Retained Earnings.
Instructions
Classify each account using the following table headings.
|
Paid in Capital |
||||
|
Capital |
Retained |
|||
|
Account |
Stock |
Additional |
Earnings |
Other |
Franco Corporation was organized on January 1, 2010. It is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.
|
Jan. 10 |
Issued 80,000 shares of common stock for cash at $4 per share. |
|
Mar. 1 |
Issued 5,000 shares of preferred stock for cash at $105 per share. |
|
Apr. 1 |
Issued 24,000 shares of common stock for land. The asking price of the land was $90,000.The fair market value of the land was $85,000. |
|
May 1 |
Issued 80,000 shares of common stock for cash at $4.50 per share. |
|
Aug. 1 |
Issued 10,000 shares of common stock to attorneys in payment of their bill of $30,000 for services provided in helping the company organize. |
|
Sept. 1 |
Issued 10,000 shares of common stock for cash at $5 per share. |
|
Nov. 1 |
Issued 1,000 shares of preferred stock for cash at $109 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J5 as the posting reference.)
(c) Prepare the paid in capital section of stockholders’ equity at December 31, 2010.
Jacobsen Corporation had the following stockholders’ equity accounts on January 1, 2010: Common Stock ($5 par) $500,000, Paid in Capital in Excess of Par Value $200,000, and Retained Earnings $100,000. In 2010, the company had the following treasury stock transactions.
|
Mar. 1 |
Purchased 5,000 shares at $9 per share. |
|
June 1 |
Sold 1,000 shares at $12 per share. |
|
Sept. 1 |
Sold 2,000 shares at $10 per share. |
|
Dec. 1 |
Sold 1,000 shares at $6 per share. |
Jacobsen Corporation uses the cost method of accounting for treasury stock. In 2010, the company reported net income of $30,000.
Instructions
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2010, for net income.
(b) Open accounts for (1) Paid in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J10 as the posting reference.
(c) Prepare the stockholders’ equity section for Jacobsen Corporation at December 31, 2010.
A the beginning of the current season on April 1, the ledger of Five Pines Pro Shop showed Cash $3,000; Merchandise Inventory $4,000; and Common Stock $7,000. These transactions occurred during April 2010.
Apr. 5 Purchased golf bags, clubs, and balls on account from Mickelson Co. $1,200, FOB shipping point, terms 2/10, n/60.
7 Paid freight on Mickelson Co. purchases $50.
9 Received credit from Mickelson Co. for merchandise returned $100.
10 Sold merchandise on account to members $600, terms n/30.
12 Purchased golf shoes, sweaters, and other accessories on account from Dagger Sportswear $340, terms 1/10, n/30.
14 Paid Mickelson Co. in full.
17 Received credit from Dagger Sportswear for merchandise returned $40.
20 Made sales on account to members $600, terms n/30.
21 Paid Dagger Sportswear in full.
27 Granted credit to members for clothing that had flaws $35.
30 Received payments on account from members $650. The chart of accounts for the pro shop includes Cash; Accounts Receivable, Merchandise Inventory; Accounts Payable; Common Stock; Sales; Sales Returns and Allowances; Purchases; Purchase Returns and Allowances; Purchase Discounts, and Freight in.
Instructions
(a) Journalize the April transactions using a periodic inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2011.
(d) Prepare an income statement through gross profit, assuming merchandise inventory on hand at April 30 is $4,726.
No financial decision maker should ever rely solely on the financial information reported in the annual report to make decisions. It is important to keep abreast of financial news. This activity demonstrates how to search for financial news on the Web. Address: biz.yahoo.com/i, or go to www.wiley.com/college/weygandt Steps
1. Type in either PepsiCo or Coca Cola.
2. Choose News.
3. Select an article that sounds interesting to you.
Instructions
(a) What was the source of the article? (For example, Reuters, Businesswire, PR Newswire.)
(b) Pretend that you are a personal financial planner and that one of your clients owns stock in the company. Write a brief memo to your client, summarizing the article and explaining the implications of the article for their investment.
Three years ago, Carrie Dungy and her brother in law Luke Barber opened FedCo Department Store. For the first two years, business was good, but the following condensed income results for 2010 were disappointing.
|
FEDCO DEPARTMENT STORE Income Statement For the Year Ended December 31, 2010 |
||
|
Net sales |
$700,000 |
|
|
Cost of goods sold |
553,000 |
|
|
Gross profit |
147,000 |
|
|
Operating expenses |
||
|
Selling expenses |
$100,000 |
|
|
Administrative expenses |
20,000 |
120,000 |
|
Net income |
$ 27,000 |
|
Carrie believes the problem lies in the relatively low gross profit rate (gross profit divided by net sales) of 21%. Luke believes the problem is that operating expenses are too high. Carrie thinks the gross profit rate can be improved by making both of the following changes. She does not anticipate that these changes will have any effect on operating expenses.
1. Increase average selling prices by 17%.This increase is expected to lower sales volume so that total sales will increase only 6%.
2. Buy merchandise in larger quantities and take all purchase discounts. These changes are expected to increase the gross profit rate by 3 percentage points. Luke thinks expenses can be cut by making both of the following changes. He feels that these changes will not have any effect on net sales.
1. Cut 2010 sales salaries of $60,000 in half and give sales personnel a commission of 2% of net sales.
2. Reduce store deliveries to one day per week rather than twice a week; this change will reduce 2010 delivery expenses of $30,000 by 40%. Carrie and Luke come to you for help in deciding the best way to improve net income.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a condensed income statement for 2011 assuming (1) Carrie’s changes are implemented and (2) Luke’s ideas are adopted.
(b) What is your recommendation to Carrie and Luke?
(c) Prepare a condensed income statement for 2011 assuming both sets of proposed changes are made.
The following situation is in chronological order.
1. Flutie decides to buy a surfboard.
2. He calls Surfing USA Co. to inquire about their surfboards.
3. Two days later he requests Surfing USA Co. to make him a surfboard.
4. Three days later, Surfing USA Co. sends him a purchase order to fill out.
5. He sends back the purchase order.
6. Surfing USA Co. receives the completed purchase order.
7. Surfing USA Co. completes the surfboard.
8. Flutie picks up the surfboard.
9. Surfing USA Co. bills Flutie.
10. Surfing USA Co. receives payment from Flutie.
Instructions In a memo to the president of Surfing USA Co., answer the following.
(a) When should Surfing USA Co. record the sale?
(b) Suppose that with his purchase order, Flutie is required to make a down payment.Would that change your answer?
Laura McAntee was just hired as the assistant treasurer of Dorchester Stores. The company is a specialty chain store with nine retail stores concentrated in one metropolitan area. Among other things, the payment of all invoices is centralized in one of the departments Laura will manage. Her primary responsibility is to maintain the company’s high credit rating by paying all bills when due and to take advantage of all cash discounts. Danny Feeney, the former assistant treasurer who has been promoted to treasurer, is training Laura in her new duties. He instructs Laura that she is to continue the practice of preparing
all checks “net of discount” and dating the checks the last day of the discount period. “But,” Danny continues, “we always hold the checks at least 4 days beyond the discount period before mailing them. That way we get another 4 days of interest on our money. Most of our creditors need our business and don’t complain.And, if they scream about our missing the discount period, we blame it on the mail room or the post office. We’ve only lost one discount out of every hundred we take that way. I think everybody does it. By the way, welcome to our team!”
Instructions
(a) What are the ethical considerations in this case?
(b) Who are the stakeholders that are harmed or benefitted in this situation?
(c) Should Laura continue the practice started by Danny? Does she have any choice?
There are many situations in business where it is difficult to determine the proper period in which to record revenue. Suppose that after graduation with a degree in finance, you take a job as a manager at a consumer electronics store called Atlantis Electronics. The company has expanded rapidly in order to compete with Best Buy. Atlantis has also begun selling gift cards for its electronic products.The cards are available in any dollar amount, and allow the holder of the card to purchase an item for up to 2 years from the time the card is purchased. If the card is not used during that 2 years, it expires.
Instructions
Answer the following questions: At what point should the revenue from the gift cards be recognized? Should the revenue be recognized at the time the card is sold, or should it be recorded when the card is redeemed? Explain the reasoning to support your conclusion.
Complete each sentence with the appropriate term.
1. Systems that integrate most of the business information functions are referred to as _____________.
2. Financial data about individual items of importance to a company are recorded in _____________.
3. Summary accounts that maintain totals for all subsidiary accounts of a particular type are called _____________.
4. A _____________ is an accounting record of each (control) account and the balance of each such account.
5. The use of computer networks, such as the Internet, to provide for customer sales is referred to as _____________.
6. A computer program that permits data to be recorded and processed is one kind of _____________.
7. A _____________ is a set of computerized files in which company data are stored in a form that facilitates retrieval and updating of the data.
8. A _____________ controls database functions to ensure data are recorded properly and can be accessed only by those authorized to record, update, or retrieve the data.
9. The interaction of a company and its suppliers is known as_____________.
10. A _____________ is a set of related files that are linked so the files can be updated and information can be retrieved from the files efficiently.
Match each term with the appropriate definition.
a. application software
b. control accounts
c. database management system
d. database
e. E business
f. enterprise resource planning (ERP) systems
g. general ledger
h. relational database
i. subsidiary accounts
j. supply chain management
1. A set of computerized files in which company data are stored in a form that facilitates retrieval and updating of the data
2. A set of related files that are linked so the files can be updated and information can be retrieved from the files efficiently
3. An accounting record of each (control) account and the balance of each such account
4. Controls database functions to ensure data are recorded properly and can be accessed only by those authorized to record, update, or retrieve the data
5. Includes the computer programs that permit data to be recorded and processed
6. Type of account in which financial data about individual items of importance to a company are recorded
7. Summary accounts that maintain totals for all subsidiary accounts of a particular type
8. Systems that integrate most of the business information functions
9. The interaction of a company and its suppliers
10. Term that refers to the use of computer networks, such as the Internet, to provide for customer sales
Howard Company sells woolen goods and maintains its accounting system using a relational database. To prepare information about sales transactions, the company uses the following tables in its database. The fields that appear in each table are in brackets following the table.
• customers [customer ID, name, shipping address, phone number]
• sales orders [sales order number, customer ID, order date, product ID, order quantity]
• inventory [product ID, product name, quantity on hand, unit price]
• customer shipments [sales order number, shipping date]
• sales invoice [sales invoice number, sales order number, invoice date]
• cash receipts [sales invoice number, cash receipt amount, receipt date]
For each of the following events, identify the tables that would be needed to record the event.
1. Received an order from Jones & Sons for 12 blankets on November 3.
2. Shipped the blankets to Jones & Sons and billed the customer on November 6.
3. Received cash from Jones & Sons for the purchase on December 5.
Computer Networks You have just been hired as an account representative for a large inancial institution. Your supervisor shows you to your desk that contains a workstation. She explains that the workstation is part of a wide area network connecting all of the bank’s offices through a clientserver system. All of the bank’s data are maintained in databases on servers and are accessed through a database management system. To obtain account information, you must log on to the network and use the bank’s account service program on your workstation to retrieve data from the database.
Required What is the supervisor talking about? Explain the function of each part of the bank’s computer network. Why do most companies use computer networks for their accounting systems?
Bovine Company, a dairy, began operations in January 2004. It issued 100,000 shares of $1 par value common stock. The stock sold for $5 per share. The company’s charter permits it to issue 250,000 shares of stock. In 2005, the company repurchased 8,000 shares of stock at a cost of $7 per share. Bovine’s net income and cash dividend payments have been as follows:
|
Year |
Net Income |
Dividends |
|
2004 |
($60,000) |
$0 |
|
2005 |
140,000 |
50,000 |
|
2006 |
220,000 |
100,000 |
Required Draft the stockholders’ equity section of Bovine’s balance sheet for the years ended December 31, 2006 and 2005.
Required Use information from the accompanying financial statements of Lesco, Inc. to answer the following questions:
A. What was Lesco’s total contributed capital for 2004?
B. How many shares of common stock were outstanding at the end of 2004?
C. What dollar amount of treasury stock did Lesco hold at the end of 2004?
D. What dollar amount of stock did Lesco repurchase during 2004? How much did it issue?
E. What was the amount of dividends paid in 2004?
F. How much net cash flow came from financing activities associated with stockholders’ equity during 2004, excluding the effect of net income? What were the sources of that cash flow?
G. How much net income came from financing activities associated with stockholders’ equity during the current year?
|
Lesco, Inc. |
|
|
Stockholders’ Equity |
|
|
Common stock, $0.10 par value, |
|
|
1,000,000 shares authorized, |
|
|
700,000 shares issued |
$70,000 |
|
Paid in capital in excess of par value |
810,240 |
|
Retained earnings |
356,812 |
|
Treasury stock (30,000 shares at cost) |
42,296 |
|
Total stockholders’ equity |
$1,194,756 |
|
Lesco, Inc. |
|||||
|
Common |
Paid In |
Retained |
Treasury |
Total |
|
|
31 Dec 03 |
$65,000 |
$747,196 |
$306,201 |
$33,941 |
$1,084,456 |
|
Net income |
92,611 |
92,611 |
|||
|
Dividends |
42,000 |
42,000 |
|||
|
Stock purchased |
8,355 |
8,355 |
|||
|
Stock issued |
5,000 |
63,044 |
68,044 |
||
|
31 Dec 04 |
$70,000 |
$810,240 |
$356,812 |
$42,296 |
$1,194,756 |
The Calvert Corporation plans to expand its operations. To obtain the necessary cash, $5 million of 6%, five year bonds were issued on January 1, 2005. The bonds pay interest annually.
a. Assume Calvert Corporation issued the bonds to yield an effective rate of 7%. Calculate the selling price of the bonds and describe the interest rate conditions under which the bonds were sold.
b. Now, assume Calvert Corporation issued the bonds to yield an effective rate of 5%.
Calculate the selling price of the bonds and describe the conditions under which the bonds were sold.
c. Without setting up an amortization table, calculate the total amount of interest expense over the life of the bonds in parts a and b above. How do they compare? Why?
Below are listed key word clues and descriptions. The key word clues relate to different features or aspects of debt. Match the letter of each clue to the most relevant description provided. Use each clue only once.
|
a. bond |
e. contingency |
i. liability |
m. secured |
|
b. callable |
f. current |
j. maturity value |
n. serial |
|
c. capital |
g. debenture |
k. nominal |
|
|
d. commitment |
h. effective |
l. operating |
1. Obligations expected to be discharged within one year
2. A financial instrument that promises to repay principal at maturity and to pay interest each period until then
3. An obligation to convey resources to another entity in the future
4. Debt that is backed up by specific assets of the debtor company
5. A bond backed only by the general creditworthiness of the issuing company
6. Bonds that can be reacquired at the request of the issuing company
7. The amount repaid to bondholders at the end of the bond’s life
8. The rate of interest that determines the amount of cash sent to bondholders each period
9. Bonds that mature a portion at a time over the life of the issue
10. The actual (or real) rate of return earned by the holder of a bond
11. A type of lease that results in a liability being reported on the balance sheet
12. An existing condition that may result in an economic effect later
13. A promise to engage in some future economic activity
14. A lease that does not result in a liability being reported on the balance sheet
The Quick Chips Company, a fast food manufacturer, began operations in January 2004. It issued 500,000 shares of $0.25 par value common stock. The stock sold for $20 per share. There are 600,000 shares authorized. In 2006, the company repurchased 15,000 shares of stock at a cost of $26 per share. Quick Chips’s net income and cash dividend payments have been as follows:
|
Year |
Net Income |
Dividends |
|
2004 |
($100,000) |
$0 |
|
2005 |
250,000 |
75,000 |
|
2006 |
400,000 |
150,000 |
Draft the stockholders’ equity section of Quick Chips’s balance sheet for the years ended December 31, 2005 and 2006.
Fast Start Corporation manufactures automobile ignitions. Selected portions of the company’s recent financial statements are given below.
|
Fast Start Corporation |
|
|
Stockholders’ equity: |
|
|
Common stock, $0.50 par value, 2,000,000 shares authorized, 1,400,000 shares issued |
$700,000 |
|
Paid In capital in excess of par value |
8,200,000 |
|
Retained earnings |
4,600,000 |
|
Treasury stock (60,000 shares at cost) |
480,000 |
|
Total stockholders’ equity |
$13,020,000 |
|
Fast Start Corporation |
|||||
|
Common |
Paid In |
Retained |
Treasury |
Total |
|
|
31 Dec 03 |
$650 |
$7,450 |
$4,035 |
($260) |
$11,875 |
|
Net income |
900 |
900 |
|||
|
Dividends |
335 |
335 |
|||
|
Stock purchased |
220 |
220 |
|||
|
Stock issued |
50 |
750 |
800 |
||
|
31 Dec 04 |
$700 |
$8,200 |
$4,600 |
$480 |
$13,020 |
a. What was Fast Start’s total contributed capital at year end?
b. How many shares of common stock were outstanding at year end?
c. What dollar amount of treasury stock did Fast Start hold at year end?
d. What dollar amount of treasury stock did Fast Start repurchase during the year? How much common stock did the company issue?
e. What was the amount of dividends paid during the year?
f. How much cash flow came from financing activities associated with shareholders’ equity during the current year, excluding the effect of net income? What were the sources of that cash flow?
g. How much net income came from financing activities associated with stockholders’ equity during the current year?
The post closing trial balances of two proprietorships on January 1, 2010, are presented below.
|
Patrick Company |
Samuelson Company |
|||
|
Cash |
$ 14,000 |
$12,000 |
||
|
Accounts receivable |
17,500 |
26,000 |
||
|
Allowance for doubtful accounts |
$ 3,000 |
$ 4,400 |
||
|
Merchandise inventory |
26,500 |
18,400 |
||
|
Equipment |
45,000 |
29,000 |
||
|
Accumulated depreciation—equipment |
24,000 |
11,000 |
||
|
Notes payable |
18,000 |
15,000 |
||
|
Accounts payable |
22,000 |
31,000 |
||
|
Patrick, Capital |
36,000 |
|||
|
Samuelson, Capital |
24,000 |
|||
|
$103,000 |
$103,000 |
$85,400 |
$85,400 |
|
Patrick and Samuelson decide to form a partnership, Pasa Company, with the following agreed upon valuations for noncash assets.
|
Patrick Company |
Samuelson Company |
|
|
Accounts receivable |
$17,500 |
$26,000 |
|
Allowance for doubtful accounts |
4,500 |
4,000 |
|
Merchandise inventory |
28,000 |
20,000 |
|
Equipment |
23,000 |
16,000 |
All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that Patrick will invest an additional $5,000 in cash, and Samuelson will invest an additional $19,000 in cash.
Instructions
(a) Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership.
(b) Journalize the additional cash investment by each partner.
(c) Prepare a classified balance sheet for the partnership on January 1, 2010.
At the end of its first year of operations on December 31, 2010, CNU Company’s accounts show the following.
|
Partner |
Drawings |
Capital |
|
Reese Caplin |
$23,000 |
$48,000 |
|
Phyllis Newell |
14,000 |
30,000 |
|
Betty Uhrich |
10,000 |
25,000 |
The capital balance represents each partner’s initial capital investment.Therefore, net income or net loss for 2010 has not been closed to the partners’ capital accounts.
Instructions
(a) Journalize the entry to record the division of net income for the year 2010 under each of the following independent assumptions.
(1) Net income is $30,000. Income is shared 6 : 3 : 1.
(2) Net income is $37,000. Caplin and Newell are given salary allowances of $15,000 and $10,000, respectively.The remainder is shared equally.
(3) Net income is $19,000. Each partner is allowed interest of 10% on beginning capital balances. Caplin is given a $12,000 salary allowance.The remainder is shared equally.
(b) Prepare a schedule showing the division of net income under assumption (3) above.
(c) Prepare a partners’ capital statement for the year under assumption (3) above.
The partners in New Yorker Company decide to liquidate the firm when the balance sheet shows the following.
|
NEW YORKER COMPANY |
|||
|
Assets |
Liabilities and Owners’ Equity |
||
|
Cash |
$ 27,500) |
Notes payable |
$ 13,500 |
|
Accounts receivable |
25,000) |
Accounts payable |
27,000 |
|
Allowance for doubtful accounts |
(1,000) |
Wages payable |
4,000 |
|
Merchandise inventory |
34,500) |
M. Mantle, Capital |
33,000 |
|
Equipment |
21,000) |
W. Mays, Capital |
21,000 |
|
Accumulated depreciation—equipment |
(5,500) |
D. Snider, Capital |
3,000 |
|
Total |
$101,500) |
Total |
$101,500 |
The partners share income and loss 5 : 3 : 2. During the process of liquidation, the following transactions were completed in the following sequence.
1. A total of $55,000 was received from converting noncash assets into cash.
2. Gain or loss on realization was allocated to partners.
3. Liabilities were paid in full.
4. D. Snider paid his capital deficiency.
5. Cash was paid to the partners with credit balances.
Instructions
(a) Prepare the entries to record the transactions.
(b) Post to the cash and capital accounts.
(c) Assume that Snider is unable to pay the capital deficiency.
(1) Prepare the entry to allocate Snider’s debit balance to Mantle and Mays.
(2) Prepare the entry to record the final distribution of cash.
At April 30, partners’ capital balances in SKG Company are: S. Seger $52,000, J. Kensington $54,000, and T. Gomez $18,000. The income sharing ratios are 5:4:1, respectively. On May 1, the SKGA Company is formed by admitting D. Atchley to the firm as a partner.
Instructions
(a) Journalize the admission of Atchley under each of the following independent assumptions.
(1) Atchley purchases 50% of Gomez’s ownership interest by paying Gomez $16,000 in cash.
(2) Atchley purchases 331/3% of Kensington’s ownership interest by paying Kensington $15,000 in cash.
(3) Atchley invests $66,000 for a 30% ownership interest, and bonuses are given to the old partners.
(4) Atchley invests $46,000 for a 30% ownership interest, which includes a bonus to the new partner.
(b) Kensington’s capital balance is $32,000 after admitting Atchley to the partnership by investment.
If Kensington’s ownership interest is 20% of total partnership capital, what were (1) Atchley’s cash investment and (2) the bonus to the new partner?
Presented below is information for Obley Company for the month of March 2011.
|
Cost of goods sold |
$212,000 |
Rent expense |
$ 32,000 |
|
Freight out |
7,000 |
Sales discounts |
8,000 |
|
Insurance expense |
12,000 |
Sales returns and allowances |
13,000 |
|
Salary expense |
58,000 |
Sales |
370,000 |
Instructions
(a) Prepare a multiple step income statement.
(b) Compute the gross profit rate.
Presented below is financial information for two different companies.
|
Nam |
Mayo |
|
|
Company |
Company |
|
|
Sales |
$90,000 |
(d) |
|
Sales returns |
(a) |
$ 5,000 |
|
Net sales |
84,000 |
100,000 |
|
Cost of goods sold |
56,000 |
(e) |
|
Gross profit |
(b) |
41,500 |
|
Operating expenses |
15,000 |
(f) |
|
Net income |
(c) |
15,000 |
Instructions
(a) Determine the missing amounts.
(b) Determine the gross profit rates. (Round to one decimal place.)
Financial information is presented below for three different companies.
|
Natural |
Mattar |
Allied |
|
|
Cosmetics |
Grocery |
Wholesalers |
|
|
Sales |
$90,000 |
$ (e) |
$144,000 |
|
Sales returns and allowances |
(a) |
5,000 |
12,000 |
|
Net sales |
81,000 |
95,000 |
(i) |
|
Cost of goods sold |
56,000 |
(f) |
(j) |
|
Gross profit |
(b) |
38,000 |
24,000 |
|
Operating expenses |
15,000 |
(g) |
18,000 |
|
Income from operations |
(c) |
(h) |
(k) |
|
Other expenses and losses |
4,000 |
7,000 |
(l) |
|
Net income |
(d) |
11,000 |
5,000 |
Instructions Determine the missing amounts.
On January 1, 2011, Rachael Ray Corporation had merchandise inventory of $50,000. At December 31, 2011, Rachael Ray had the following account balances.
|
Freight in |
$ 4,000 |
|
Purchases |
500,000 |
|
Purchase discounts |
6,000 |
|
Purchase returns and allowances |
2,000 |
|
Sales |
800,000 |
|
Sales discounts |
5,000 |
|
Sales returns and allowances |
10,000 |
At December 31, 2011, Rachael Ray determines that its ending inventory is $60,000.
Instructions
(a) Compute Rachael Ray’s 2011 gross profit.
(b) Compute Rachael Ray’s 2011 operating expenses if net income is $130,000 and there are no nonoperating activities.
This information relates to Martinez Co.
1. On April 5 purchased merchandise from D. Norlan Company for $20,000, terms 2/10, net/30, FOB shipping point.
2. On April 6 paid freight costs of $900 on merchandise purchased from D. Norlan Company.
3. On April 7 purchased equipment on account for $26,000.
4. On April 8 returned some of April 5 merchandise, which cost $2,800, to D. Norlan Company.
5. On April 15 paid the amount due to D. Norlan Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Martinez Co. using a periodic inventory system.
(b) Assume that Martinez Co. paid the balance due to D. Norlan Company on May 4 instead of April 15. Prepare the journal entry to record this payment.
Presented below are selected accounts for Carpenter Company as reported in the worksheet at the end of May 2011.
|
Accounts |
Adjusted Income Accounts Trial Balance |
Income Statement |
Balance Sheet |
|||
|
Dr. |
Cr. |
Dr |
Cr |
Dr |
Cr. |
|
|
Cash |
9,000 |
. |
. |
. |
||
|
Merchandise Inventory |
76,000 |
|||||
|
Sales |
450000 |
|||||
|
Sales Returns and Allowances |
10,000 |
|||||
|
Sales Discounts |
9,000 |
|||||
|
Cost of Goods Sold |
300,000 |
|||||
Instructions Complete the worksheet by extending amounts reported in the adjusted trial balance to the appropriate columns in the work sheet. Do not total individual columns.
The trial balance columns of the worksheet for Green Company at June 30, 2011, are as follows.
|
GREEN COMPANY Worksheet For the Month Ended June 30, 2011 |
||
|
Account Titles |
Debit |
Credit |
|
Cash |
$ 2,320 |
|
|
Accounts Receivable |
2,440 |
|
|
Merchandise Inventory |
11,640 |
|
|
Accounts Payable |
$ 1,120 |
|
|
Common Stock |
3,600 |
|
|
Sales |
42,400 |
|
|
Cost of Goods Sold |
20,560 |
|
|
Operating Expenses |
10,160 |
|
|
$47,120 |
$47,120 |
|
Other data: Operating expenses incurred on account, but not yet recorded, total $1,500.
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
Olaf Distributing Company completed the following merchandising transactions in the month of April. At the beginning of April, the ledger of Olaf showed Cash of $9,000 and Common Stock of $9,000.
Apr. 2 Purchased merchandise on account from Dakota Supply Co. $6,900, terms 1/10, n/30.
4 Sold merchandise on account $5,500, FOB destination, terms 1/10, n/30.The cost of themerchandise sold was $4,100.
5 Paid $240 freight on April 4 sale.
6 Received credit from Dakota Supply Co. for merchandise returned $500.
11 Paid Dakota Supply Co. in full, less discount.
13 Received collections in full, less discounts, from customers billed on April 4.
14 Purchased merchandise for cash $3,800.
16 Received refund from supplier for returned goods on cash purchase of April 14, $500.
18 Purchased merchandise from Skywalker Distributors $4,500, FOB shipping point, terms 2/10, n/30.
20 Paid freight on April 18 purchase $100.
23 Sold merchandise for cash $6,400.The merchandise sold had a cost of $5,120.
26 Purchased merchandise for cash $2,300.
27 Paid Skywalker Distributors in full, less discount.
29 Made refunds to cash customers for defective merchandise $90. The returned merchandise had a scrap value of $30.
30 Sold merchandise on account $3,700, terms n/30.The cost of the merchandise sold was $2,800. Olaf Company’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 311 Common Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold, and No. 644 Freight out.
Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Enter the beginning cash and common stock balances, and post the transactions. (Use J1 for the journal reference.)
(c) ~
Maine Department Store is located near the Village Shopping Mall. At the end of the company’s calendar year on December 31, 2011, the following accounts appeared in two of its trial balances.
|
Unadjusted |
Adjusted |
Unadjusted |
Adjusted |
||
|
Accounts Payable |
$ 79,300 |
$ 79,300 |
Interest Payable |
$ 8,000 |
|
|
Accounts Receivable |
50,300 |
50,300 |
Interest Revenue |
$ 4,000 |
4,000 |
|
Accumulated Depr.—Building |
42,100 |
52,500 |
Merchandise Inventory |
75,000 |
75,000 |
|
Accumulated Depr.—Equipment |
29,600 |
42,900 |
Mortgage Payable |
80,000 |
80,000 |
|
Building |
190,000 |
190,000 |
Office Salaries Expense |
32,000 |
32,000 |
|
Cash |
23,800 |
23,800 |
Prepaid Insurance |
9,600 |
2,400 |
|
Common Stock |
116,600 |
116,600 |
Property Tax Expense |
4,800 |
|
|
Cost of Goods Sold |
412,700 |
412,700 |
Property Taxes Payable |
4,800 |
|
|
Depr. Expense—Building |
10,400 |
Retained Earnings |
60,000 |
60,000 |
|
|
Depr. Expense—Equipment |
13,300 |
Sales Salaries Expense |
76,000 |
76,000 |
|
|
Dividends |
28,000 |
28,000 |
Sales |
628,000 |
628,000 |
|
Equipment |
110,000 |
110,000 |
Sales Commissions Expense |
10,200 |
14,500 |
|
Insurance Expense |
7,200 |
Sales Commissions Payable |
60,000 |
4,300 |
|
|
Interest Expense |
3,000 |
11,000 |
Sales Returns and Allowances |
8,000 |
8,000 |
|
Utilities Expense |
11,000 |
12,000 |
|||
|
Utilities Expense Payable |
1,000 |
Instructions
(a) Prepare a multiple step income statement, a retained earnings statement, and a classified balance sheet. $20,000 of the mortgage payable is due for payment next year.
(b) Journalize the adjusting entries that were made.
(c) Journalize the closing entries that are necessary.
J. Hafner, a former professional tennis star, operates Hafner’s Tennis Shop at the Miller Lake Resort. At the beginning of the current season, the ledger of Hafner’s Tennis Shop showed Cash $2,500, Merchandise Inventory $1,700, and Common Stock $4,200. The following transactions were completed during April.
Apr. 4 Purchased racquets and balls from Wellman Co. $840, FOB shipping point, terms 2/10, n/30.
6 Paid freight on purchase from Wellman Co. $40.
8 Sold merchandise to members $1,150, terms n/30. The merchandise sold had a cost of $790.
10 Received credit of $40 from Wellman Co. for a racquet that was returned.
11 Purchased tennis shoes from Venus Sports for cash, $420.
13 Paid Wellman Co. in full.
14 Purchased tennis shirts and shorts from Serena’s Sportswear $900, FOB shipping point, terms 3/10, n/60.
15 Received cash refund of $50 from Venus Sports for damaged merchandise that was returned.
17 Paid freight on Serena’s Sportswear purchase $30.
18 Sold merchandise to members $810, terms n/30.The cost of the merchandise sold was $530.
20 Received $500 in cash from members in settlement of their accounts.
21 Paid Serena’s Sportswear in full.
27 Granted an allowance of $30 to members for tennis clothing that did not fit properly.
30 Received cash payments on account from members, $660. The chart of accounts for the tennis shop includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 311 Common Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 505 Cost of Goods Sold.
Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) Enter the beginning balances in the ledger accounts and post the April transactions. (Use J1 for the journal reference.)
(c) Prepare a trial balance on April 30, 2011.
At the end of Gordman Department Store’s fiscal year on December 31, 2011, these accounts appeared in its adjusted trial balance.
|
Freight in |
$ 5,600 |
|
Merchandise Inventory |
40,500 |
|
Purchases |
447,000 |
|
Purchase Discounts |
12,000 |
|
Purchase Returns and Allowances |
6,400 |
|
Sales |
718,000 |
|
Sales Returns and Allowances |
8,000 |
Additional facts:
1. Merchandise inventory on December 31, 2011, is $75,000.
2. Note that Gordman Department Store uses a periodic system.
Instructions
Prepare an income statement through gross profit for the year ended December 31, 2011.
Kristen Montana operates a retail clothing operation. She purchases all merchandise inventory on credit and uses a periodic inventory system. The accounts payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2008, 2009, 2010, and 2011.
|
2008 |
2009 |
2010 |
2011 |
|
|
Inventory (ending) |
$13,000 |
$ 11,300 |
$ 14,700 |
$ 12,200 |
|
Accounts payable (ending) |
20,000 |
|||
|
Sales |
225,700 |
227,600 |
219,500 |
|
|
Purchases of merchandise |
||||
|
inventory on account |
146,000 |
145,000 |
129,000 |
|
|
Cash payments to suppliers |
135,000 |
161,000 |
127,000 |
Instructions
(a) Calculate cost of goods sold for each of the 2009, 2010, and 2011 fiscal years.
(b) Calculate the gross profit for each of the 2009, 2010, and 2011 fiscal years.
(c) Calculate the ending balance of accounts payable for each of the 2009, 2010, and 2011 fiscal years.
(d) Sales declined in fiscal 2011. Does that mean that profitability, as measured by the gross profit rate, necessarily also declined? Explain, calculating the gross profit rate for each fiscal year to help support your answer. (Round to one decimal place.)
At the beginning of the current season, the ledger of Village Tennis Shop showed Cash $2,500; Merchandise Inventory $1,700; and Common Stock $4,200. The following transactions were completed during April.
Apr. 4 Purchased racquets and balls from Denton Co. $740, terms 3/10, n/30.
6 Paid freight on Denton Co. purchase $60.
8 Sold merchandise to members $900, terms n/30.
10 Received credit of $40 from Denton Co. for a racquet that was returned.
11 Purchased tennis shoes from Newbee Sports for cash $300.
13 Paid Denton Co. in full.
14 Purchased tennis shirts and shorts from Venus’s Sportswear $600, terms 2/10, n/60.
15 Received cash refund of $50 from Newbee Sports for damaged merchandise that was returned.
17 Paid freight on Venus’s Sportswear purchase $30.
18 Sold merchandise to members $1,000, terms n/30.
20 Received $500 in cash from members in settlement of their accounts.
21 Paid Venus’s Sportswear in full.
27 Granted an allowance of $30 to members for tennis clothing that did not fit properly.
30 Received cash payments on account from members $500. The chart of accounts for the tennis shop includes Cash; Accounts Receivable; Merchandise Inventory; Accounts Payable; Common Stock; Sales; Sales Returns and Allowances; Purchases; Purchase Returns and Allowances; Purchase Discounts; and Freight in.
Instructions
(a) Journalize the April transactions using a periodic inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April transactions.
(c) Prepare a trial balance on April 30, 2011.
(d) Prepare an income statement through gross profit, assuming merchandise inventory on hand at April 30 is $2,296.
The trial balance of Terry Manning Fashion Center contained the following accounts at November 30, the end of the company’s fiscal year.
|
TERRY MANNING FASHION CENTER Trial Balance November 30, 2011 |
||
|
Debit |
Credit |
|
|
Cash |
$ 28,700 |
|
|
Accounts Receivable |
30,700 |
|
|
Merchandise Inventory |
44,700 |
|
|
Store Supplies |
6,200 |
|
|
Store Equipment |
85,000 |
|
|
Accumulated Depreciation—Store Equipment |
$ 22,000 |
|
|
Delivery Equipment |
48,000 |
|
|
Accumulated Depreciation—Delivery Equipment |
6,000 |
|
|
Notes Payable |
51,000 |
|
|
Accounts Payable |
48,500 |
|
|
Common Stock |
80,000 |
|
|
Retained Earnings |
30,000 |
|
|
Dividends |
12,000 |
|
|
Sales |
755,200 |
|
|
Sales Returns and Allowances |
8,800 |
|
|
Cost of Goods Sold |
497,400 |
|
|
Salaries Expense |
140,000 |
|
|
Advertising Expense |
24,400 |
|
|
Utilities Expense |
14,000 |
|
|
Repair Expense |
12,100 |
|
|
Delivery Expense |
16,700 |
|
|
Rent Expense |
24,000 |
|
|
Totals |
$992,700 |
$992,700 |
Adjustment data:
1. Store supplies on hand totaled $2,500.
2. Depreciation is $9,000 on the store equipment and $5,000 on the delivery equipment.
3. Interest of $4,080 is accrued on notes payable at November 30.
4. Merchandise inventory actually on hand is $44,400.
Instructions
(a) Enter the trial balance on a worksheet, and complete the worksheet.
(b) Prepare a multiple step income statement and a retained earnings statement for the year, and a classified balance sheet as of November 30, 2011. Notes payable of $30,000 are due in January 2012.
(c) Journalize the adjusting entries.
(d) Journalize the closing entries.
(e) Prepare a post closing trial balance.
Paul’s Book Warehouse distributes hardcover books to retail stores and extends credit terms of 2/10, n/30 to all of its customers. At the end of May, Paul’s inventory consisted of books purchased for $1,800. During June the merchandising transactions shown on page 244 occurred. June 1 Purchased books on account for $1,200 from Logan Publishers, FOB destination, terms 2/10, n/30. The appropriate party also made a cash payment of $50 for the freight on this date.
3 Sold books on account to Reading Rainbow for $2,400.The cost of the books sold was $1,440.
6 Received $100 credit for books returned to Logan Publishers.
9 Paid Logan Publishers in full, less discount.
15 Received payment in full from Reading Rainbow.
17 Sold books on account to Cheap Books for $1,800.The cost of the books sold was $1,080.
20 Purchased books on account for $1,500 from Phantom Publishers, FOB destination, terms 2/15, n/30.The appropriate party also made a cash payment of $50 for the freight on this date.
24 Received payment in full from Cheap Books.
26 Paid Phantom Publishers in full, less discount.
28 Sold books on account to Willow Bookstore for $1,300.The cost of the books sold was $780.
30 Granted Willow Bookstore $120 credit for books returned costing $72. Paul’s Book Warehouse’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold.
Instructions
Journalize the transactions for the month of June for Paul’s Book Warehouse using a perpetual inventory system.
Newman Hardware Store completed the following merchandising transactions in the month of May. At the beginning of May, the ledger of Newman showed Cash of $5,000 and Common Stock of $5,000.
May 1 Purchased merchandise on account from Jerry’s Wholesale Supply $4,200, terms 2/10, n/30.
2 Sold merchandise on account $2,100, terms 1/10, n/30.The cost of the merchandise sold was $1,300.
5 Received credit from Jerry’s Wholesale Supply for merchandise returned $300.
9 Received collections in full, less discounts, from customers billed on sales of $2,100 on May 2.
10 Paid Jerry’s Wholesale Supply in full, less discount.
11 Purchased supplies for cash $400.
12 Purchased merchandise for cash $1,400.
15 Received refund for poor quality merchandise from supplier on cash purchase $150.
17 Purchased merchandise from Cosmo Distributors $1,300, FOB shipping point, terms 2/10, n/30.
19 Paid freight on May 17 purchase $130.
24 Sold merchandise for cash $3,200.The merchandise sold had a cost of $2,000.
25 Purchased merchandise from Costanza, Inc. $550, FOB destination, terms 2/10, n/30.
27 Paid Cosmo Distributors in full, less discount.
29 Made refunds to cash customers for defective merchandise $60. The returned merchandisehad a scrap value of $10. 31 Sold merchandise on account $900, terms n/30. The cost of the merchandise sold was $560. Newman Hardware’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 126 Supplies, No. 201 Accounts Payable, No. 311 Common Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold.
Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Enter the beginning cash and capital balances and post the transactions. (Use J1 for the journal reference.)
(c) Prepare an income statement through gross profit for the month of May 2011.
Tarp Department Store is located in midtown Platteville. During the past several years, net income has been declining because of suburban shopping centers. At the end of the company’s fiscal year on November 30, 2011, the following accounts appeared in two of its trial balances.
|
Unadjusted |
Adjusted |
Unadjusted |
Adjusted |
||
|
Accounts Payable |
$ 25,200 |
$ 25,200 |
Merchandise Inventory |
$ 29,000 |
$ 29,000 |
|
Accounts Receivable |
30,500 |
30,500 |
Notes Payable |
37,000 |
37,000 |
|
Accumulated Depr.—Delivery Equip. |
10,000 |
15,000 |
Prepaid Insurance |
10,500 |
3,500 |
|
Accumulated Depr.—Store Equip. |
24,000 |
32,000 |
Property Tax Expense |
2,800 |
|
|
Cash |
6,000 |
6,000 |
Property Taxes Payable |
2,800 |
|
|
Common Stock |
50,000 |
50,000 |
Rent Expense |
15,000 |
15,000 |
|
Cost of Goods Sold |
507,000 |
507,000 |
Retained Earnings |
51,700 |
51,700 |
|
Delivery Expense |
6,500 |
6,500 |
Salaries Expense |
96,000 |
96,000 |
|
Delivery Equipment |
46,000 |
46,000 |
Sales |
680,000 |
680,000 |
|
Depr. Expense—Delivery Equip. |
5,000 |
Sales Commissions Expense |
6,500 |
11,200 |
|
|
Depr. Expense—Store Equip. |
8,000 |
Sales Commissions Payable |
8,000 |
4,700 |
|
|
Dividends |
10,000 |
10,000 |
Sales Returns and Allowances |
100,000 |
8,000 |
|
Insurance Expense |
7,000 |
Store Equip. |
8,500 |
100,000 |
|
|
Interest Expense |
6,400 |
6,400 |
Utilities Expense |
8,000 |
8,500 |
|
Interest Revenue |
8,000 |
8,000 |
Instructions
(a) Prepare a multiple step income statement, a retained earnings statement, and a classified balance sheet. Notes payable are due in 2014.
(b) Journalize the adjusting entries that were made.
(c) Journalize the closing entries that are necessary.
Caleb Borke, a former disc golf star, operates Caleb’s Discorama. At the beginning of the current season on April 1, the ledger of Caleb’s Discorama showed Cash $1,800, Merchandise Inventory $2,500, and Common Stock $4,300.The following transactions were completed during April. Apr. 5 Purchased golf discs, bags, and other inventory on account from Innova Co. $1,200, FOB shipping point, terms 2/10, n/60.
7 Paid freight on Innovas purchase $50.
9 Received credit from Innova Co. for merchandise returned $100.
10 Sold merchandise on account for $900, terms n/30. The merchandise sold had a cost of $540.
12 Purchased disc golf shirts and other accessories on account from Lightning Sportswear $670, terms 1/10, n/30.
14 Paid Innova Co. in full, less discount.
17 Received credit from Lightning Sportswear for merchandise returned $70.
20 Made sales on account for $560, terms n/30. The cost of the merchandise sold was $340.
21 Paid Lightning Sportswear in full, less discount.
27 Granted an allowance to members for clothing that was flawed $30.
30 Received payments on account from customers $800. The chart of accounts for the store includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 311 Common Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 505 Cost of Goods Sold.
Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) Enter the beginning balances in the ledger accounts and post the April transactions. (Use J1 for the journal reference.)
(c) Prepare a trial balance on April 30, 2011.
At the end of Duckworth Department Store’s fiscal year on November 30, 2011, these accounts appeared in its adjusted trial balance.
|
Freight in |
$ 4,500 |
|
Merchandise Inventory |
40,000 |
|
Purchases |
585,000 |
|
Purchase Discounts |
6,300 |
|
Purchase Returns and Allowances |
2,700 |
|
Sales |
810,000 |
|
Sales Returns and Allowances |
18,000 |
Additional facts:
1. Merchandise inventory on November 30, 2011, is $32,600.
2. Note that Duckworth Department Store uses a periodic system.
Instructions
Prepare an income statement through gross profit for the year ended November 30, 2011.
Letterman Inc. operates a retail operation that purchases and sells home entertainment products.The company purchases all merchandise inventory on credit and uses a periodic inventory system. The accounts payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2008 through 2011, inclusive.
|
2008 |
2009 |
2010 |
2011 |
|
|
Income Statement Data |
||||
|
Sales |
$53,300 |
$ (e) |
$45,200 |
|
|
Cost of goods sold |
(a) |
13,800 |
14,300 |
|
|
Gross profit |
38,300 |
33,800 |
(i) |
|
|
Operating expenses |
34,900 |
(f) |
28,600 |
|
|
Net income |
$ (b) |
$ 2,500 |
$ (j) |
|
|
Balance Sheet Data |
$ (c) |
$ 8,100 |
$ (k) |
|
|
Merchandise inventory |
$7,200 |
3,600 |
2,500 |
(l) |
|
Accounts payable |
3,200 |
|||
|
Additional Information |
||||
|
Purchases of merchandise |
||||
|
inventory on account |
$14,200 |
$ (g) |
$13,200 |
|
|
Cash payments to suppliers |
(d) |
(h) |
13,600 |
Instructions
(a) Calculate the missing amounts.
(b) Sales declined over the 3 year fiscal period, 2009–2011. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio for each fiscal year to help support your answer. (Round to one decimal place.)
The completed financial statement columns of the worksheet for Woods Company Inc. are shown be
|
WOODS COMPANY INC. Worksheet For the Year Ended December 31, 2011 |
|||||
|
Income Statement |
Balance Sheet |
||||
|
Account |
Dr. |
Cr. |
Dr. |
Cr. |
|
|
No. |
Account Titles |
||||
|
101 |
Cash |
8,200 |
|||
|
112 |
Accounts Receivable |
7,500 |
|||
|
130 |
Prepaid Insurance |
1,800 |
|||
|
157 |
Equipment |
28,000 |
|||
|
167 |
Accumulated Depreciation |
8,600 |
|||
|
201 |
Accounts Payable |
11,700 |
|||
|
212 |
Salaries Payable |
3,000 |
|||
|
311 |
Common Stock |
20,000 |
|||
|
320 |
Retained Earnings |
14000 |
|||
|
332 |
Dividends |
7,200 |
|||
|
400 |
Service Revenue |
44,000 |
|||
|
622 |
Repair Expense |
5,400 |
|||
|
711 |
Depreciation Expense |
2,800 |
|||
|
722 |
Insurance Expense |
1,200 |
|||
|
726 |
Salaries Expense |
35,200 |
|||
|
732 |
Utilities Expense |
4,000 |
|||
|
Totals |
48,600 |
44,000 |
52,700 |
57,300 |
|
|
Net Loss |
4,600 |
4,600 |
|||
|
48,600 |
48,600 |
57,300 |
57,300 |
||
Instructions
(a) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
(b) Prepare the closing entries.
(c) Post the closing entries and rule and balance the accounts. Use T accounts. Income Summary is account No. 350.
(d) Prepare a post closing trial balance.
Laura Eddy opened Eddy’s Carpet Cleaners Inc. on March 1. During March, the following transactions were completed.
Mar. 1 Stockholders invested $10,000 in cash in the business in exchange for common stock.
1 Purchased used truck for $6,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $1,200 on account.
5 Paid $1,200 cash on one year insurance policy effective March 1.
Mar. 14 Billed customers $4,800 for cleaning services.
18 Paid $1,500 cash on amount owed on truck and $500 on amount owed on cleaning supplies.
20 Paid $1,800 cash for employee salaries.
21 Collected $1,400 cash from customers billed on March 14.
28 Billed customers $2,500 for cleaning services.
31 Paid gas and oil for month on truck $200.
31 Declared and paid a $700 cash dividend.
The chart of accounts for Eddy’s Carpet Cleaners Inc. contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries Payable,No. 311 Common Stock,No. 320 Retained Earnings,No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634 Cleaning Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, andNo. 726 Salaries Expense.
Instructions
(a) Journalize and post the March transactions. Use page J1 for the journal and the three column form of account.
(b) Prepare a trial balance at March 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Earned but unbilled revenue at March 31 was $700.
(2) Depreciation on equipment for the month was $250.
(3) One twelfth of the insurance expired.
(4) An inventory count shows $400 of cleaning supplies on hand at March 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and a retained earnings statement for March and a classified balance sheet at March 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Prepare a post closing trial balance at March 31.
Joe Edmonds, CPA, was retained by Clark Cable Inc. to prepare financial statements for April 2011. Edmonds accumulated all the ledger balances per Clark’s records and found the following.
|
CLARK CABLE INC. |
||
|
Trial Balance |
||
|
April 30, 2011 |
||
|
Debit |
Credit |
|
|
Cash |
$ 4,100 |
|
|
Accounts Receivable |
3,200 |
|
|
Supplies |
800 |
|
|
Equipment |
10,600 |
|
|
Accumulated Depreciation |
$ 1,350 |
|
|
Accounts Payable |
2,100 |
|
|
Salaries Payable |
700 |
|
|
Unearned Revenue |
890 |
|
|
Common Stock |
10,000 |
|
|
Retained Earnings |
2,900 |
|
|
Service Revenue |
5,450 |
|
|
Salaries Expense |
3,300 |
|
|
Advertising Expense |
600 |
|
|
Miscellaneous Expense |
290 |
|
|
Depreciation Expense |
500 |
|
|
$23,390 |
$23,390 |
Joe Edmonds reviewed the records and found the following errors.
1. Cash received from a customer on account was recorded as $960 instead of $690.
2. A payment of $65 for advertising expense was entered as a debit to Miscellaneous Expense $65 and a credit to Cash $65.
3. The first salary payment this month was for $1,900, which included $700 of salaries payable on March 31. The payment was recorded as a debit to Salaries Expense $1,900 and a credit to Cash $1,900. (No reversing entries were made on April 1.)
4. The purchase on account of a printer costing $290 was recorded as a debit to Supplies and a credit to Accounts Payable for $290.
5. A cash payment of repair expense on equipment for $95 was recorded as a debit to Equipment $59 and a credit to Cash $59.
Instructions
(a) Prepare an analysis of each error showing (1) the incorrect entry, (2) the correct entry, and
(3) the correcting entry. Items 4 and 5 occurred on April 30, 2011.
(b) Prepare a correct trial balance.
The adjusted trial balance columns of the worksheet for Rachel Company Inc. are as follows.
|
RACHEL COMPANY INC. |
|||
|
Worksheet |
|||
|
For the Year Ended December 31, 2011 |
|||
|
Account |
|||
|
No. |
Account Titles |
Dr. |
Cr. |
|
101 |
Cash |
8,100 |
|
|
112 |
Accounts Receivable |
10,800 |
|
|
126 |
Supplies |
1,500 |
|
|
130 |
Prepaid Insurance |
2,000 |
|
|
151 |
Office Equipment |
24,000 |
|
|
152 |
Accumulated Depreciation—Office Equipment |
5,600 |
|
|
200 |
Notes Payable |
15,000 |
|
|
201 |
Accounts Payable |
6,100 |
|
|
212 |
Salaries Payable |
2,400 |
|
|
230 |
Interest Payable |
600 |
|
|
311 |
Common Stock |
10,000 |
|
|
320 |
Retained Earnings |
5,800 |
|
|
332 |
Dividends |
7,000 |
|
|
400 |
Service Revenue |
61,000 |
|
|
610 |
Advertising Expense |
8,400 |
|
|
631 |
Supplies Expense |
4,000 |
|
|
711 |
Depreciation Expense |
5,600 |
|
|
722 |
Insurance Expense |
3,500 |
|
|
726 |
Salaries Expense |
31,000 |
|
|
905 |
Interest Expense |
600 |
|
|
Totals |
106,500 |
106,500 |
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, a retained earnings statement, and a classified balance sheet.(Note: $9,000 of the notes payable become due in 2012.)
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three column form of account. Income Summary is No. 350.
(e) Prepare a post closing trial balance.
The completed financial statement columns of the worksheet for Muddy Company are shown below and on the next page.
|
MUDDY COMPANY |
|||||
|
Worksheet |
|||||
|
For the Year Ended December 31, 2011 |
|||||
|
Account |
|||||
|
No. |
Account Titles |
Dr. |
Cr. |
Dr. |
Cr. |
|
101 |
Cash |
17,900 |
|||
|
112 |
Accounts Receivable |
10,800 |
|||
|
130 |
Prepaid Insurance |
2,800 |
|||
|
157 |
Equipment |
21,000 |
|||
|
167 |
Accumulated Depreciation |
4,500 |
|||
|
201 |
Accounts Payable |
9,000 |
|||
|
212 |
Salaries Payable |
2,400 |
|||
|
311 |
Common Stock |
20,000 |
|||
|
320 |
Retained Earnings |
8,500 |
|||
|
332 |
Dividends |
11000 |
|||
|
400 |
Service Revenue |
56,000 |
|||
|
622 |
Repair Expense |
1,600 |
|||
|
711 |
Depreciation Expense |
2,100 |
|||
|
722 |
Insurance Expense |
1,800 |
|||
|
726 |
Salaries Expense |
30,000 |
|||
|
732 |
Utilities Expense |
1,400 |
|||
|
Totals |
36,900 |
56,000 |
63,500 |
44,400 |
|
|
Net Income |
19,100 |
19,100 |
|||
|
56000 |
56,000 |
63,500 |
63,500 |
Instructions
(a) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
(b) Prepare the closing entries.
(c) Post the closing entries and rule and balance the accounts. Use T accounts. Income Summary is account No. 350.
(d) Prepare a post closing trial balance.
Rockford Management Services Inc. began business on January 1, 2011, with a capital investment of $120,000. The company manages condominiums for owners (Service Revenue) and rents space in its own office building (Rent Revenue). The trial balance and adjusted trialbalance columns of the worksheet at the end of the first year are as follows.
|
ROCKFORD MANAGEMENT SERVICES INC. |
||||
|
Worksheet |
||||
|
For the Year Ended December 31, 2011 |
||||
|
Account Titles |
Dr. |
Cr. |
Dr. |
Cr. |
|
Cash |
13,800 |
|||
|
Accounts Receivable |
28,300 |
|||
|
Prepaid Insurance |
3,600 |
|||
|
Land |
67,000 |
|||
|
Building |
127,000 |
|||
|
Equipment |
59,000 |
12,500 |
||
|
Accounts Payable |
12,500 |
2,000 |
||
|
Unearned Rent Revenue |
6,000 |
120,000 |
||
|
Mortgage Note Payable |
120,000 |
100,000 |
||
|
Common Stock |
100,000 |
44,000 |
||
|
Retained Earnings |
44,000 |
12,500 |
||
|
Dividends |
22,000 |
|||
|
Service Revenue |
90,700 |
90,700 |
||
|
Rent Revenue |
29,000 |
33,000 |
||
|
Salaries Expense |
42,000 |
|||
|
Advertising Expense |
20,500 |
|||
|
Utilities Expense |
19,000 |
|||
|
Totals |
402,200 |
402,200 |
||
|
Insurance Expense |
1,200 |
|||
|
Depreciation Expense—Building |
3,000 |
|||
|
Accumulated Depreciation—Building |
3,000 |
|||
|
Depreciation Expense—Equipment |
4,700 |
|||
|
Accumulated Depreciation—Equipment |
4,700 |
|||
|
Interest Expense |
11,000 |
|||
|
Interest Payable |
11,000 |
|||
|
Totals |
420,900 |
420,900 |
Instructions
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $20,000 of the mortgage note payable is due for payment next year.)
(c) Journalize the adjusting entries.
(d) Journalize the closing entries.
(e) Prepare a post closing trial balance.
Lee Chang opened Chang’s Cleaning Service Inc. on July 1, 2011. During July the following transactions were completed.
July 1 Stockholders invested $20,000 cash in the business in exchange for common stock.
1 Purchased used truck for $9,000, paying $4,000 cash and the balance on account.
3 Purchased cleaning supplies for $2,100 on account.
5 Paid $1,800 cash on one year insurance policy effective July 1.
12 Billed customers $4,500 for cleaning services.
18 Paid $1,500 cash on amount owed on truck and $1,400 on amount owed on cleaning supplies.
20 Paid $2,000 cash for employee salaries.
21 Collected $3,400 cash from customers billed on July 12.
25 Billed customers $9,000 for cleaning services.
31 Paid gas and oil for month on truck $350.
31 Declared and paid a $1,600 cash dividend. The chart of accounts for Chang’s Cleaning Service Inc. contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary,No. 400 Service Revenue,No. 633 Gas & Oil Expense,No. 634 Cleaning Supplies Expense,No. 711 Depreciation Expense,No. 722 Insurance Expense, and No. 726 Salaries Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal and the three columnform of account.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Services provided but unbilled and uncollected at July 31 were $2,700.
(2) Depreciation on equipment for the month was $500.
(3) One twelfth of the insurance expired.
(4) An inventory count shows $700 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $1,000.
(d) Prepare the income statement and retained earnings statement for July and a classified balance sheet at July 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Prepare a post closing trial balance at July 31.
Julie Molony opened Julie’s Maids Cleaning Service Inc. on July 1, 2011. During July, the company completed the following transactions.
July 1 Stockholders invested $14,000 cash in the business in exchange for common stock.
1 Purchased a used truck for $10,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $800 on account.
5 Paid $1,800 on a one year insurance policy, effective July 1.
12 Billed customers $3,800 for cleaning services.
18 Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies.
20 Paid $1,600 for employee salaries.
21 Collected $1,400 from customers billed on July 12.
25 Billed customers $1,500 for cleaning services.
31 Paid gas and oil for the month on the truck, $400.
31 Declared and paid a $600 cash dividend. The chart of accounts for Julie’s Maids Cleaning Service Inc. contains the following accounts: No. 101 Cash,No. 112 Accounts Receivable,No. 128 Cleaning Supplies,No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332 Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634 Cleaning Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the worksheet.
(1) Earned but unbilled fees at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One twelfth of the insurance expired.
(4) An inventory count shows $100 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and a retained earnings statement for July, and a classified balance sheet at July 31, 2011.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f) Journalize and post the closing entries, and complete the closing process. Use page J3 for the journal.
(g) Prepare a post closing trial balance at July 31.
Whitegloves Janitorial Service Inc. was started 2 years ago by Nancy Kohl. Because business has been exceptionally good, Nancy decided on July 1, 2011, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Nancy obtained on July 1, 2011, a $25,000, 10% bank loan, payable $10,000 on July 1, 2012, and the balance on July 1, 2013. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2011. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2011, the accountant for Whitegloves Janitorial Service Inc. prepared the balance sheet shown on page 199. Nancy presented the balance sheet to the bank’s loan officer on January 2, 2012, confident that the company had met the terms of the loan. The loan officer was not impressed. She said, “We need financial statements audited by a CPA.” A CPA was hired and immediately realized that the balance sheet had been prepared from a trial balance and not from an adjusted trial balance. The adjustment data at the balance sheet date consisted of the following.
(1) Earned but unbilled janitorial services were $3,700.
(2) Janitorial supplies on hand were $2,500.
(3) Prepaid insurance was a 3 year policy dated January 1, 2011.
(4) December expenses incurred but unpaid at December 31, $500.
(5) Interest on the bank loan was not recorded.
The amounts for property, plant, and equipment presented in the balance sheet were reported net of accumulated depreciation (cost less accumulated depreciation).These amounts were $4,000 for cleaning equipment and $5,000 for delivery trucks as of January 1, 2011. Depreciation for 2011 was $2,000 for cleaning equipment and $5,000 for delivery trucks.
|
WHITEGLOVES JANITORIAL SERVICE INC. Balance Sheet December 31, 2011 |
||||
|
Assets |
Liabilities and Stockholders’ Equity |
|||
|
Current assets |
Current liabilities |
|||
|
Cash |
$ 6,500 |
Notes payable |
$10,000 |
|
|
Accounts receivable |
9,000 |
Accounts payable |
2,500 |
|
|
Janitorial supplies |
5,200 |
Total current liabilities |
12,500 |
|
|
Prepaid insurance |
4,800 |
Long term liability |
||
|
Total current assets |
25,500 |
Notes payable |
15,000 |
|
|
Property, plant, and equipment |
Total liabilities |
27,500 |
||
|
Cleaning equipment (net) |
22,000 |
Stockholders’ equity |
||
|
Delivery trucks (net) |
34,000 |
Common stock |
$ 40,000 |
|
|
Total property, plant, and equipment |
56,000 |
Retained earnings |
14,000 |
54,000 |
|
Total assets |
$81,500 |
Total liabilities and stockholders’ equity |
$81,500 |
|
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct balance sheet.
(b) Were the terms of the bank loan met? Explain.
As the controller of Breathless Perfume Company, you discover a misstatement that overstated net income in the prior year’s financial statements. The misleading financial statements appear in the company’s annual report which was issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president, Jerry McNabb, about this misstatement, you gather your courage to inform him. Jerry says “Hey! What they don’t know won’t hurt them. But, just so we set the record straight, we’ll adjust this year’s financial statements for last year’s mis statement.We can absorb that misstatement better in this year than in last year anyway! Just don’t make such a mistake again.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this situation?
(c) What would you do as a controller in this situation?
Companies prepare balance sheets in order to know their financial position at a specific point in time. This enables them to make a comparison to their position at previous points in time, and gives them a basis for planning for the future. As discussed in the All About You feature in this chapter, in order to evaluate your financial position you need to prepare a personal balance sheet. Assume that you have compiled the following information regarding your finances. (Hint: Some of the items might not be used in your personal balance sheet.)
|
Amount owed on student loan balance (long term) |
$5,000 |
|
Balance in checking account |
1,200 |
|
Certificate of deposit (6 month) |
3,000 |
|
Annual earnings from part time job |
11,300 |
|
Automobile |
7,000 |
|
Balance on automobile loan (current portion) |
1,500 |
|
Balance on automobile loan (long term portion) |
4,000 |
|
Home computer |
800 |
|
Amount owed to you by younger brother |
300 |
|
Balance in money market account |
1,800 |
|
Annual tuition |
6,400 |
|
Video and stereo equipment |
1,250 |
|
Balance owed on credit card (current portion) |
150 |
|
Balance owed on credit card (long term portion) |
1,650 |
Instructions
Prepare a personal balance sheet using the format you have learned for a classified balance sheet for a company. For the owner’s equity account, use M. Y. Own, Capital.
The adjusted trial balance columns of Falcetto Company’s worksheet for the year ended December 31, 2011, are as follows.
|
Debit |
|
|
Cash |
14,500 |
|
Accounts Receivable |
11,100 |
|
Merchandise Inventory |
29,000 |
|
Prepaid Insurance |
2,500 |
|
Store Equipment |
95,000 |
|
Dividends |
12,000 |
|
Sales Returns and Allowances |
6,700 |
|
Sales Discounts |
5,000 |
|
Cost of Goods Sold |
363,400 |
|
Freight out |
7,600 |
|
Advertising Expense |
12,000 |
|
Salaries Expense |
56,000 |
|
Utilities Expense |
18,000 |
|
Rent Expense |
24,000 |
|
Depreciation Expense |
9,000 |
|
Insurance Expense |
4,500 |
|
Interest Expense |
3,600 |
|
673,900 |
|
|
Credit |
|
|
Accumulated Depreciation |
18,000 |
|
Notes Payable |
25,000 |
|
Accounts Payable |
10,600 |
|
Common Stock |
50,000 |
|
Retained Earnings |
31,000 |
|
Sales |
536,800 |
|
Interest Revenue |
2,500 |
|
673,900 |
|
Instructions
Prepare a multiple step income statement for Falcetto Company.
Presented below are the components in Waegelain Company’s income statement. Determine the missing amounts.
|
Cost of |
Gross |
Operating |
Net |
|
|
Sales |
Goods Sold |
Profit |
Expenses |
Income |
|
(a) $ 75,000 |
? |
$30,000 |
? |
$10,800 |
|
(b) $108,000 |
$70,000 |
? |
? |
$29,500 |
|
(c) ? |
$71,900 |
$79,600 |
$39,500 |
? |
The trial balance of Dionne”s Boutique at December 31 shows Merchandise Inventory $21,000, Sales $136,000, Sales Returns and Allowances $4,000, Sales Discounts $3,000, Cost of Goods Sold $92,400, Interest Revenue $5,000, Freight out $1,500, Utilities Expense $7,400, Salaries Expense $18,500. Prepare the closing entries for the Dionne”s accounts.
Smith Company is preparing its multiple step income statement, retained earnings statement, and classified balance sheet. Using the column heads Account, Financial Statement, and Classification, indicate in which financial statement and under what classification each of the following would be reported.
|
Account |
Financial Statement |
Classification |
|
Accounts Payable |
||
|
Accounts Receivable |
||
|
Accumulated Depreciation— |
||
|
Office Building |
||
|
Cash |
||
|
Casualty Loss from Vandalism |
||
|
Cost of Goods Sold |
||
|
Delivery Equipment |
||
|
Depreciation Expense |
||
|
Common Stock |
||
|
Dividends |
||
|
Freight out |
||
|
Insurance Expense |
||
|
Interest Payable |
||
|
Land |
||
|
Merchandise Inventory |
||
|
Notes Payable (due in 5 years) |
||
|
Property Tax Payable |
||
|
Salaries Expense |
||
|
Salaries Payable |
||
|
Sales Returns and Allowances |
||
|
Sales |
||
|
Unearned Rent |
||
|
Utilities Expense |
||
|
Warehouse |
Mr.Wellington has prepared the following list of statements about service companies and merchandisers.
1. Measuring net income for a merchandiser is conceptually the same as for a service company.
2. For a merchandiser, sales less operating expenses is called gross profit.
3. For a merchandiser, the primary source of revenues is the sale of inventory.
4. Sales salaries is an example of an operating expense.
5. The operating cycle of a merchandiser is the same as that of a service company.
6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.
7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.
8. A periodic inventory system provides better control over inventories than a perpetual system.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Information related to Steffens Co. is presented below.
1. On April 5, purchased merchandise from Bryant Company for $25,000 terms 2/10, net/30, FOB shipping point.
2. On April 6 paid freight costs of $900 on merchandise purchased from Bryant.
3. On April 7, purchased equipment on account for $26,000.
4. On April 8, returned damaged merchandise to Bryant Company and was granted a $4,000 credit for returned merchandise.
5. On April 15 paid the amount due to Bryant Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Steffens Co. under a perpetual inventory system.
(b) Assume that Steffens Co. paid the balance due to Bryant Company on May 4 instead of April 15. Prepare the journal entry to record this payment.
On September 1, Howe Office Supply had an inventory of 30 calculators at a cost of $18 each.The company uses a perpetual inventory system. During September, the following transactions occurred.
Sept. 6 Purchased 80 calculators at $20 each from DeVito Co. for cash.
9 Paid freight of $80 on calculators purchased from DeVito Co.
10 Returned 2 calculators to DeVito Co. for $42 credit (including freight) because they did not meet specifications.
12 Sold 26 calculators costing $21 (including freight) for $31 each to Mega Book Store, terms n/30.
14 Granted credit of $31 to Mega Book Store for the return of one calculator that was not ordered.
20 Sold 30 calculators costing $21 for $31 each to Barbara’s Card Shop, terms n/30.
Instructions
Journalize the September transactions.
Presented below are transactions related to Wheeler Company.
1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point.The cost of the merchandise sold was $350,000.
2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance due from Hashmi Co.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.
(b) Assume that Wheeler Company received the balance due from Hashmi Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.
Presented is information related to Rogers Co. for the month of January 2011.
|
Ending inventory per |
Insurance expense |
$ 12,000 |
|
|
perpetual records |
$ 21,600 |
Rent expense |
20,000 |
|
Ending inventory actually |
Salary expense |
61,000 |
|
|
on hand |
21,000 |
Sales discounts |
10,000 |
|
Cost of goods sold |
218,000 |
Sales returns and allowances |
13,000 |
|
Freight out |
7,000 |
Sales |
350,000 |
Instructions
(a) Prepare the necessary adjusting entry for inventory.
(b) Prepare the necessary closing entries.
Presented below are three different lease transactions in which Kristi Enterprises engaged in 2012. Assume that all lease transactions start on January 1, 2012. In no case does Kristi receive title to the properties leased during or at the end of the lease term.
|
Lessor |
|||
|
Denham Springs Co. |
Hofmeister Co. |
Janca Inc. |
|
|
Type of property |
Bulldozer |
Truck |
Furniture |
|
Bargain purchase option |
None |
None |
None |
|
Lease term |
4 years |
6 years |
3 years |
|
Estimated economic life |
8 years |
7 years |
5 years |
|
Yearly rental |
$13,000 |
$20,000 |
$ 3,000 |
|
Fair value of leased asset |
$80,000 |
$96,000 |
$20,500 |
|
Present value of the lease |
|||
|
rental payments |
$48,000 |
$82,000 |
$ 9,000 |
Instructions
(a) Identify the leases above as operating or capital leases. Explain.
(b) How should the lease transaction for Hofmeister Co. be recorded on January 1, 2012?
(c) How should the lease transaction for Janca Inc. be recorded in 2012?
On July 1, 2012, Sagittarius Satellites issued $4,500,000 face value, 9%, 10 year bonds at $4,219,600. This price resulted in an effective interest rate of 10% on the bonds. Sagittarius uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2012.
(b) Prepare an amortization table through December 31, 2013 (3 interest periods) for this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2012.
(d) Prepare the journal entry to record the payment of interest and the amortization of the discount on July 1, 2013, assuming that interest was not accrued on June 30.
(e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2013.
On July 1, 2012, Dacotah Chemical Company issued $4,000,000 face value, 10%, 10 year bonds at $4,543,627. This price resulted in an 8% effective interest rate on the bonds. Dacotah uses the effective interest method to amortize bon d premium or discount. The bonds pay semiannual interest on each July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2012.
(2) The accrual of interest and the amortization of the premium on December 31, 2012.
(3) The payment of interest and the amortization of the premium on July 1, 2013, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the premium on December 31, 2013.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2013, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2013?
(2) Would the bond interest expense reported in 2013 be the same as, greater than, or less than the amount that would be reported if the straight line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense if the straight line method of amortization were used?
The following is taken from the Kijak Corp. balance sheet.
|
KIJAK CORPORATION |
||
|
Balance Sheet (partial) |
||
|
December 31, 2012 |
||
|
Current liabilities |
||
|
Interest payable (for 6 months |
||
|
from July 1 to December 31) |
$ 108,000 |
|
|
Long term liabilities |
||
|
Bonds payable, 9%, due |
||
|
January 1, 2023 |
$2,400,000 |
|
|
Less: Discount on bonds payable |
90,000 |
2,310,000 |
Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual interest date. Kijak uses straight line amortization for any bond premium or discount. From December 31, 2012, the bonds will be outstanding for an additional 10 years (120 months).
Instructions
(Round all computations to the nearest dollar).
(a) Journalize the payment of bond interest on January 1, 2013.
(b) Prepare the entry to amortize bond discount and to pay the interest due on July 1, 2013, assuming that interest was not accrued on June 30.
(c) Assume that on July 1, 2013, after paying interest, Kijak Corp. calls bonds having a face value of $800,000. The call price is 102. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2013, to amortize bond discount and to accrue interest on the remaining bonds.
Nordham Corporation’s trial balance at December 31, 2012, is presented below. All 2012 transactions have been recorded except for the items described below.
|
Debit |
Credit |
|
|
Cash |
$ 23,000 |
|
|
Accounts Receivable |
51,000 |
|
|
Inventory |
22,700 |
|
|
Land |
65,000 |
|
|
Buildings |
95,000 |
|
|
Equipment |
40,000 |
|
|
Allowance for Doubtful Accounts |
$ 450 |
|
|
Accumulated Depreciation—Buildings |
30,000 |
|
|
Accumulated Depreciation—Equipment |
14,400 |
|
|
Accounts Payable |
19,300 |
|
|
Interest Payable |
–0– |
|
|
Dividends Payable |
–0– |
|
|
Unearned Rent Revenue |
8,000 |
|
|
Bonds Payable (10%) |
50,000 |
|
|
Common Stock ($10 par) |
30,000 |
|
|
Paid in Capital in Excess of Par—Common Stock |
6,000 |
|
|
Preferred Stock ($20 par) |
–0– |
|
|
Paid in Capital in Excess of Par—Preferred Stock |
–0– |
|
|
Retained Earnings |
75,050 |
|
|
Treasury Stock |
–0– |
|
|
Cash Dividends |
–0– |
|
|
Sales Revenue |
570,000 |
|
|
Rent Revenue |
–0– |
|
|
Bad Debts Expense |
–0– |
|
|
Interest Expense |
2,500 |
|
|
Cost of Goods Sold |
400,000 |
|
|
Depreciation Expense |
–0– |
|
|
Other Operating Expenses |
39,000 |
|
|
Salaries and Wages Expense |
65,000 |
|
|
Total |
$803,200 |
$803,200 |
Unrecorded transactions
1. On January 1, 2012, Nordham issued 1,000 shares of $20 par, 6% preferred stock for $22,000.
2. On January 1, 2012, Nordham also issued 1,000 shares of common stock for $23,000.
3. Nordham reacquired 300 shares of its common stock on July 1, 2012, for $49 per share.
4. On December 31, 2012, Nordham declared the annual preferred stock dividend and a $1.50 per share dividend on the outstanding common stock, all payable on January 15, 2013.
5. Nordham estimates that uncollectible accounts receivable at year end is $5,100.
6. The building is being depreciated using the straight line method over 30 years. The salvage value is $5,000.
7. The equipment is being depreciated using the straight line method over 10 years. The salvage value is $4,000.
8. The unearned rent was collected on October 1, 2012. It was receipt of 4 months’ rent in advance (October 1, 2012 through January 31, 2013).
9. The 10% bonds payable pay interest every January 1 and July 1. The interest for the 6 months ended December 31, 2012, has not been paid or recorded.
Instructions
(Ignore income taxes.)
(a) Prepare journal entries for the transactions listed above.
(b) Prepare an updated December 31, 2012, trial balance, refl ecting the unrecorded transactions.
(c) Prepare a multiple step income statement for the year ending December 31, 2012.
(d) Prepare a retained earnings statement for the year ending December 31, 2012.
(e) Prepare a classified balance sheet as of December 31, 2012.
On January 1, 2010, Carlin Corporation issued $2,400,000 of 5 year, 8% bonds at 95; the bonds pay interest semiannually on July 1 and January 1. By January 1, 2012, the market rate of interest for bonds of risk similar to those of Carlin Corporation had risen. As a result, the market value of these bonds was $2,000,000 on January 1, 2012—below their carrying value. Andrea Carlin, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so the company will have to issue $2,000,000 (face value) of new 10 year, 11% bonds at par. The president asks you, as controller, “What is the feasibility of my proposed repurchase plan?”
Instructions
With the class divided into groups, answer the following.
(a) What is the carrying value of the outstanding Carlin Corporation 5 year bonds on January 1, 2012? (Assume straight line amortization.)
(b) Prepare the journal entry to retire the 5 year bonds on January 1, 2012. Prepare the journal entry to issue the new 10 year bonds.
(c) Prepare a short memo to the president in response to her request for advice. List the economic factors that you believe should be considered for her repurchase proposal.
Sam Farr is the president, founder, and majority owner of Galena Medical Corporation, an emerging medical technology products company. Galena is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Sam, as owner of 51% of the outstanding stock, manages the company’s operations. He places heavy emphasis on research and development and on long term growth. The other principal stockholder is Jill Hutton who, as a nonemployee investor, owns 40% of the stock. Jill would like to deemphasize the R&D functions and emphasize the marketing function, to maximize short run sales and profits from existing products. She believes this strategy would raise the market price of Galena’s stock.
All of Sam’s personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won’t be able to participate in such an issuance. But, Jill has money and would likely buy enough shares to gain control of Galena. She then would dictate the company’s future direction, even if it meant replacing Sam as president and CEO.
The company already has considerable debt. Raising additional debt will be costly, will adversely affect Galena’s credit rating, and will increase the company’s reported losses due to the growth in interest expense. Jill and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Sam is doing everything to avoid a stock issuance. He is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective interest rate.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this case?
(c) What would you do if you were Sam?
BYP15 7 Numerous articles have been written that identify early warning signs that you might be getting into trouble with your personal debt load. You can find many good articles on this topic on the Internet.
Instructions
Find an article that identifies early warning signs of personal debt trouble. Write a summary of the article and bring your summary and the article to class to share.
The financial statements of Zetar plc are presented on Appendix C. The company’s complete annual report, including the notes to its financial statement.
Instructions
Use the company’s annual report to answer the following questions.
(a) According to the notes to the financial statements, what types of transactions do trade payables relate to? What was the average amount of time it took the company to pay its payables?
(b) Note 2 (B) discusses provisions that the company records for certain types of activities. What do the provisions relate to, what are the estimates based on, and what could cause those estimates to change in subsequent periods?
(c) What was the average interest rate paid on bank loans and overdrafts?
The following accounts were taken from the financial statements of Crofoot Company.
______ Interest revenue
______ Utilities payable
______ Accounts payable
______ Supplies
______ Bonds payable
______ Trademarks
______ Common stock
______ Accumulated depreciation
______ Machinery
______ Salaries expense
______ Investment in real estate
______ Unearned rent
Match each of the accounts to its proper balance sheet classification, as shown below. If the item
would not appear on a balance sheet, use “NA.”
Current assets (CA)
Long term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long term liabilities (LTL)
Stockholders’ equity (SE)
The trial balance columns of the worksheet for Briscoe Company at June 30, 2011, are as follows.
|
BRISCOE COMPANY Worksheet For the Month Ended June 30, 2011 |
||
|
Trial Balance |
||
|
Account Titles |
Dr. |
Cr. |
|
Cash |
$2,320 |
|
|
Accounts Receivable |
2,440 |
|
|
Supplies |
1,880 |
|
|
Accounts Payable |
$1,120 |
|
|
Unearned Revenue |
240 |
|
|
Common Stock |
3,600 |
|
|
Service Revenue |
2,400 |
|
|
Salaries Expense |
560 |
|
|
Miscellaneous Expense |
160 |
|
|
$7,360 |
$7,360 |
|
Other data:
1. A physical count reveals $300 of supplies on hand.
2. $100 of the unearned revenue is still unearned at month end.
3. Accrued salaries are $280.
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
The adjustments columns of the worksheet for Mears Company are shown below.
|
Adjustments |
||
|
Account Titles |
Debit |
|
|
Accounts Receivable |
600 |
400 |
|
Prepaid Insurance |
900 |
|
|
Accumulated Depreciation |
500 |
|
|
Salaries Payable |
600 |
|
|
Service Revenue |
400 |
|
|
Salaries Expense |
500 |
|
|
Insurance Expense |
400 |
|
|
Depreciation Expense |
900 |
|
|
2,400 |
2,400 |
|
Instructions
(a) Prepare the adjusting entries.
(b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended.
Selected worksheet data for Nicholson Company are presented below.
|
Trial Balance |
Adjusted Trial Balance |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Accounts Receivable |
? |
34,000 |
||
|
Prepaid Insurance |
26,000 |
20,000 |
||
|
Supplies |
7,000 |
? |
||
|
Accumulated Depreciation |
12,000 |
? |
||
|
Salaries Payable |
? |
5,000 |
||
|
Service Revenue |
88,000 |
97,000 |
||
|
Insurance Expense |
? |
|||
|
Depreciation Expense |
? |
10,000 |
||
|
Supplies Expense |
5,000 |
|||
|
Salaries Expense |
49,000 |
|||
Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.
Emil Skoda Company had the following adjusted trial balance.
|
EMIL SKODA COMPANY Adjusted Trial Balance For the Month Ended June 30, 2011 |
||
|
Adjusted Trial Balance |
||
|
Account Titles |
Debits |
Credits |
|
Cash |
$ 3,712 |
|
|
Accounts Receivable |
3,904 |
|
|
Supplies |
480 |
|
|
Accounts Payable |
$ 1,792 |
|
|
Unearned Revenue |
160 |
|
|
Common Stock |
5,000 |
|
|
Retained Earnings |
760 |
|
|
Dividends |
300 |
|
|
Service Revenue |
4,064 |
|
|
Salaries Expense |
1,344 |
|
|
Miscellaneous Expense |
256 |
|
|
Supplies Expense |
2,228 |
|
|
Salaries Payable |
448 |
|
|
$12,224 |
$12,224 |
|
Instructions
(a) Prepare closing entries at June 30, 2011.
(b) Prepare a post closing trial balance.
Apachi Company ended its fiscal year on July 31, 2011. The company’s adjusted trial balance as of the end of its fiscal year is as shown at the top of page 186.
|
APACHI COMPANY Adjusted Trial Balance July 31, 2011 |
|||
|
No. |
Account Titles |
Debits |
Credits |
|
101 |
Cash |
$ 14,840 |
|
|
112 |
Accounts Receivable |
8,780 |
|
|
157 |
Equipment |
15,900 |
|
|
167 |
Accumulated Depreciation |
$ 7,400 |
|
|
201 |
Accounts Payable |
4,220 |
|
|
208 |
Unearned Rent Revenue |
1,800 |
|
|
311 |
Common Stock |
20,000 |
|
|
320 |
Retained Earnings |
25,200 |
|
|
332 |
Dividends |
16,000 |
|
|
404 |
Commission Revenue |
65,000 |
|
|
429 |
Rent Revenue |
6,500 |
|
|
711 |
Depreciation Expense |
4,000 |
|
|
720 |
Salaries Expense |
55,700 |
|
|
732 |
Utilities Expense |
14,900 |
|
|
$130,120 |
$130,120 |
||
Instructions
(a) Prepare the closing entries using page J15.
(b) Post to Retained Earnings and No. 350 Income Summary accounts. (Use the three column form.)
(c) Prepare a post closing trial balance at July 31.
Mason Company has an inexperienced accountant. During the first 2 weeks on the job, the accountant made the following errors in journalizing transactions. All entries were posted as made.
1. A payment on account of $630 to a creditor was debited to Accounts Payable $360 and credited to Cash $360.
2. The purchase of supplies on account for $560 was debited to Equipment $56 and credited to Accounts Payable $56.
3. A $400 cash dividend was debited to Salaries Expense $400 and credited to Cash $400.
Instructions
Prepare the correcting entries.
E4 14 The adjusted trial balance for Karr Bowling Alley at December 31, 2011, contains the following accounts.E4 10 Josh Borke has prepared the following list of statements about the accounting cycle.
1. “Journalize the transactions” is the first step in the accounting cycle.
2. Reversing entries are a required step in the accounting cycle.
3. Correcting entries do not have to be part of the accounting cycle.
4. If a worksheet is prepared, some steps of the accounting cycle are incorporated into the worksheet.
5. The accounting cycle begins with the analysis of business transactions and ends with the preparation of a post closing trial balance.
6. All steps of the accounting cycle occur daily during the accounting period.
7. The step of “post to the ledger accounts” occurs before the step of “journalize the transactions.”
8. Closing entries must be prepared before financial statements can be prepared.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
|
Debits |
Credits |
||
|
Building |
$128,800 |
Common Stock |
$100,000 |
|
Accounts Receivable |
14,520 |
Retained Earnings |
15,000 |
|
Prepaid Insurance |
4,680 |
Accumulated Depreciation—Building |
42,600 |
|
Cash |
18,040 |
Accounts Payable |
12,300 |
|
Equipment |
62,400 |
Note Payable |
97,780 |
|
Land |
64,000 |
Accumulated Depreciation—Equipment |
18,720 |
|
Insurance Expense |
780 |
Interest Payable |
2,600 |
|
Depreciation Expense |
7,360 |
Bowling Revenues |
14,180 |
|
Interest Expense |
2,600 |
$303,180 |
|
|
$303,180 |
|||
Instructions
(a) Prepare a classified balance sheet; assume that $13,900 of the note payable will be paid in 2012.
(b) Comment on the liquidity of the company.
The following are the major balance sheet classifications.
Current assets (CA)
Long term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long term liabilities (LTL)
Stockholders’ equity (SE)
Instructions
Classify each of the following accounts taken from Roberts Company’s balance sheet.
______ Accounts payable
______ Accounts receivable
______ Accumulated depreciation
______ Buildings
______ Cash
______ Common stock
______ Patents
______ Salaries payable
______ Inventories
______ Investments
______ Land
______ Long term debt
______ Supplies
______ Office equipment
______ Prepaid expenses
The following items were taken from the financial statements of R. Stevens Company. (All dollars are in thousands.)
|
Salaries payable |
$ 2,080 |
Note payable (long term) |
$ 1,800 |
|
Salaries expense |
51,700 |
Cash |
24,200 |
|
Utilities expense |
22,600 |
Accounts receivable |
9,780 |
|
Equipment |
18,500 |
Accumulated depreciation |
6,000 |
|
Accounts payable |
4,100 |
Dividends |
4,000 |
|
Commission revenue |
61,100 |
Depreciation expense |
4,000 |
|
Rent revenue |
8,500 |
Retained earnings (beginning |
21,200 |
|
Common stock |
30,000 |
of the year) |
Instructions
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified balance sheet at July 31.
On December 31, the adjusted trial balance of Oslo Employment Agency shows the following selected data.
|
Accounts Receivable |
$24,000 |
Commission Revenue |
$92,000 |
|
Interest Expense |
7,800 |
Interest Payable |
1,500 |
Analysis shows that adjusting entries were made to
(1) accrue $4,500 of commission revenue and
(2) accrue $1,500 interest expense.
Instructions
(a) Prepare the closing entries for the temporary accounts shown above at December 31.
(b) Prepare the reversing entries on January 1.
(c) Post the entries in (a) and (b). Rule and balance the accounts. (Use T accounts.)
(d) Prepare the entries to record (1) the collection of the accrued commissions on January 10 and (2) the payment of all interest due ($2,500) on January 15.
(e) Post the entries in (d) to the temporary accounts.
Thomas Magnum began operations as a private investigator on January 1, 2011.The trial balance columns of the worksheet for Thomas Magnum, P.I., Inc. at March 31 are as follows.
|
THOMAS MAGNUM, P.I., INC. Worksheet For the Quarter Ended March 31, 2011 |
||
|
Trial Balance |
||
|
Account Titles |
Dr. |
Cr. |
|
Cash |
11,400 |
|
|
Accounts Receivable |
5,620 |
|
|
Supplies |
1,050 |
|
|
Prepaid Insurance |
2,400 |
|
|
Equipment |
30,000 |
|
|
Notes Payable |
10,000 |
|
|
Accounts Payable |
12,350 |
|
|
Common Stock |
20,000 |
|
|
Dividends |
600 |
|
|
Service Revenue |
||
|
Salaries Expense |
2,200 |
13,620 |
|
Travel Expense |
1,300 |
|
|
Rent Expense |
1,200 |
|
|
Miscellaneous Expense |
200 |
|
|
55,970 |
55,970 |
|
Other data:
1. Supplies on hand total $380.
2. Depreciation is $1,000 per quarter.
3. Interest accrued on 6 month note payable, issued January 1, $300.
4. Insurance expires at the rate of $200 per month.
5. Services provided but unbilled at March 31 total $530.
Instructions
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Prepare an income statement and a retained earnings statement for the quarter and a classified balance sheet at March 31.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
The adjusted trial balance columns of the worksheet for Porter Company are as follows.
|
PORTER COMPANY Worksheet For the Year Ended December 31, 2011 |
|||
|
Account |
|||
|
No. |
Account Titles |
Dr. |
Cr. |
|
101 |
Cash |
4,400 |
|
|
112 |
Accounts Receivable |
44,000 |
|
|
126 |
Supplies |
||
|
130 |
Prepaid Insurance |
||
|
151 |
Office Equipment |
||
|
152 |
Accumulated Depreciation—Office Equipment |
20,000 |
|
|
200 |
Notes Payable |
20,000 |
|
|
201 |
Accounts Payable |
8,000 |
|
|
212 |
Salaries Payable |
2,600 |
|
|
230 |
Interest Payable |
1,000 |
|
|
311 |
Common Stock |
30,000 |
|
|
320 |
Retained Earnings |
6,000 |
|
|
332 |
Dividends |
12,000 |
|
|
400 |
Service Revenue |
77,800 |
|
|
610 |
Advertising Expense |
12,000 |
|
|
631 |
Supplies Expense |
3,700 |
|
|
711 |
Depreciation Expense |
8,000 |
|
|
722 |
Insurance Expense |
4,000 |
|
|
726 |
Salaries Expense |
39,000 |
|
|
905 |
Interest Expense |
1,000 |
|
|
Totals |
165,400 |
||
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, a retained earnings statement, and a classified balance sheet. $10,000 of the notes payable become due in 2012.
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three column form of account. Income Summary is account No. 350.
(e) Prepare a post closing trial balance.
On January 1, 2012, Syed Corporation had the following stockholders’ equity accounts
|
Common Stock ($5 par value, 200,000 shares issued and outstanding) |
$1,000,000 |
|
Paid in Capital in Excess of Par—Common Stock |
200,000 |
|
Retained Earnings |
840,000 |
During the year, the following transactions occurred.
|
Jan. |
15 |
Declared a $1 cash dividend per share to stockholders of record on January 31, payable |
|
February 15. |
||
|
Feb. |
15 |
Paid the dividend declared in January. |
|
Apr. |
15 |
Declared a 10% stock dividend to stockholders of record on April 30, distributable |
|
May 15. On April 15, the market price of the stock was $15 per share. |
||
|
May |
15 |
Issued the shares for the stock dividend. |
|
July |
1 |
Announced a 2 for 1 stock split. The market price per share prior to the announcement |
|
was $17. (The new par value is $2.50.) |
||
|
Dec. |
1 |
Declared a $0.50 per share cash dividend to stockholders of record on December 15, |
|
payable January 10, 2013. |
||
|
31 |
Determined that net income for the year was $250,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances, and post the entries to the stockholders’ equity accounts.
(c) Prepare a stockholders’ equity section at December 31.
The stockholders’ equity accounts of Motz Inc., at January 1, 2012, are as follows.
|
Preferred Stock, $100 par, 7% |
$600,000 |
|
Common Stock, $10 par |
900,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
100,000 |
|
Paid in Capital in Excess of Par—Common Stock |
200,000 |
|
Retained Earnings |
500,000 |
There were no dividends in arrears on preferred stock. During 2012, the company had the following transactions and events.
|
July |
1 |
Declared a $0.50 cash dividend on common stock. |
|
Aug. |
1 |
Discovered a $72,000 overstatement of 2011 depreciation on equipment. Ignore income |
|
taxes. |
||
|
Sept. |
1 |
Paid the cash dividend declared on July 1. |
|
Dec. |
1 |
Declared a 10% stock dividend on common stock when the market value of the stock |
|
was $16 per share. |
||
|
15 |
Declared a 7% cash dividend on preferred stock payable January 31, 2013. |
|
|
31 |
Determined that net income for the year was $350,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts and post to the stockholders’ equity accounts.
(c) Prepare a retained earnings statement for the year.
(d) Prepare a stockholders’ equity section at December 31, 2012.
The ledger of Conway Corporation at December 31, 2012, after the books have been closed, contains the following stockholders’ equity accounts.
|
Preferred Stock (10,000 shares issued) |
$1,000,000 |
|
Common Stock (400,000 shares issued) |
2,000,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
200,000 |
|
Paid in Capital in Excess of Stated—Common Stock |
1,180,000 |
|
Common Stock Dividends Distributable |
200,000 |
|
Retained Earnings |
2,560,000 |
A review of the accounting records reveals the following.
1. No errors have been made in recording 2012 transactions or in preparing the closing entry for net income.
2. Preferred stock is 6%, $100 par value, noncumulative, and callable at $125. Since January 1, 2011, 10,000 shares have been outstanding; 20,000 shares are authorized.
3. Common stock is no par with a stated value of $5 per share; 600,000 shares are authorized.
4. The January 1 balance in Retained Earnings was $2,450,000.
5. On October 1, 100,000 shares of common stock were sold for cash at $8 per share.
6. A cash dividend of $500,000 was declared and properly allocated to preferred and common stock on November 1. No dividends were paid to preferred stockholders in 2011.
7. On December 31, a 10% common stock dividend was declared out of retained earnings on common stock when the market price per share was $9.
8. Net income for the year was $970,000.
9. On December 31, 2012, the directors authorized disclosure of a $100,000 restriction of retained earnings for plant expansion. (Use Note A.)
Instructions
(a) Reproduce the Retained Earnings account (T account) for 2012.
(b) Prepare a retained earnings statement for 2012.
(c) Prepare a stockholders’ equity section at December 31, 2012.
(d) Compute the allocation of the cash dividend to preferred and common stock.
(e) Compute the earnings per share of common stock using 325,000 as the weighted average shares outstanding for the year.
On January 1, 2012, Acierno Corporation had the following stockholders’ equity accounts.
|
Common Stock (no par value, 100,000 shares issued and outstanding) |
$2,800,000 |
|
Retained Earnings |
1,000,000 |
During the year, the following transactions occurred.
|
Feb. |
1 |
Declared a $1 cash dividend per share to stockholders of record on February 15, payable |
|
March 1. |
||
|
Mar. |
1 |
Paid the dividend declared in February. |
|
Apr. |
1 |
Announced a 4 for 1 stock split. Prior to the split, the market price per share was $36. |
|
July |
1 |
Declared a 5% stock dividend to stockholders of record on July 15, distributable July 31. |
|
On July 1, the market price of the stock was $13 per share. |
||
|
31 |
Issued the shares for the stock dividend. |
|
|
Dec. |
1 |
Declared a $0.50 per share dividend to stockholders of record on December 15, payable |
|
January 5, 2013. |
||
|
31 |
Determined that net income for the year was $700,000. |
Instructions
Prepare the stockholders’ equity section of the balance sheet at: (a) March 31, (b) June 30, (c) September 30, and (d) December 31, 2012.
On January 1, 2012, Beacham Inc. had the following shareholders’ equity balances.
|
Common Stock, no par value (1,000,000 shares issued) |
$3,000,000 |
|
Common Stock Dividends Distributable |
400,000 |
|
Retained Earnings |
1,200,000 |
During 2012, the following transactions and events occurred.
1. Issued 100,000 shares of common stock as a result of a 10% stock dividend declared on December 15, 2011.
2. Issued 60,000 shares of common stock for cash at $5 per share.
3. Corrected an error that had understated the net income for 2010 by $140,000.
4. Declared and paid a cash dividend of $300,000.
5. Earned net income of $600,000.
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2012.
The stockholders’ equity accounts of Fernandez, Inc., at January 1, 2012, are as follows.
|
Preferred Stock, no par, 4,000 shares issued |
$400,000 |
|
Common Stock, no par, 140,000 shares issued |
700,000 |
|
Retained Earnings |
500,000 |
During 2012, the company had the following transactions and events.
|
July |
1 |
Declared a $0.50 cash dividend on common stock. |
|
Aug. |
1 |
Discovered a $72,000 overstatement of 2011 depreciation expense. (Ignore income taxes.) |
|
Sept. |
1 |
Paid the cash dividend declared on July 1. |
|
Dec. |
1 |
Declared a 10% stock dividend on common stock when the market value of the stock was |
|
$12 per share. |
||
|
15 |
Declared a $9 per share cash dividend on preferred stock, payable January 31, 2013. |
|
|
31 |
Determined that net income for the year was $320,000. |
Instructions
With the class divided into groups, answer the following questions.
(a) Prepare a retained earnings statement for the year. There are no preferred dividends in arrears.
(b) Discuss why the overstatement of 2011 depreciation expense is not treated as an adjustment of the current year’s income.
(c) Discuss the reasons why a company might decide to issue a stock dividend rather than a cash dividend.
Garcia Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months, however, have been a cash drain on the company, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day to day operating needs, the president, Tom Henson, has decided that a stock dividend instead of a cash dividend should be declared. He tells Garcia’s financial vice president, Andrea Lane, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”
Instructions
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about Henson’s intentions or actions?
(c) What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why?
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
|
Lease A |
Lease B |
|
a. Operating lease |
Capital lease |
|
b. Operating lease |
Operating lease |
|
c. Capital lease |
Operating lease |
|
d. Capital lease |
Capital lease |
Laci Inc. is considering two alternatives to finance its construction of a new $2 million plant.
(a) Issuance of 200,000 shares of common stock at the market price of $10 per share.
(b) Issuance of $2 million, 8% bonds at face value.
Complete the following table, and indicate which alternative is preferable.
|
Issue Stock |
Issue Bond |
|
|
Income before interest and taxes |
$700,000 |
$700,000 |
|
Interest expense from bonds |
||
|
Income before income taxes |
$ |
$ |
|
Income tax expense (30%) |
||
|
Net income |
$ |
$ |
|
Outstanding shares |
500,000 |
|
|
Earnings per share |
Presented below is the partial bond discount amortization schedule for Bilder Corp. Bilder uses the effective interest method of amortization.
|
Interest |
|||||
|
Semiannual |
Interest to |
Expense to |
Discount |
Unamortized |
Bond Carrying |
|
Interest Periods |
Be Paid |
Be Recorded |
Amortization |
Discount |
Value |
|
Issue date |
$62,311 |
$937,689 |
|||
|
1 |
$45,000 |
$46,884 |
$1,884 |
60,427 |
939,573 |
|
2 |
45,000 |
46,979 |
1,979 |
58,448 |
941,552 |
Instructions
(a) Prepare the journal entry to record the payment of interest and the discount amortization at the end of period 1.
(b) Explain why interest expense is greater than interest paid.
(c) Explain why interest expense will increase each period.
Jeff Bly has prepared the following list of statements about bonds.
1. Bonds are a form of interest bearing notes payable.
2. When seeking long term financing, an advantage of issuing bonds over issuing common stock is that stockholder control is not affected.
3. When seeking long term financing, an advantage of issuing common stock over issuing bonds is that tax savings result.
4. Secured bonds have specific assets of the issuer pledged as collateral for the bonds.
5. Secured bonds are also known as debenture bonds.
6. Bonds that mature in installments are called term bonds.
7. A conversion feature may be added to bonds to make them more attractive to bond buyers.
8. The rate used to determine the amount of cash interest the borrower pays is called the stated rate.
9. Bond prices are usually quoted as a percentage of the face value of the bond.
10. The present value of a bond is the value at which it should sell in the marketplace.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
The following section is taken from Koster Corp.’s balance sheet at December 31, 2011.
|
Current liabilities |
|
|
Interest payable |
$ 72,000 |
|
Long term liabilities |
|
|
Bonds payable, 9%, due January 1, 2016 |
1,600,000 |
Bond interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.
Instructions
(a) Journalize the payment of the bond interest on January 1, 2012.
(b) Assume that on January 1, 2012, after paying interest, Koster calls bonds having a face value of $600,000. The call price is 104. Record the redemption of the bonds.
(c) Prepare the entry to record the payment of interest on July 1, 2012, assuming no previous accrual of interest on the remaining bonds.
Presented below are two independent situations.
1. Sunny Isles Car Rental leased a car to Emmaus Company for one year. Terms of the operating lease agreement call for monthly payments of $500.
2. On January 1, 2012, Wruck Inc. entered into an agreement to lease 20 computers from Braskich Electronics. The terms of the lease agreement require three annual rental payments of $30,000 (including 10% interest) beginning December 31, 2012. The present value of the three rental payments is $74,606. Wruck considers this a capital lease.
Instructions
(a) Prepare the appropriate journal entry to be made by Emmaus Company for the first lease payment.
(b) Prepare the journal entry to record the lease agreement on the books of Wruck Inc. on January 1, 2012.
Brasswood Corporation reports the following amounts in its 2012 financial statements:
|
At December 31, 2012 |
For the Year 2012 |
|
|
Total assets |
$1,000,000 |
|
|
Total liabilities |
620,000 |
|
|
Total stockholders’ equity |
? |
|
|
Interest expense |
$ 7,000 |
|
|
Income tax expense |
100,000 |
|
|
Net income |
150,000 |
Instructions
(a) Compute the December 31, 2012, balance in stockholders’ equity.
(b) Compute the debt to total assets ratio at December 31, 2012.
(c) Compute times interest earned for 2012.
On May 1, 2012, Chance Corp. issued $600,000, 9%, 5 year bonds at face value. The bonds were dated May 1, 2012, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2012.
(c) Show the balance sheet presentation on December 31, 2012.
(d) Prepare the journal entry to record payment of interest on May 1, 2013, assuming no accrual of interest from January 1, 2013, to May 1, 2013.
(e) Prepare the journal entry to record payment of interest on November 1, 2013.
(f) Assume that on November 1, 2013, Chance calls the bonds at 102. Record the redemption of the bonds.
Presented below are three different lease transactions that occurred for Manitoba Inc. in 2012. Assume that all lease contracts start on January 1, 2012. In no case does Manitoba receive title to the properties leased during or at the end of the lease term.
|
Lessor |
|||
|
Farrey Delivery |
DiBell Co. |
Diederich Auto |
|
|
Type of property |
Computer |
Delivery equipment |
Automobile |
|
Yearly rental |
$ 6,000 |
$ 4,200 |
$ 3,700 |
|
Lease term |
6 years |
4 years |
2 years |
|
Estimated economic life |
7 years |
7 years |
5 years |
|
Fair value of lease asset |
$33,000 |
$19,000 |
$11,000 |
|
Present value of the lease |
|||
|
rental payments |
$31,000 |
$13,000 |
$ 6,400 |
|
Bargain purchase option |
None |
None |
None |
Instructions
(a) Which of the leases are operating leases and which are capital leases? Explain.
(b) How should the lease transaction for DiBell Co. be recorded in 2012?
(c) How should the lease transaction for Farrey Delivery be recorded on January 1, 2012?
On July 1, 2012, Charisse Corporation issued $2,000,000 face value, 10%, 10 year bonds at $2,271,813. This price resulted in an effective interest rate of 8% on the bonds. Charisse uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2012.
(b) Prepare an amortization table through December 31, 2013 (3 interest periods) for this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2012.
(d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2013, assuming no accrual of interest on June 30.
(e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2013.
On July 1, 2012, Francesca Company issued $4,000,000 face value, 8%, 10 year bonds at $3,501,514. This price resulted in an effective interest rate of 10% on the bonds. Francesca uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2012.
(2) The accrual of interest and the amortization of the discount on December 31, 2012.
(3) The payment of interest and the amortization of the discount on July 1, 2013, assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the discount on December 31, 2013.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2013, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2013?
(2) Would the bond interest expense reported in 2013 be the same as, greater than, or less than the amount that would be reported if the straight line method of amortization were used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense that would be reported if the straight line method of amortization were used?
The following is taken from the Gajda Company balance sheet.
|
GAJDA COMPANY |
||
|
Balance Sheet (partial) |
||
|
December 31, 2012 |
||
|
Current liabilities |
||
|
Interest payable (for 6 months |
||
|
from July 1 to December 31) |
$ 105,000 |
|
|
Long term liabilities |
||
|
Bonds payable, 7% due January 1, 2023 |
$3,000,000 |
|
|
Add: Premium on bonds payable |
200,000 |
$3,200,000 |
Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual interest date. Gajda uses straight line amortization for any bond premium or discount. From December 31, 2012, the bonds will be outstanding for an additional 10 years (120 months).
Instructions
(a) Journalize the payment of bond interest on January 1, 2013.
(b) Prepare the entry to amortize bond premium and to pay the interest due on July 1, 2013, assuming no accrual of interest on June 30.
(c) Assume that on July 1, 2013, after paying interest, Gajda Company calls bonds having a face value of $1,200,000. The call price is 101. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2013, to amortize bond premium and to accrue interest on the remaining bonds.
On June 1, 2012, Lublin Corp. issued $2,000,000, 9%, 5 year bonds at face value. The bonds were dated June 1, 2012, and pay interest semiannually on June 1 and December 1. Financial statements are prepared annually on December 31.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2012.
(c) Show the balance sheet presentation on December 31, 2012.
(d) Prepare the journal entry to record payment of interest on June 1, 2013, assuming no accrual of interest from January 1, 2013, to June 1, 2013.
(e) Prepare the journal entry to record payment of interest on December 1, 2013.
(f) Assume that on December 1, 2013, Lublin calls the bonds at 102. Record the redemption of the bonds.
Goody Foods has developed choc o spice cookies with a distinct flavour it believes will be popular with young people. The product will be test marketed in Atlantic Canada for two years. It requires an initial investment of $2 million and because of heavy promotional expenses, it is not expected to generate any positive cash flows after tax (CFAT) during the first two years. There is a 60 percent chance that demand for the choc o spice cookies will be satisfactory; if that is so, a further investment cost of $5 million will be incurred in Year 2 to market the cookies nationwide. The subsequent CFATs expected are $4 million, $7 million, and $6 million, in years 3, 4, and 5, respectively. The cookies will be withdrawn from the market if the test market results are unfavourable (a 40 percent chance) in Year 2.
Goody Foods considers the project to be of average risk, with a 14 percent opportunity cost of Capital. The company intends to use net present value analysis to determine whether it will be worthwhile to go forward with the project. What decision should the company make?
On January 1, 2012, Siena Corporation purchased 2,000 shares of treasury stock. Other information regarding Siena Corporation is provided below.
|
2011 |
2012 |
|
|
Net income |
$110,000 |
$110,000 |
|
Dividends on preferred stock |
$10,000 |
$10,000 |
|
Dividends on common stock |
$2,000 |
$1,600 |
|
Weighted average number of shares outstanding |
10,000 |
8,000* |
|
Common stockholders’ equity, beginning of year |
$500,000 |
$400,000* |
|
Common stockholders’ equity, end of year |
$500,000 |
$400,000 |
|
*Adjusted for purchase of treasury stock. |
Compute (a) return on common stockholders’ equity for each year and (b) earnings per share for each year, and (c) discuss the changes in each.
On January 1, 2012, Hayslett Corporation had the following stockholders’ equity accounts.
|
Common Stock ($10 par value, 260,000 shares issued |
|
|
and outstanding) |
$2,600,000 |
|
Paid in Capital in Excess of Par—Common Stock |
1,500,000 |
|
Retained Earnings |
3,200,000 |
During the year, the following transactions occurred.
|
April |
1 |
Declared a $1.50 cash dividend per share to stockholders of record on April 15, payable May 1. |
|
May |
1 |
Paid the dividend declared in April. |
|
June |
1 |
Announced a 2 for 1 stock split. Prior to the split, the market price per share was $24. |
|
Aug. |
1 |
Declared a 10% stock dividend to stockholders of record on August 15, distributable |
|
August 31. On August 1, the market price of the stock was $10 per share. |
||
|
31 |
Issued the shares for the stock dividend. |
|
|
Dec. |
1 |
Declared a $1.50 per share dividend to stockholders of record on December 15, payable |
|
January 5, 2011. |
||
|
31 |
Determined that net income for the year was $600,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Prepare a stockholders’ equity section at December 31.
On January 1, 2012, Raczynski Corporation purchased 1,000 shares of treasurystock. Other information regarding Raczynski Corporation is provided below.
|
2011 |
2012 |
|
|
Net income |
$200,000 |
$210,000 |
|
Dividends on preferred stock |
$30,000 |
$30,000 |
|
Dividends on common stock |
$20,000 |
$25,000 |
|
Weighted average number of common shares outstanding |
10,000 |
9,000 |
|
Common stockholders’ equity beginning of year |
$600,000 |
$750,000 |
|
Common stockholders’ equity end of year |
$750,000 |
$830,000 |
Compute (a) return on common stockholders’ equity for each year and (b) earnings per share for each year, and (c) discuss the changes in each.
On January 1, Chreesh Corporation had 95,000 shares of no par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following occurred.
|
Apr. |
1 |
Issued 25,000 additional shares of common stock for $17 per share. |
|
June |
15 |
Declared a cash dividend of $1 per share to stockholders of record on June 30. |
|
July |
10 |
Paid the $1 cash dividend. |
|
Dec. |
1 |
Issued 2,000 additional shares of common stock for $19 per share. |
|
15 |
Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of |
|
|
record on December 31. |
Instructions
(a) Prepare the entries, if any, on each of the three dividend dates.
(b) How are dividends and dividends payable reported in the financial statements prepared at December 31?
On October 1, Little Tommy Corporation’s stockholders’ equity is as follows.
|
Common stock, $5 par value |
$400,000 |
|
Paid in capital in excess of par—common stock |
25,000 |
|
Retained earnings |
155,000 |
|
Total stockholders’ equity |
$580,000 |
On October 1, Little Tommy declares and distributes a 10% stock dividend when the market value of the stock is $15 per share.
Instructions
(a) Compute the par value per share (1) before the stock dividend and (2) after the stock dividend.
(b) Indicate the balances in the three stockholders’ equity accounts after the stock dividend shares have been distributed.
During 2012, Margan Corporation had the following transactions and events.
1. Declared a cash dividend.
2. Issued par value common stock for cash at par value.
3. Completed a 2 for 1 stock split in which $10 par value stock was changed to $5 par value stock.
4. Declared a small stock dividend when the market value was higher than par value.
5. Made a prior period adjustment for overstatement of net income.
6. Issued the shares of common stock required by the stock dividend declaration in item no. 4 above.
7. Paid the cash dividend in item no. 1 above.
8. Issued par value common stock for cash above par value.
Instructions
Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answer in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect. Item no. 1 is given as an example.
|
Paid in Capital |
|||
|
Capital |
Retained |
||
|
Item |
Stock |
Additional |
Earnings |
|
1 |
NE |
NE |
D |
Before preparing financial statements for the current year, the chief accountant for Paul Company discovered the following errors in the accounts.
1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest Expense $50,000 and a credit to Cash $50,000.
2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the market value per share was $18. The only entry made was: Stock Dividends (Dr.) $10,000 and Dividend Payable (Cr.) $10,000. The shares have not been issued.
3. A 4 for 1 stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.
Instructions
Prepare the correcting entries at December 31.
The following accounts appear in the ledger of Kallie Inc. after the books are closed at December 31.
|
Common Stock, no par, $1 stated value, 400,000 shares authorized; |
|
|
300,000 shares issued |
$ 300,000 |
|
Common Stock Dividends Distributable |
30,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,200,000 |
|
Preferred Stock, $5 par value, 8%, 40,000 shares authorized; |
|
|
30,000 shares issued |
150,000 |
|
Retained Earnings |
800,000 |
|
Treasury Stock (10,000 common shares) |
74,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
344,000 |
Instructions
Prepare the stockholders’ equity section at December 31, assuming retained earnings is restricted for plant expansion in the amount of $100,000.
The following financial information is available for Monique Corporation.
|
2012 |
2011 |
|
|
Average common stockholders’ equity |
$1,200,000 |
$900,000 |
|
Dividends paid to common stockholders |
50,000 |
30,000 |
|
Dividends paid to preferred stockholders |
20,000 |
20,000 |
|
Net income |
290,000 |
200,000 |
|
Market price of common stock |
20 |
15 |
The weighted average number of shares of common stock outstanding was 80,000 for 2011 and 100,000 for 2012.
Instructions
Calculate earnings per share and return on common stockholders’ equity for 2012 and 2011.
This financial information is available for Hoyle Corporation.
|
2012 |
2011 |
|
|
Average common stockholders’ equity |
$1,800,000 |
$1,900,000 |
|
Dividends paid to common stockholders |
90,000 |
70,000 |
|
Dividends paid to preferred stockholders |
20,000 |
20,000 |
|
Net income |
290,000 |
248,000 |
|
Market price of common stock |
20 |
25 |
The weighted average number of shares of common stock outstanding was 180,000 for 2011 and
150,000 for 2012.
Instructions
Calculate earnings per share and return on common stockholders’ equity for 2012 and 2011.
On January 1, 2012, Kristen Corporation had the following stockholders’ equity accounts.
|
Common Stock ($20 par value, 60,000 shares issued and outstanding) |
$1,200,000 |
|
Paid in Capital in Excess of Par—Common Stock |
200,000 |
|
Retained Earnings |
600,000 |
During the year, the following transactions occurred.
|
Feb. |
1 |
Declared a $1 cash dividend per share to stockholders of record on February 15, payable |
|
March 1. |
||
|
Mar. |
1 |
Paid the dividend declared in February. |
|
Apr. |
1 |
Announced a 2 for 1 stock split. Prior to the split, the market price per share was $36. |
|
July |
1 |
Declared a 10% stock dividend to stockholders of record on July 15, distributable |
|
July 31. On July 1, the market price of the stock was $13 per share. |
||
|
. |
31 |
Issued the shares for the stock dividend. |
|
Dec |
1 |
Declared a $0.50 per share dividend to stockholders of record on December 15, payable |
|
January 5, 2013. |
||
|
31 |
Determined that net income for the year was $350,000. |
|
|
Declared a $1 cash dividend per share to stockholders of record on February 15, payable |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances, and post the entries to the stockholders’ equity accounts.
(c) Prepare a stockholders’ equity section at December 31.
The stockholders’ equity accounts of Falk Company at January 1, 2012, are as follows.
|
Preferred Stock, 6%, $50 par |
$600,000 |
|
Common Stock, $5 par |
800,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
200,000 |
|
Paid in Capital in Excess of Par—Common Stock |
300,000 |
|
Retained Earnings |
800,000 |
There were no dividends in arrears on preferred stock. During 2012, the company had the following transactions and events.
|
July |
1 |
Declared a $0.50 cash dividend on common stock. |
|
Aug. |
1 |
Discovered $25,000 understatement of 2011 depreciation on equipment. Ignore income |
|
taxes. |
||
|
Sept. |
1 |
Paid the cash dividend declared on July 1. |
|
Dec. |
1 |
Declared a 10% stock dividend on common stock when the market value of the stock |
|
was $18 per share. |
||
|
15 |
Declared a 6% cash dividend on preferred stock payable January 15, 2013. |
|
|
31 |
Determined that net income for the year was $355,000. |
|
|
31 |
Recognized a $200,000 restriction of retained earnings for plant expansion. |
Instructions
(a) Journalize the transactions, events, and closing entry.
(b) Enter the beginning balances in the accounts, and post to the stockholders’ equity accounts.
(c) Prepare a retained earnings statement for the year.
(d) Prepare a stockholders’ equity section at December 31, 2012.
The post closing trial balance of Violet Corporation at December 31, 2012, contains the following stockholders’ equity accounts.
|
Preferred Stock (15,000 shares issued) |
$ 750,000 |
|
Common Stock (250,000 shares issued) |
2,500,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
250,000 |
|
Paid in Capital in Excess of Par—Common Stock |
400,000 |
|
Common Stock Dividends Distributable |
250,000 |
|
Retained Earnings |
1,042,000 |
A review of the accounting records reveals the following.
1. No errors have been made in recording 2012 transactions or in preparing the closing entry for net income.
2. Preferred stock is $50 par, 6%, and cumulative; 15,000 shares have been outstanding since January 1, 2011.
3. Authorized stock is 20,000 shares of preferred, 500,000 shares of common with a $10 par value.
4. The January 1 balance in Retained Earnings was $1,170,000.
5. On July 1, 20,000 shares of common stock were issued for cash at $16 per share.
6. On September 1, the company discovered an understatement error of $90,000 in computing depreciation in 2011. The net of tax effect of $63,000 was properly debited directly to Retained Earnings.
7. A cash dividend of $250,000 was declared and properly allocated to preferred and common stock on October 1. No dividends were paid to preferred stockholders in 2011.
8. On December 31, a 10% common stock dividend was declared out of retained earnings on common stock when the market price per share was $16.
9. Net income for the year was $585,000.
10. On December 31, 2012, the directors authorized disclosure of a $200,000 restriction of retained earnings for plant expansion. (Use Note X.)
Instructions
(a) Reproduce the Retained Earnings account for 2012.
(b) Prepare a retained earnings statement for 2012.
(c) Prepare a stockholders’ equity section at December 31, 2012.
(d) Compute the allocation of the cash dividend to preferred and common stock.
(e) Compute the earnings per share of common stock using 240,000 as the weighted average shares outstanding for the year.
On January 1, 2012, Saa Corporation had the following stockholders’ equity accounts.
|
Common Stock (no par value, 90,000 shares issued and outstanding) |
$1,400,000 |
|
Retained Earnings |
500,000 |
During the year, the following transactions occurred.
|
Feb. |
1 |
Declared a $1 cash dividend per share to stockholders of record on February 15, payable |
|
March 1. |
||
|
Mar. |
1 |
Paid the dividend declared in February. |
|
Apr. |
1 |
Announced a 4 for 1 stock split. Prior to the split, the market price per share was $36. |
|
July |
1 |
Declared a 5% stock dividend to stockholders of record on July 15, distributable July 31. |
|
On July 1, the market price of the stock was $13 per share. |
||
|
31 |
Issued the shares for the stock dividend. |
|
|
Dec. |
1 |
Declared a $0.50 per share dividend to stockholders of record on December 15, payable |
|
January 5, 2013. |
||
|
31 |
Determined that net income for the year was $350,000. |
Instructions
Prepare the stockholders’ equity section of the balance sheet at: (a) March 31, (b) June 30, (c) September 30, and (d) December 31, 2012.
On January 1, 2012, Hammermeister Inc. had the following stockholders’ equity account balances.
|
Common Stock, no par value (500,000 shares issued) |
$1,500,000 |
|
Common Stock Dividends Distributable |
200,000 |
|
Retained Earnings |
600,000 |
During 2012, the following transactions and events occurred.
1. Issued 50,000 shares of common stock as a result of a 10% stock dividend declared on December 15, 2009.
2. Issued 30,000 shares of common stock for cash at $6 per share.
3. Corrected an error that had understated the net income for 2010 by $70,000.
4. Declared and paid a cash dividend of $80,000.
5. Earned net income of $300,000.
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2012.
Creation of a trust
You have been hired as trustee for the testamentary trust created by the will of Jimmy Olson. The trust is created on July 22, 2011.
The trust initially invests the proceeds from the estate in a checking account that pays 3 percent per year. Interest is paid monthly. On July 23, the trust invests $300,000 in a certificate of deposit at Metropolis National Bank. The certificate earns 6 percent interest per year, paid monthly. On July 25, the trust invests $500,000 in the Super Stock Mutual Fund. On July 31, the trust invests $100,000 in 10 year 10 percent Smallville Municipal Bonds, which mature on July 31, 2018. The bonds pay interest semiannually on January 31 and July 31. On August 22, you receive a check for $1,500, representing one month’s interest on the certificate of deposit. On August 23, you receive the statement on the checking account indicating a deposit of $405 for one month’s interest on the checking account. The statement also indicates the bank’s monthly fee of $100 for maintaining the trust. On August 31, you send a check to Lois Olson for $3,700 to cover her monthly living expenses. REQUIRED: Prepare the entry to record the creation of the Olson trust on July 22. Prepare all additional required entries to account for trust activities through August 31.
Creation of a trust
You have been hired as trustee for the testamentary trust created by the will of George Wilson. The trust is created on April 30, 2011. The trust initially invests the proceeds from the estate in a checking account, which pays 3 percent per year. Interest is paid quarterly. On May 3, the trust invests $450,000 in a certificate of deposit at the local bank. The certificate earns 6 percent interest per year, paid monthly. On May 25, the trust sells the land for $31,300 in cash. On May 31 and June 30, you pay the $165 monthly service fees to the bank. On June 3, you receive a check for $2,250, representing the first month’s interest on the certificate of deposit. On June 15, you send a check to Jimmy Wilson (George’s oldest son) for $8,700 to cover his fall semester tuition, room, and board at Big State University.
REQUIRED : Prepare the entry to record the creation of the Wilson Family Trust on April 30. Prepare all required entries to account for trust activities through June 30.
Creation of a trust
You have been hired as trustee for the testamentary trust created by the will of Tom Josephson. The trust is created on June 30, 2011. The trust initially invests the proceeds from the estate in a checking account, which pays 3 percent per year. Interest is paid quarterly. On July 5, the trust invests $750,000 in a certificate of deposit at the local bank. The certificate earns 6 percent interest per year, paid monthly. On July 31, you pay the $275 quarterly trust service fees to the bank. On August 5, you receive a check for $3,750, representing the first month’s interest on the certificate of deposit. On August 19, you send a $15,000 check to Superprivate Academy to cover fall semester tuition, room, and board for Megan and Ryan.
REQUIRED: Prepare the entry to record the creation of the Josephson Family Trust on June 30, 2011. Prepare all required entries to account for trust activities through August 31.
A firm pays $100 in period 1 to produce some goods. It sells those goods for $ 150 in period 2 but does not collect payment from its customers until period 3. Calculate the cash flows to the firm in each period by completing the following table. Do the resulting values for net cash flow in each period make sense?
|
Period: |
1 |
2 |
3 |
|
Sales |
|||
|
Change in accounts receivable |
|||
|
Cost of goods sold |
|||
|
Change in inventories |
|||
|
Net cash flow |
Kensingtown Processing Company provides word processing services for business clients and students in a university community. The work for business clients is fairly steady throughout the year. The work for students peaks significantly in December and May as a result of term papers, research project reports, and dissertations.
Two years ago, the company attempted to meet the peak demand by hiring part time help. This led to numerous errors and much customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis in place of part time help.This proved to be much better in terms of productivity and customer satisfaction. But, it has caused an increase in annual payroll costs and a significant decline in annual net income.
Recently,Valarie Flynn, a sales representative of Metcalfe Services Inc., has made a proposal to the company. Under her plan, Metcalfe will provide up to four experienced workers at a daily rate of $75 per person for an 8 hour workday. Metcalfe workers are not available on an hourly basis. Kensingtown would have to pay only the daily rate for the workers used.
The owner of Kensingtown Processing, Donna Bell, asks you, as the company’s accountant, to prepare a report on the expenses that are pertinent to the decision. If the Metcalfe plan is adopted, Donna will terminate the employment of two permanent employees and will keep two permanent employees. At the moment, each employee earns an annual income of $21,000. Kensingtown pays 8% FICA taxes, 0.8% federal unemployment taxes, and 5.4% state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Kensingtown pays $40 per month for each employee for medical and dental insurance. Donna indicates that if the
Metcalfe Services plan is accepted, her needs for temporary workers will be as follows.
|
Number |
Working |
|
|
Months |
of Employees |
Days per Month |
|
January–March |
2 |
20 |
|
April–May |
3 |
25 |
|
June–October |
2 |
18 |
|
November–December |
3 |
23 |
Instructions
With the class divided into groups, answer the following.
(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Metcalfe Services Inc. plan.
(b) What other factors should Donna consider before finalizing her decision?
medical costs are substantial and rising. But will they be the most substantial expense over your lifetime? Not likely. Will it be housing or food? Again, not likely. The answer is in the Accounting Across the Organization box on page 498: taxes. On average, Americans work 74 days to afford their federal taxes. Companies, too, have large tax burdens. They look very hard at tax issues in deciding where to build their plants and where to locate their administrative headquarters.
Instructions
(a) Determine what your state income taxes are if your taxable income is $60,000 and you file as a single taxpayer in the state in which you live.
(b) Assume that you own a home worth $200,000 in your community and the tax rate is 2.1%. Compute the property taxes you would pay.
(c) Assume that the total gasoline bill for your automobile is $1,200 a year (300 gallons at $4 per gallon).What are the amounts of state and federal taxes that you pay on the $1,200?
(d) Assume that your purchases for the year total $9,000. Of this amount, $5,000 was for food and prescription drugs.What is the amount of sales tax you would pay on these purchases?
(Many states do not levy a sales tax on food or prescription drugs. Does yours?)
(e) Determine what your Social Security taxes are if your income is $60,000.
(f) Determine what your federal income taxes are if your taxable income is $60,000 and you file as a single taxpayer.
(g) Determine your total taxes paid based on the above calculations, and determine the percentage of income that you would pay in taxes based on the following formula:Total taxes paid Total income.
Shani Davis has prepared the following list of statements about partnerships.
1. A partnership is an association of three or more persons to carry on as co owners of a business for profit.
2. The legal requirements for forming a partnership can be quite burdensome.
3. A partnership is not an entity for financial reporting purposes.
4. The net income of a partnership is taxed as a separate entity.
5. The act of any partner is binding on all other partners, even when partners perform business acts beyond the scope of their authority.
6. Each partner is personally and individually liable for all partnership liabilities.
7. When a partnership is dissolved, the assets legally revert to the original contributor.
8. In a limited partnership, one or more partners have unlimited liability and one or more partners have limited liability for the debts of the firm.
9. Mutual agency is a major advantage of the partnership form of business.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
O. Guillen (beginning capital, $60,000) and K.Williams (beginning capital $90,000) are partners. During 2010, the partnership earned net income of $70,000, and Guillen made drawings of $18,000 while Williams made drawings of $24,000.
Instructions
(a) Assume the partnership income sharing agreement calls for income to be divided 45% to Guillen and 55% to Williams. Prepare the journal entry to record the allocation of net income.
(b) Assume the partnership income sharing agreement calls for income to be divided with a salary of $30,000 to Guillen and $25,000 to Williams, with the remainder divided 45% to Guillen and 55% to Williams. Prepare the journal entry to record the allocation of net income.
(c) Assume the partnership income sharing agreement calls for income to be divided with a salary of $40,000 to Guillen and $35,000 to Williams, interest of 10% on beginning capital, and the remainder divided 50%–50%. Prepare the journal entry to record the allocation of net income.
(d) Compute the partners’ ending capital balances under the assumption in part (c).
Journal entries—Various not for profit organizations
1. A nongovernmental VHWO receives $20,000 of unconditional promises to give with no donor imposed restrictions of this amount $14,000 is due during the current period and $6,000 is due in the next period. The organization estimates that 3% of the pledges will be uncollectible.
2. A nongovernmental VHWO receives a $200 cash gift that is restricted for use in a project to provide immediate assistance to qualified people with temporary hardships. Money is given to a qualified individual during the same period.
3. The Uptown Restaurant donated restaurant equipment to the Food Kitchen, a nongovernmental VHWO. The equipment had a fair value of $6,000 and a remaining useful life of four years, with no scrap value. No restrictions were imposed on the use of the equipment, either by the Uptown Restaurant or the Food Kitchen.
4. A donor contributed $8,000 to a homeless shelter that was restricted to the purchase of a new truck. The money was invested in a CD that pays 5% interest. Accrued interest on the investment totaled $215 at year end. The income from the investment was also restricted for the purchase of a truck.
5. Orleans Community College assessed its students $750,000 tuition for the 2011 fall term. The college estimates bad debts will be 1% of the gross assessed tuition. Orleans’s scholarship program provides for tuition waivers totaling $65,000. Because of class cancellations, $15,000 is refunded to the students.
6. Your State University received donations of $3 million in 2011 that were restricted to certain research projects on the feasibility of growing tobacco for pharmaceutical uses. The university incurred $1.2 million of expenses on this research in 2011.
REQUIRED: Prepare journal entries to account for these transactions. Include net asset classifications, where applicable.
Journal entries—Various not for profit organizations
Three wealthy friends, Tom, Grant, and Karen, each decided to donate $5,000,000 to the not for profit organization of their choice. Each donation was made on May 21, 2011. Prepare the entries required for each of the recipient organizations under the following scenarios.
1. Tom chose to contribute to a local voluntary health and welfare organization, and no restrictions were placed on the use of the donated resources.
a. Prepare the May 21, 2011, entry.
b. Prepare any entries necessary in 2012 if $2,300,000 of the gift is used to fi nance operating expenses.
2. Grant contributed to a local private university, and the donation was restricted to research.
a. Prepare the May 21, 2011, entry.
b. Prepare any entries necessary in 2012 if $2,300,000 of the gift is used to fi nance research expenses.
3. Karen gave to the local hospital, and the donation was restricted for construction of a fixed asset.
a. Prepare the May 21, 2011, entry.
b. Prepare any entries necessary in 2012 if $2,300,000 of the gift is used to fi nance construction costs.
Journal entries—Voluntary health and welfare organization
At the beginning of 2011, the citizens of North Ptarmigan created Share Shop, a voluntary health and welfare organization. Share receives donations of money, nonperishable groceries, and household items from contributors. The food and household items are distributed free of charge to families on the basis of need. Share allocates expenses 80 percent to community services and 20 percent to management and general services, unless otherwise noted.
Share has one paid administrator with a yearly salary of $14,600. An accountant donates accounting services to Share that have a fair value of $900 and are allocated to management and general. Work is also performed by regular volunteers whose services cannot be measured.
A local transit company has provided free warehouse space for the operations of Share Shop. Fair value of rent for the warehouse is $3,000 a year. Utilities of $1,800 are paid by Share for 2011. During the year, Share purchased supplies for $300. At December 31, 2011, the supplies inventory was insignificant. Expenses incurred in determining which families were eligible for Share’s services and other accounting and reporting expenses totaled $6,000.
Donated assets for 2011 included nonperishable groceries with a fair value of $60,000 and household items with a fair value of $40,000. During the year, Share Shop distributed three fourths of the groceries and half of the household items. No portion of these distributions was allocated to management and general services.
In addition to the donated assets, Share received cash donations of $10,000 and pledges of $20,000. Share estimated that 10 percent of the pledges would be uncollectible. At year end 2011, $15,000 of the pledges had been collected. Share estimates that only $1,000 of the remaining pledges will be uncollectible.
The town council of North Ptarmigan made a $25,000 grant to Share Shop that will be paid in January 2012.
REQUIRED: Prepare summary entries for Share Shop for 2011.
Statement of operations—Nongovernmental not for profit health care organization
The following selected items were taken from the accounts of Hometown Memorial Hospital, a not for profit hospital, at December 31, 2011:
|
Debits |
|
|
Administrative services |
$ 310,000 |
|
Contractual allowances |
400,000 |
|
Depreciation |
200,000 |
|
Employee discounts |
100,000 |
|
General services |
290,000 |
|
Loss on sale of assets |
50,000 |
|
Nursing services |
1,000,000 |
|
Other professional services |
500,000 |
|
Provision for bad debts |
150,000 |
|
Credits |
|
|
Donated medicine |
300,000 |
|
Income from investment in affi liate |
80,000 |
|
Patient service revenues |
2,500,000 |
|
Television rentals to patients |
50,000 |
|
Unrestricted donations |
200,000 |
|
Unrestricted income from investments of endowment funds |
270,000 |
|
Restricted donations for fi xed asset purchases |
300,000 |
|
Restricted donations for specifi c operating purposes |
100,000 |
REQUIRED: Use the information given to prepare a statement of operations for Hometown Memorial Hospital at December 31, 2011. Assume that $80,000 of expenses were for purposes for which restricted donations were available and that fixed assets costing $97,000 were purchased from donations restricted for their purchase.
Journal entries and statement of activities—Nongovernmental not for profit college
The following information relates to revenues and expenses for a private not for profit college:
|
Tuition and Fees |
|
|
Total assessed |
$2,000,000 |
|
Tuition waivers |
120,000 |
|
Appropriations |
|
|
State |
800,000 |
|
Local |
300,000 |
|
Auxiliary Enterprises |
|
|
Sales |
500,000 |
|
Expenses |
480,000 |
|
Endowment Income |
|
|
Restricted to research |
70,000 |
|
Unrestricted |
20,000 |
|
Private Gifts and Grants |
|
|
Restricted to student scholarships |
300,000 |
|
Unrestricted |
80,000 |
|
Expenses |
|
|
Instruction |
2,100,000 |
|
Research |
100,000 |
|
Student services |
120,000 |
|
Operation of plant |
180,000 |
|
Scholarships (does not include tuition waivers) |
200,000 |
REQUIRED: Prepare journal entries and a statement of activities for the college.
Statement of activities—Nongovernmental not for profit organization
The following information was taken from the accounts and records of the Community Society, a nongovernmental not for profit organization. The balances are as of December 31, 2011, unless otherwise stated:
|
Unrestricted support—contributions |
$3,000,000 |
|
Unrestricted support—membership dues |
400,000 |
|
Unrestricted revenues—investment income |
83,000 |
|
Temporarily restricted gain on sale of investments |
5,000 |
|
Expenses—education |
300,000 |
|
Expenses—research |
2,300,000 |
|
Expenses—fund raising |
223,000 |
|
Expenses—management and general |
117,000 |
|
Restricted support—contributions |
438,000 |
|
Restricted revenues—investment income |
22,500 |
|
Permanently restricted support—contributions |
37,000 |
|
Unrestricted net assets, January 1, 2011 |
435,000 |
|
Temporarily restricted net assets, January 1, 2011 |
5,000,000 |
|
Permanently restricted net assets, January 1, 2011 |
40,000 |
The unrestricted support from contributions was all received in cash during the year. Additionally, the society received pledges totaling $425,000. The pledges should be collected during 2012, except for the estimated uncollectible portion of $16,000. The society spent $3,789,000 of restricted resources on construction of a major capital facility during 2011, and $500,000 of research expenses were for research financed from restricted donations.
REQUIRED: Prepare the statement of activities for the Community Society for 2011.
Journal entries—Nongovernmental not for profit university
Prepare journal entries to record the following transactions in the appropriate funds of a nongovernmental not for profit university:
1. Tuition and fees assessed total $6,000,000. Eighty percent is collected by year end, scholarships are granted for $200,000, and $100,000 is expected to be uncollectible.
2. Revenues collected from sales and services of the university bookstore, an auxiliary enterprise, were $800,000.
3. Salaries and wages were paid, $2,600,000. Of this amount, $170,000 was for employees of the university bookstore.
4. Unrestricted resources were used to service the long term mortgage on the university’s buildings, $1,000,000.
5. Mortgage payments totaled $960,000, of which $600,000 was for interest.
6. Restricted contributions for a specific academic program were received, $440,000.
7. Expenses for the restricted program were incurred and paid, $237,000.
8. Equipment was purchased from resources previously set aside for that purpose, $44,000.
Journal entries—Voluntary health and welfare organization
The Good Grubb Food for the Hungry Institute is a nongovernmental not for profit organization that provides free meals for the destitute in a large metropolitan area. Record the following transactions in the accounts of Good Grubb.
1. Cash gifts that were received last year, but designated for use in the current year, totaled $20,000.
2. Unrestricted pledges of $65,000 were received. Five percent of pledges typically prove uncollectible. Additional cash contributions during the year totaled $35,000.
3. Donations of food totaled $150,000. The inventory of food on hand decreased by $1,200 during the year.
4. Expenses were incurred as follows: salary of director, $10,000; facility rental, $8,000; purchases of food, $70,000; and supplies, $27,000. Supplies inventory increased by $5,000 during the year.
5. Restricted pledges of $300,000 were received during the year. The pledges are restricted for use in constructing a new kitchen and dining hall. Of the pledges received, 5% is expected to be uncollectible.
Journal entries—Nongovernmental not for profit health care organization
The Fort Collins Health Center is a nongovernmental not for profit health care organization. During the current year, the following occurred:
1. Gross charges at established rates for services rendered to patients amounted to $102,300. The clinic had contractual adjustments with insurers and Medicare of $30,000. Bad debts are estimated at 2% of gross charges.
2. The health center receives premium revenue from capitation agreements totaling $54,000.
3. The center also receives revenue of $16,000 from the pharmacy housed in its building.
4. The center paid salaries and wages allocated to functional categories as follows: nursing services, $35,000; other professional services, $11,000; general services, $10,000; fiscal services, $2,000; and administrative services, $20,000.
5. The health center receives a federal grant for $12,000. The money must be used for medical equipment.
6. Supplies costing $13,000 were purchased during the month, and $6,700 in nursing supplies were used.
REQUIRED : Prepare journal entries to account for these transactions. Include net asset classifications, where applicable.
Prepare journal entries for an estate
You serve as the executor for the estate of Willy Rock. The following transactions occur during June 2011:
a. Willy’s estate included a municipal bond with a value of $500,000. On the date of Willy’s death, there was $4,400 of accrued but unpaid interest. On June 5, you received a check in the amount of $9,000, representing the normal semiannual interest payment.
b. Included in the specific devises of Willy’s will was a bequest to the Atlanta Animal Shelter in the amount of $100,000. You decide that estate assets will be more than adequate to meet all obligations of the estate and to pay all specific devises, and you issue a check for $100,000 to the animal shelter on June 10.
c. On June 20, you pay funeral expenses for Willy, in the amount of $16,400.
d. You receive an interest check in the amount of $3,000 from First Atlanta National Bank on June 24 and realize that an unknown investment in a certificate of deposit in the amount of $50,000 was omitted in the original inventory of estate assets, along with $1,200 of accrued interest.
REQUIRED: Prepare journal entries for the listed transactions. You can ignore estate and income taxes.
Prepare journal entries for an estate
You serve as the executor for the estate of Maribeth Rainy. The following transactions occur during July 2011:
a. The Rainy estate included a certificate of deposit in the amount of $600,000. On the date of death, there was $11,600 of accrued but unpaid interest. On July 15, you received a check in the amount of $15,000, representing the normal semiannual interest payment.
b. Included in the specific devises of Maribeth’s will was a bequest to the local symphony orchestra in the amount of $150,000. You decide that estate assets will be more than adequate to meet all obligations of the estate and to pay all specific devises, and you issue a check for $150,000 to the orchestra on July 18.
c. You pay a probate court fee of $2,800 on July 24.
d. On July 20, you pay funeral expenses in the amount of $12,800.
e. On July 28, you receive a bill from the local hospital for costs not covered by Maribeth’s insurance in the amount of $44,000. The liability was unknown and not included in your initial estate inventory.
REQUIRED: Prepare journal entries for the listed transactions. You can ignore estate and income taxes.
Prepare journal entries for an estate
You serve as the executor for the estate of Virginia Troy. Virginia’s will provides that all remaining assets other than specific items in the will pass to her longtime friend Melanie Matthews. The following transactions occur during October and November 2011:
a. The Troy estate included 100,000 shares of common stock of the Board of Water & Light, valued at $62 per share. On the date of death, there were no outstanding dividends receivable. On October 15, you note that a dividend of $3 per share has been declared, payable on October 25.
b. Included in the specific devises of Virginia’s will was a bequest to the Philadelphia Art Museum in the amount of $150,000.
c. You pay a probate court fee of $3,800 on October 24.
d. On October 29, you pay funeral expenses in the amount of $11,600.
e. On October 28, you receive and pay a bill from the local hospital for costs not covered by Virginia’s insurance in the amount of $37,000. The liability was unknown and not included in your initial estate inventory.
f. On October 29, you receive a dividend check from the Board of Water & Light in the amount of $300,000. REQUIRED: Prepare journal entries for the listed transactions. You may ignore estate and income taxes.
Accounting for an estate
K.T. Tim has been appointed to serve as executor for the estate of Ms. Melanie Triciao, who passed away on August 15, 2011. Ms. Triciao’s assets consisted of the following:
|
Asset |
Book Value |
Fair Value |
|
Cash |
$118,225 |
$ 118,225 |
|
Savings accounts |
250,000 |
250,000 |
|
ViaReggio common stock |
67,500 |
225,000 |
|
City of Roma municipal bonds |
381,500 |
412,000 |
|
Mercedes sports car |
57,500 |
41,000 |
|
Condominium on Italian Riviera |
399,700 |
1,265,500 |
|
Atlanta personal residence |
225,700 |
430,000 |
|
Collection of rare hand puppets |
11,145 |
85,000 |
|
Fully restored Model T Ford |
1,750 |
125,000 |
The probate court has ruled that other personal effects may be excluded from the estate inventory.
REQUIRED: Prepare the estate inventory as of August 15, 2011.
Journal entries and accounting for an estate
You serve as the executor for the estate of Jeff Carpenter, who passed away on August 25, 2011, at the age of 102. Jeff’s estate consisted of two certificates of deposit totaling $800,000 and a $15,000 balance in his checking account. Total accrued interest on the CDs at the date of death amounted to $7,000. Jeff left a valid will, which provided that most of the estate be inherited by his sole surviving nephew, J.J. Kara. The will further provided that $100,000 be transferred to a trust account for his faithful dog, Sooner XXV. Income from the trust would be used to care for Sooner. Upon Sooner’s demise, the trust would end, and remaining trust principal would transfer to J.J. Kara. Jeff’s personal effects were minimal and excluded from the estate. Ms. Colleen Ryan, a trust officer at the Oxford National Bank, serves as estate executrix and as fiduciary for the trust. Ms. Ryan determines that no federal or state inheritance taxes are due. The limited estate income is also free from any federal or state income tax. The following transactions occur during September 2011:
a. On September 12, received a check in the amount of $11,500, representing the normal semiannual interest payment on the certificates of deposit.
b. On September 13, cashed out the certificates of deposit for $800,000.
c. On September 15, transferred $100,000 to a trust account at Oxford National Bank to provide care for Sooner XXV. Also, on the way to the bank, Sooner was dropped off at Puppy Paradise, his new home.
d. On September 18, paid funeral expenses for Jeff in the amount of $7,200.
e. On September 20, paid herself the $2,500 executor’s fee specified in Jeff’s will.
f. On September 28, finalized the estate and transferred the balance of the estate assets to Jeff’s nephew, J.J. Kara.
REQUIRED
1. Prepare an estate inventory at the date of death.
2. Prepare journal entries to record the estate transactions during September.
3. Prepare the estate closing entries on September 28.
4. Prepare the charge–discharge statement for the estate of Jeff Carpenter for the period August 25 through September 28, 2011.
Prepare journal entries for a trust
You serve as the trustee for the Lisa Ann Trust. The following transactions occur during June and July 2011:
|
June 1 |
Open the trust account, depositing the $1,000,000 transferred from the estate of Cheri James into a non interest bearing checking account to be used for trust investment and administration and for accumulation of interest and dividends received from trust investments. |
|
June 2 |
Deposit $500,000 into a two year certificate of deposit earning 6 percent annually, with interest paid monthly. |
|
June 3 |
Invest the remaining $500,000 in a stock mutual fund. |
|
July 2 |
Record deposit of one month’s interest from the certificate of deposit to the trust checking account. |
|
July 3 |
Pay bank’s trust administration monthly fee of $41. |
REQUIRED: Prepare journal entries for the listed transactions. You may ignore taxes.
Prepare journal entries for a trust
You serve as the trustee for the Josephine Frederick testamentary income trust. The trust was created by the will of her late husband, John. Under the terms of John’s will, all assets are transferred to the trust to cover living expenses for his spouse. Upon her demise, trust assets will be sold, with the proceeds distributed to their six children. Each is to receive an equal share. The probate court ruled that household furnishings and John’s personal effects could be excluded from the estate. The executor has paid all inheritance and income taxes on estate income for the period of estate administration. The estate inventory prepared by John’s estate executor showed the following assets:
|
Asset |
Cost |
Fair Value |
|
Cash |
$218,220 |
$218,220 |
|
Savings accounts |
300,000 |
300,000 |
|
Microsystems common stock |
163,400 |
400,000 |
|
Big Casino common stock |
181,500 |
120,000 |
|
Vintage sports car |
17,500 |
31,000 |
|
Mountain cottage |
39,700 |
114,500 |
|
Personal residence |
209,900 |
457,500 |
REQUIRED: Prepare the journal entries for the creation of the trust.
Lepid Company has the following account balances at December 31, 2010.
|
Notes payable ($80,000 due after 12/31/11) |
$200,000 |
|
Unearned revenue |
75,000 |
|
Other long term debt ($30,000 due in 2011) |
150,000 |
|
Salaries payable |
22,000 |
|
Other accrued expenses |
15,000 |
|
Accounts payable |
100,000 |
In addition, Lepid is involved in a lawsuit. Legal counsel feels it is probable Lepid will pay damages of $38,000 in 2011.
(a) Prepare the current liability section of Lepid’s December 31, 2010, balance sheet.
(b) Lepid’s current assets are $504,000. Compute Lepid’s working capital and current ratio.
Indiana Jones Company had the following selected transactions.
|
Feb. 1 |
Signs a $50,000, 6 month, 9% interest bearing note payable to CitiBank and receives $50,000 in cash. |
|
10 |
Cash register sales total $43,200, which includes an 8% sales tax. |
|
28 |
The payroll for the month consists of Sales Salaries $32,000 and Office Salaries $18,000. All wages are subject to 8% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries are paid on March 1. |
|
28 |
The company develops the following adjustment data. |
|
1. Interest expense of $375 has been incurred on the note. |
|
|
2. Employer payroll taxes include 8% FICA taxes, a 5.4% state unemployment tax, and a 0.8% federal unemployment tax. |
|
|
3. Some sales were made under warranty. Of the units sold underwarranty, 350 are expected to become defective. Repair costs are estimated to be $40 per unit. |
Rob Judson Company had the following transactions involving notes payable.
|
July 1, 2010 |
Borrows $50,000 from Third National Bank by signing a 9 month, 12% note. |
|
Nov. 1, 2010 |
Borrows $60,000 from DeKalb State Bank by signing a 3 month, 10% note. |
|
Dec. 31, 2010 |
Prepares adjusting entries. |
|
Feb. 1, 20011 |
Pays principal and interest to DeKalb State Bank. |
|
Apr. 1, 20011 |
Pays principal and interest to Third National Bank. |
Instructions
Prepare journal entries for each of the transactions.
Hiatt Company sells automatic can openers under a 75 day warranty for defective merchandise.
Based on past experience, Hiatt estimates that 3% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $20.The units sold and units defective that occurred during the last 2 months of 2010 are as follows.
|
Units |
Units Defective |
|
|
Month |
Sold |
Prior to December 31 |
|
November |
30,000 |
600 |
|
December |
32,000 |
400 |
Instructions
(a) Determine the estimated warranty liability at December 31 for the units sold in November and December.
(b) Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,000 arranty claims. (Assume actual costs of $20,000.)
(c) Give the entry to record the honoring of 500 warranty contracts in January at an average cost of $20.
Kroger Co.’s 2007 financial statements contained the following data (in millions).
|
Current assets |
$ 6,755 |
Accounts receivable |
$ 773 |
|
Total assets |
21,215 |
Interest expense |
488 |
|
Current liabilities |
7,581 |
Income tax expense |
633 |
|
Total liabilities |
16,292 |
Net income |
1,115 |
|
Cash |
189 |
Instructions
Compute these values:
(a) Working capital.
(b) Current ratio.
The following financial data were reported by 3M Company for 2006 and 2007 (dollars in millions).
|
3M COMPANY |
||
|
2007 |
2006 |
|
|
Current assets |
||
|
Cash and cash equivalents |
$1,896 |
$1,447 |
|
Accounts receivable, net |
3,362 |
3,102 |
|
Inventories |
2,852 |
2,601 |
|
Other current assets |
1,728 |
1,796 |
|
Total current assets |
$9,838 |
$8,946 |
|
Current liabilities |
$5,362 |
$7,323 |
Instructions
(a) Calculate the current ratio and working capital for 3M for 2006 and 2007.
(b) Suppose that at the end of 2007 3M management used $200 million cash to pay off $200 million of accounts payable. How would its current ratio and working capital have changed?
Joyce Kieffer’s regular hourly wage rate is $15, and she receives a wage of 11/2 times the regular hourly rate for work in excess of 40 hours. During a March weekly pay period Joyce worked 42 hours. Her gross earnings prior to the current week were $6,000. Joyce is married and claims three withholding allowances. Her only voluntary deduction is for group hospitalization insurance at $25 per week.
Instructions
(a) Compute the following amounts for Joyce’s wages for the current week.
(1) Gross earnings.
(2) FICA taxes. (Assume an 8% rate on maximum of $90,000.)
(3) Federal income taxes withheld. (Use the withholding table in the text, .)
(4) State income taxes withheld. (Assume a 2.0% rate.)
(5) Net pay.
(b) Record Joyce’s pay, assuming she is an office computer operator.
Alvamar Company has the following data for the weekly payroll ending January 31.
|
Hours |
||||||
|
Employee |
M |
T |
W |
T |
F |
S |
|
M. Hashmi |
8 |
8 |
9 |
8 |
10 |
3 |
|
E. Benson |
8 |
8 |
8 |
8 |
8 |
2 |
|
K. Kern |
9 |
10 |
8 |
8 |
9 |
0 |
|
Hourly Rate |
Federal Income Tax Withholding |
Health Insurance |
|
$12 |
$34 |
$10 |
|
13 |
37 |
25 |
|
15 |
58 |
25 |
Employees are paid 11/2 times the regular hourly rate for all hours worked in excess of 40 hours per week. FICA taxes are 8% on the first $100,000 of gross earnings. Alvamar Company is subject to 5.4% state unemployment taxes and 0.8% federal unemployment taxes on the first $7,000 of gross earnings. Instructions
(a) Prepare the payroll register for the weekly payroll.
(b) Prepare the journal entries to record the payroll and Alvamar’s payroll tax expense.
Selected data from a February payroll register for Gerfield Company are presented below. Some amounts are intentionally omitted.
|
Gross earnings: |
State income taxes |
$(3) |
|
|
Regular |
$8,900 |
Union dues |
100 |
|
Overtime |
(1) |
Total deductions |
(4) |
|
Total |
(2) |
Net pay |
$7,660 |
|
Deductions: |
Accounts debited: |
||
|
FICA taxes |
$ 800 |
Warehouse wages |
(5) |
|
Federal income taxes |
1,140 |
Store wages |
$4,000 |
FICA taxes are 8%. State income taxes are 3% of gross earnings.
Instructions
(a) Fill in the missing amounts.
(b) Journalize the February payroll and the payment of the payroll.
On January 1, 2010, the ledger of Mane Company contains the following liability accounts.
|
Accounts Payable |
$52,000 |
|
Sales Taxes Payable |
7,700 |
|
Unearned Service Revenue |
16,000 |
During January the following selected transactions occurred.
|
Jan. 5 |
Sold merchandise for cash totaling $22,680, which includes 8% sales taxes. |
|
12 |
Provided services for customers who had made advance payments of $10,000. (Credit Service Revenue.) |
|
14 |
Paid state revenue department for sales taxes collected in December 2009 ($7,700). |
|
20 |
Sold 800 units of a new product on credit at $50 per unit, plus 8% sales tax. This new product is subject to a 1 year warranty. |
|
21 |
Borrowed $18,000 from UCLA Bank on a 3 month, 8%, $18,000 note. |
|
25 |
Sold merchandise for cash totaling $12,420, which includes 8% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2) estimated warranty liability, assuming warranty costs are expected to equal 7% of sales of the new product. (Hint: Use one third of a month for the UCLA Bank note.)
(c) Prepare the current liabilities section of the balance sheet at January 31, 2010. Assume no change in accounts payable.
The following are selected transactions of Winsky Company.Winsky prepares financial statements quarterly.
|
Jan. 2 |
Purchased merchandise on account from Yokum Company, $30,000, terms 2/10, n/30. |
|
Feb. 1 |
Issued a 9%, 2 month, $30,000 note to Yokum in payment of account. |
|
Mar. 31 |
Accrued interest for 2 months on Yokum note. |
|
Apr. 1 |
Paid face value and interest on Yokum note. |
|
July 1 |
Purchased equipment from Korsak Equipment paying $11,000 in cash and signing a 10%, 3 month, $40,000 note. |
|
Sept. 30 |
Accrued interest for 3 months on Korsak note. |
|
Oct. 1 |
Paid face value and interest on Korsak note. |
|
Dec. 1 |
Borrowed $15,000 from the Otago Bank by issuing a 3 month, 8% note with a face value of $15,000. |
|
Dec. 31 |
Recognized interest expense for 1 month on Otago Bank note. |
Instructions
(a) Prepare journal entries for the listed transactions and events.
(b) Post to the accounts Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) What is total interest expense for the year?
Del Hardware has four employees who are paid on an hourly basis plus time and a half for all hours worked in excess of 40 a week. Payroll data for the week ended March 15, 2010, are presentd below.
|
Employee |
Hours Worked |
Hourly Rate |
Federal Income Tax Withholdings |
United Fund |
|
Joe Devena |
40 |
$15.00 |
$? |
$5.00 |
|
Mary Keener |
42 |
15.00 |
? |
5.00 |
|
Andy Dye |
44 |
13.00 |
60 |
8.00 |
|
Kim Shen |
46 |
13.00 |
61 |
5.00 |
Devena and Keener are married. They claim 0 and 4 withholding allowances, respectively. The following tax rates are applicable: FICA 8%, state income taxes 3%, state unemployment taxes5.4%, and federal unemployment 0.8%. The first three employees are sales clerks (store wages expense).The fourth employee performs administrative duties (office wages expense).
Instructions
(a) Prepare a payroll register for the weekly payroll. (Use the wage bracket withholding table in the text for federal income tax withholdings.)
(b) Journalize the payroll on March 15, 2010, and the accrual of employer payroll taxes.
(c) Journalize the payment of the payroll on March 16, 2010.
(d) Journalize the deposit in a Federal Reserve bank on March 31, 2010, of the FICA and federal income taxes payable to the government.
The following payroll liability accounts are included in the ledger of Armitage Company on January 1, 2010.
|
FICA Taxes Payable |
$760.00 |
|
Federal Income Taxes Payable |
1,204.60 |
|
State Income Taxes Payable |
108.95 |
|
Federal Unemployment Taxes Payable |
288.95 |
|
State Unemployment Taxes Payable |
1,954.40 |
|
Union Dues Payable |
870.00 |
|
U.S. Savings Bonds Payable |
360.00 |
In January, the following transactions occurred.
|
Jan. 10 |
Sent check for $870.00 to union treasurer for union dues. |
|
12 |
Deposited check for $1,964.60 in Federal Reserve bank for FICA taxes and federal income taxes withheld. |
|
15 |
Purchased U.S. Savings Bonds for employees by writing check for $360.00. |
|
17 |
Paid state income taxes withheld from employees. |
|
20 |
Paid federal and state unemployment taxes. |
|
31 |
Completed monthly payroll register, which shows office salaries $26,600, store wages $28,400, FICA taxes withheld $4,400, federal income taxes payable $2,158, state income taxes payable $454, union dues payable $400, United Fund contributions payable $1,888, and net pay $45,700. |
|
31 |
Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accrued adjustments pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 8%, federal unemployment taxes 0.8%, and state unemployment taxes 5.4%.
*2. Vacation pay: 6% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjustments pertaining to employee compensation at January 31.
For the year ended December 31, 2010, Blasing Electrical Repair Company reports the following summary payroll data.
|
Gross earnings: |
|
|
Administrative salaries |
$200,000 |
|
Electricians’ wages |
370,000 |
|
Total |
$570,000 |
|
Deductions: |
|
|
FICA taxes |
$ 38,800 |
|
Federal income taxes withheld |
174,400 |
|
State income taxes withheld (3%) |
17,100 |
|
United Fund contributions payable |
27,500 |
|
Hospital insurance premiums |
17,200 |
|
Total |
$275,000 |
Blasing Company’s payroll taxes are: FICA 8%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to FICA taxes total $485,000, and gross earnings subject to unemployment taxes total $135,000. Instructions
(a) Prepare a summary journal entry at December 31 for the full year’s payroll.
(b) Journalize the adjusting entry at December 31 to record the employer’s payroll taxes.
(c) The W 2 Wage and Tax Statement requires the following dollar data.
|
Wages, Tips, |
Federal Income |
State Income |
FICA |
FICA |
|
Other Compensation |
Tax Withheld |
Tax Withheld |
Wages |
Tax Withheld |
Complete the required data for the following employees.
|
Employee |
Gross Earnings |
Federal Income Tax Withheld |
|
Jane Eckman |
$59,000 |
$28,500 |
|
Sharon Bishop |
26,000 |
10,200 |
On January 1, 2010, the ledger of Software Company contains the following liability accounts.
|
Accounts Payable |
$30,000 |
|
Sales Taxes Payable |
5,000 |
|
Unearned Service Revenue |
12,000 |
During January the following selected transactions occurred.
|
Jan. 1 |
Borrowed $20,000 in cash from Platteville Bank on a 4 month, 6%, $20,000 note. |
|
5 |
Sold merchandise for cash totaling $9,752, which includes 6% sales taxes. |
|
12 |
Provided services for customers who had made advance payments of $8,000. (Credit Service Revenue.) |
|
14 |
Paid state treasurer’s department for sales taxes collected in December 2009, $5,000. |
|
20 |
Sold 900 units of a new product on credit at $44 per unit, plus 6% sales tax. This new product is subject to a 1 year warranty. |
|
25 |
Sold merchandise for cash totaling $16,536, which includes 6% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and
(2) estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the new product.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2010. Assume no change in accounts payable.
The following are selected transactions of Donn Company. Donn prepares financial statements quarterly.
|
Jan. 2 |
Purchased merchandise on account from Stein Company, $20,000, terms 2/10, n/30. |
|
Feb. 1 |
Issued a 12%, 2 month, $20,000 note to Stein in payment of account. |
|
Mar. 31 |
Accrued interest for 2 months on Stein note. |
|
Apr. 1 |
Paid face value and interest on Stein note. |
|
July 1 |
Purchased equipment from Morelli Equipment paying $12,000 in cash and signing a 10%, 3 month, $25,000 note. |
|
Sept. 30 |
Accrued interest for 3 months on Morelli note. |
|
Oct. 1 |
Paid face value and interest on Morelli note. |
|
Dec. 1 |
Borrowed $15,000 from the Federated Bank by issuing a 3 month,12% note with a face value of $15,000. |
|
Dec. 31 |
Recognized interest expense for 1 month on Federated Bank note. |
Instructions
(a) Prepare journal entries for the above transactions and events.
(b) Post to the accounts, Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) What is total interest expense for the year?
What is total interest expense for the year?
John’s Drug Store has four employees who are paid on an hourly basis plus time anda half for all hours worked in excess of 40 a week. Payroll data for the week ended February 15, 2010, are shown at the top of the.
|
Employees |
Hours Worked |
Hourly Rate |
Federal Income Tax Withholdings |
United Fund |
|
J. Uddin |
39 |
$12.00 |
$ 34 |
$–0– |
|
B. Conway |
42 |
11.00 |
20 |
10.00 |
|
S. Becker |
44 |
10.00 |
51 |
5.00 |
|
L. Blum |
46 |
10.00 |
36 |
5.00 |
Uddin and Conway are married.They claim 2 and 4 withholding allowances, respectively.The following tax rates are applicable: FICA 8%, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%. The first three employees are sales clerks (store wages expense).The fourth employee performs administrative duties (office wages expense).
Instructions
(a) Prepare a payroll register for the weekly payroll.
(b) Journalize the payroll on February 15, 2010, and the accrual of employer payroll taxes.
(c) Journalize the payment of the payroll on February 16, 2010.
(d) Journalize the deposit in a Federal Reserve bank on February 28, 2010, of the FICA and federal income taxes payable to the government.
The following payroll liability accounts are included in the ledger of Pettibone Company on January 1, 2010.
|
FICA Taxes Payable |
$ 540 |
|
Federal Income Taxes Payable |
1,100 |
|
State Income Taxes Payable |
210 |
|
Federal Unemployment Taxes Payable |
54 |
|
State Unemployment Taxes Payable |
365 |
|
Union Dues Payable |
200 |
|
U.S. Savings Bonds Payable |
300 |
In January, the following transactions occurred.
|
Jan. 10 |
Sent check for $200 to union treasurer for union dues. |
|
12 |
Deposited check for $1,640 in Federal Reserve bank for FICA taxes and federal income taxes withheld. |
|
15 |
Purchased U.S. Savings Bonds for employees by writing check for $300. |
|
17 |
Paid state income taxes withheld from employees. |
|
20 |
Paid federal and state unemployment taxes. |
|
31 |
Completed monthly payroll register, which shows office salaries $17,400, store wages $22,500, FICA taxes withheld $3,192, federal income taxes payable $2,540, state income taxes payable $500, union dues payable $300, United Way contributions payable $1,300, and net pay $32,068. |
|
31 |
Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accruals pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 8%, state unemployment taxes 5.4%, and federal unemployment taxes 0.8%.
*2. Vacation pay: 5% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjustments pertaining to employee compensation at January 31.
For the year ended December 31, 2010, L. Ullman Company reports the following summary payroll data.
|
Gross earnings: |
Deductions: |
||
|
Administrative salaries |
$150,000 |
FICA taxes |
$ 29,600 |
|
Electricians’ wages |
240,000 |
Federal income taxes withheld |
78,000 |
|
Total |
$390,000 |
State income taxes withheld (3%) |
11,700 |
|
United Fund contributions payable |
17,000 |
||
|
Hospital insurance premiums |
12,000 |
||
|
Total |
$148,300 |
L. Ullman Company’s payroll taxes are: FICA 8%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to FICA taxes total $370,000, and gross earnings subject to unemployment taxes total $90,000.
Instructions
(a) Prepare a summary journal entry at December 31 for the full year’s payroll.
(b) Journalize the adjusting entry at December 31 to record the employer’s payroll taxes.
(c) The W 2 Wage and Tax Statement requires the dollar data shown below.
|
Wages, Tips, |
Federal Income |
State Income |
FICA |
FICA Tax |
|
Other Compensation |
Tax Withheld |
Tax Withheld |
Wages |
Withheld |
Complete the required data for the following employees.
|
Employee |
Gross Earnings |
Federal Income Tax Withheld |
|
R. Lowski |
$50,000 |
$18,300 |
|
K. Monez |
24,000 |
4,800 |
The Internal Revenue Service provides considerable information over the Internet. The following site answers payroll tax questions faced by employers.
Steps
1. Go to the site shown above.
2. Choose View Online, Tax Publications.
Instructions
Answer each of the following questions.
(a) How does the government define “employees”?
(b) What are the special rules for Social Security and Medicare regarding children who are employed by their parents?
(c) How can an employee obtain a Social Security card if he or she doesn’t have one?
(d) Must employees report to their employer tips received from customers? If so, how?
(e) Where should the employer deposit Social Security taxes withheld or contributed?
Diaz Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order.
|
Debits |
|
|
1. Cost of filling and grading the land |
$ 4,000 |
|
2. Full payment to building contractor |
700,000 |
|
3. Real estate taxes on land paid for the current year |
5,000 |
|
4. Cost of real estate purchased as a plant site (land $100,000 and |
|
|
building $45,000) |
145,000 |
|
5. Excavation costs for new building |
35,000 |
|
6. Architect’s fees on building plans |
10,000 |
|
7. Accrued real estate taxes paid at time of purchase of real estate |
2,000 |
|
8. Cost of parking lots and driveways |
14,000 |
|
9. Cost of demolishing building to make land suitable for construction |
|
|
new building |
15,000 |
|
$930,000 |
|
|
Credits |
|
|
10. Proceeds from salvage of demolished building |
$ 3,500 |
Instructions
Analyze the foregoing transactions using the following column headings. Insert the number of each transaction in the Item space, and insert the amounts in the appropriate columns. For amounts entered in the Other Accounts column, also indicate the account titles.
|
Item |
Land |
Building |
Other Accounts |
In recent years, Juresic Transportation purchased three used buses. Because of frequent turnover in the accounting department, a different accountant selected the depreciation method for each bus, and various methods were selected. Information concerning the buses is summarized below.
|
Salvage |
Useful Life |
||||
|
Bus |
Acquired |
Cost |
Value |
in Years |
Depreciation Method |
|
1 |
1/1/08 |
$ 96,000 |
$ 6,000 |
5 |
Straight line |
|
2 |
1/1/08 |
120,000 |
10,000 |
4 |
Declining balance |
|
3 |
1/1/09 |
80,000 |
8,000 |
5 |
Units of activity |
For the declining balance method, the company uses the double declining rate. For the units of activity method, total miles are expected to be 120,000. Actual miles of use in the first 3 years were: 2009, 24,000; 2010, 34,000; and 2011, 30,000.
Instructions
(a) Compute the amount of accumulated depreciation on each bus at December 31, 2010.
(b) If bus no. 2 was purchased on April 1 instead of January 1, what is the depreciation expense for this bus in (1) 2008 and (2) 2009?
On January 1, 2010, Pele Company purchased the following two machines for use in its production process.
Machine A: The cash price of this machine was $38,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end For the declining balance method, the company uses the double declining rate. For the units of activity method, total miles are expected to be 120,000. Actual miles of use in the first 3 years were: 2009, 24,000; 2010, 34,000; and 2011, 30,000.
Instructions
(a) Compute the amount of accumulated depreciation on each bus at December 31, 2010.
(b) If bus no. 2 was purchased on April 1 instead of January 1, what is the depreciation expense for this bus in (1) 2008 and (2) 2009?
On January 1, 2010, Pele Company purchased the following two machines for use in its production process.
Machine A: The cash price of this machine was $38,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end Determine acquisition costs of land and building. of that time period. Assume that the straight line method of depreciation is used.
Machine B: The recorded cost of this machine was $160,000. Pele estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2010.
(2) The journal entry to record annual depreciation at December 31, 2010.
(b) Calculate the amount of depreciation expense that Pele should record for machine B each year of its useful life under the following assumptions.
(1) Pele uses the straight line method of depreciation.
(2) Pele uses the declining balance method.The rate used is twice the straight line rate.
(3) Pele uses the units of activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2010, 45,000 units; 2011, 35,000 units; 2012, 25,000 units; 2013, 20,000 units.
(c) Which method used to calculate depreciation on machine B reports the highest amount of depreciation expense in year 1 (2010)? The highest amount in year 4 (2013)? The highest total amount over the 4 year period?
At the beginning of 2008, Lehman Company acquired equipment costing $90,000. It was estimated that this equipment would have a useful life of 6 years and a residual value of $9,000 at that time.The straight line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year. During 2010 (the third year of the equipment’s life), the company’s engineers reconsidered their expectations, and estimated that the equipment’s useful life would probably be 7 years (in total) instead of 6 years. The estimated residual value was not changed at that time. However, during 2013 the estimated residual value was reduced to $5,000.
Instructions
Indicate how much depreciation expense should be recorded each year for this equipment, by completing the following table.
|
Year |
Depreciation Expense |
Accumulated Depreciation |
|
2008 |
||
|
2009 |
||
|
2010 |
||
|
2011 |
||
|
2012 |
||
|
2013 |
||
|
2014 |
At December 31, 2010, Jimenez Company reported the following as plant assets.
|
Land |
$ 4,000,000 |
|
|
Buildings |
$28,500,000 |
|
|
Less: Accumulated depreciation—buildings |
12,100,000 |
16,400,000 |
|
Equipment |
48,000,000 |
|
|
Less: Accumulated depreciation—equipment |
5,000,000 |
43,000,000 |
|
Total plant assets |
$63,400,000 |
During 2011, the following selected cash transactions occurred.
|
April 1 |
Purchased land for $2,130,000. |
|
May 1 |
Sold equipment that cost $780,000 when purchased on January 1, 2007.The equipment was sold for $450,000. |
|
June 1 |
Sold land purchased on June 1, 2001 for $1,500,000.The land cost $400,000. |
|
July 1 |
Purchased equipment for $2,000,000. |
|
Dec. 31 |
Retired equipment that cost $500,000 when purchased on December 31, 2001. No salvage value was received. |
Instructions
(a) Journalize the above transactions. The company uses straight line depreciation for buildings and equipment. The buildings are estimated to have a 50 year life and no salvage value. The equipment is estimated to have a 10 year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement.
(b) Record adjusting entries for depreciation for 2011.
(c) Prepare the plant assets section of Jimenez’s balance sheet at December 31, 2011.
The intangible assets section of Redeker Company at December 31, 2010, is presented below.
|
Patent ($70,000 cost less $7,000 amortization) |
$63,000 |
|
Franchise ($48,000 cost less $19,200 amortization) |
28,800 |
|
Total |
$91,800 |
The patent was acquired in January 2010 and has a useful life of 10 years. The franchise was acquired in January 2007 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2011.
|
Jan. 2 |
Paid $45,000 legal costs to successfully defend the patent against infringement by another company. |
|
Jan.–June |
Developed a new product, incurring $140,000 in research and development costs.A patent was granted for the product on July 1. Its useful life is equal to its legal life. |
|
Sept. 1 |
Paid $50,000 to an extremely large defensive lineman to appear in commercials advertising the company’s products. The commercials will air in September and October. |
|
Oct. 1 |
Acquired a franchise for $100,000.The franchise has a useful life of 50 years. |
Instructions
(a) Prepare journal entries to record the transactions above.
(b) Prepare journal entries to record the 2011 amortization expense.
(c) Prepare the intangible assets section of the balance sheet at December 31, 2011.
Due to rapid turnover in the accounting department, a number of transactions involving intangible assets were improperly recorded by the Thorne Company in 2010.
1. Thorne developed a new manufacturing process, incurring research and development costs of $136,000.The company also purchased a patent for $60,000. In early January, Thorne capitalized $196,000 as the cost of the patents. Patent amortization expense of $9,800 was recorded based on a 20 year useful life.
2. On July 1, 2010, Thorne purchased a small company and as a result acquired goodwill of $92,000. Thorne recorded a half year’s amortization in 2010, based on a 50 year life ($920 amortization).The goodwill has an indefinite life.
Instructions
Prepare all journal entries necessary to correct any errors made during 2010. Assume the books have not yet been closed for 2010.
Lebo Company and Ritter Corporation, two corporations of roughly the same size, are both involved in the manufacture of in line skates. Each company depreciates its plant assets using the straight line approach. An investigation of their financial statements reveals the following information.
|
Lebo Co. |
Ritter Corp. |
|
|
Net income |
$ 800,000 |
$1,000,000 |
|
Sales |
1,200,000 |
1,080,000 |
|
Average total assets |
2,500,000 |
2,000,000 |
|
Average plant assets |
1,800,000 |
1,000,000 |
Instructions
(a) For each company, calculate the asset turnover ratio.
(b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales and produce net income.
Dewey Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order.
|
Debits |
|
|
1. Accrued real estate taxes paid at time of purchase of real estate |
$ 5,000 |
|
2. Real estate taxes on land paid for the current year |
7,500 |
|
3. Full payment to building contractor |
500,000 |
|
4. Excavation costs for new building |
|
|
5. Cost of real estate purchased as a plant site (land $75,000 and building |
19,000 |
|
$25,000) |
100,000 |
|
6. Cost of parking lots and driveways |
18,000 |
|
7. Architect’s fees on building plans |
9,000 |
|
8. Installation cost of fences around property |
6,000 |
|
9. Cost of demolishing building to make land suitable for construction of new |
|
|
Building |
17,000 |
|
$681,500 |
|
|
Credit |
|
|
10. Proceeds from salvage of demolished building |
$ 3,500 |
Instructions
Analyze the foregoing tranactions using the following column headings. Insert the number of each transaction in the Item space, and insert the amounts in the appropriate columns. For amounts entered in the Other Accounts column, also indicate the account title.
|
Item |
Land |
Building |
Other Accounts |
In recent years, Pablo Company purchased three machines. Because of heavy turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and each selected a different method. Information concerning the machines is summarized below.
|
Salvage |
Useful Life |
Depreciation |
|||
|
Machine |
Acquired |
Cost |
Value |
in Years |
Method |
|
1 |
1/1/07 |
$105,000 |
$ 5,000 |
10 |
Straight line |
|
2 |
1/1/08 |
150,000 |
10,000 |
8 |
Declining balance |
|
3 |
11/1/10 |
100,000 |
15,000 |
6 |
Units of activity |
For the declining balance method, the company uses the double declining rate. For the units of activity method, total machine hours are expected to be 25,000. Actual hours of use in the first 3 years were: 2010, 2,000; 2011, 4,500; and 2012, 5,500.
Instructions
(a) Compute the amount of accumulated depreciation on each machine at December 31, 2010.
(b) If machine 2 had been purchased on May 1 instead of January 1, what would be the depreciation expense for this machine in (1) 2008 and (2) 2009?
On January 1, 2010, Arlo Company purchased the following two machines for use in its production process.
Machine A: The cash price of this machine was $55,000. Related expenditures included: sales tax $2,750, shipping costs $100, insurance during shipping $75, installation and testing costs $75, and $90 of oil and lubricants to be used with the machinery during its first year of operation. Arlo estimates that the useful life of the machine is 4 years with a $5,000 salvage value remaining at the end of that time period.
Machine B: The recorded cost of this machine was $100,000. Arlo estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2010.
(2) The journal entry to record annual depreciation at December 31, 2010, assuming the straight line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Arlo should record for machine B each year of its useful life under the following assumption.
(1) Arlo uses the straight line method of depreciation.
(2) Arlo uses the declining balance method.The rate used is twice the straight line rate.
(3) Arlo uses the units of activity method and estimates the useful life of the machine is 25,000 units. Actual usage is as follows: 2010, 5,500 units; 2011, 7,000 units; 2012, 8,000 units; 2013, 4,500 units.
(c) Which method used to calculate depreciation on machine B reports the lowest amount of depreciation expense in year 1 (2010)?
The lowest amount in year 4 (2013)? The lowest total amount over the 4 year period?
At the beginning of 2008,Anfernee Company acquired equipment costing $200,000.
It was estimated that this equipment would have a useful life of 6 years and a residual value of $20,000 at that time. The straight line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year.
During 2010 (the third year of the equipment’s life), the company’s engineers reconsidered their expectations, and estimated that the equipment’s useful life would probably be 7 years (in total) instead of 6 years. The estimated residual value was not changed at that time. However, during 2013 the estimated residual value was reduced to $5,000.
Instructions
Indicate how much depreciation expense should be recorded for this equipment each year by completing the following table.
|
Year |
Depreciation Expense |
Accumulated Depreciation |
|
2008 |
||
|
2009 |
||
|
2010 |
||
|
2011 |
||
|
2012 |
||
|
2013 |
||
|
2014 |
At December 31, 2010, Starkey Company reported the following as plant assets.
|
Land |
$ 2,000,000 |
|
|
Buildings |
$20,000,000 |
|
|
Less: Accumulated depreciation—buildings |
8,000,000 |
12,000,000 |
|
Equipment |
30,000,000 |
|
|
Less: Accumulated depreciation—equipment |
4,000,000 |
26,000,000 |
|
Total plant assets |
$40,000,000 |
During 2011, the following selected cash transactions occurred.
|
April 1 |
Purchased land for $1,200,000. |
|
May 1 |
Sold equipment that cost $420,000 when purchased on January 1, 2007.The equipment was sold for $240,000. |
|
June 1 |
Sold land purchased on June 1, 2001, for $1,000,000.The land cost $340,000. |
|
July 1 |
Purchased equipment for $1,100,000. |
|
Dec. 31 |
Retired equipment that cost $300,000 when purchased on December 31, 2001. No salvage value was received. |
Instructions
(a) Journalize the above transactions. Starkey uses straight line depreciation for buildings and equipment. The buildings are estimated to have a 50 year useful life and no salvage value.
The equipment is estimated to have a 10 year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement.
(b) Record adjusting entries for depreciation for 2011.
(c) Prepare the plant assets section of Starkey’s balance sheet at December 31, 2011.
The intangible assets section of Time Company at December 31, 2010, is presented below.
|
Patent ($100,000 cost less $10,000 amortization) |
$ 90,000 |
|
Copyright ($60,000 cost less $24,000 amortization) |
36,000 |
|
Total |
$126,600 |
The patent was acquired in January 2010 and has a useful life of 10 years. The copyright was acquired in January 2007 and also has a useful life of 10 years. The following cash transactions may have affected intangible assets during 2011.
|
Jan. 2 |
Paid $45,000 legal costs to successfully defend the patent against infringement by another company. |
|
Jan.–June |
Developed a new product, incurring $230,000 in research and development costs. A patent was granted for the product on July 1. Its useful life is equal to its legal life. |
|
Sept. 1 |
Paid $125,000 to an X games star to appear in commercials advertising the company’s products. The commercials will air in September and October. |
|
Oct. 1 |
Acquired a copyright for $200,000.The copyright has a useful life of 50 years. |
Instructions
(a) Prepare journal entries to record the transactions above.
(b) Prepare journal entries to record the 2011 amortization expense for intangible assets.
(c) Prepare the intangible assets section of the balance sheet at December 31, 2011.
(d) Prepare the note to the financials on Time’s intangibles as of December 31, 2011.
Due to rapid turnover in the accounting department, a number of transactions involving intangible assets were improperly recorded by Wasp Company in 2010.
1. Wasp developed a new manufacturing process, incurring research and development costs of $110,000.The company also purchased a patent for $50,000. In early January, Wasp capitalized $160,000 as the cost of the patents. Patent amortization expense of $8,000 was recorded based on a 20 year useful life.
2. On July 1, 2010, Wasp purchased a small company and as a result acquired goodwill of $200,000.Wasp recorded a half year’s amortization in 2010, based on a 50 year life ($2,000 amortization).The goodwill has an indefinite life.
Instructions
Prepare all journal entries necessary to correct any errors made during 2010. Assume the books have not yet been closed for 2010.
McLead Corporation and Gene Corporation, two corporations of roughly the same size, are both involved in the manufacture of canoes and sea kayaks. Each company depreciates its plant assets using the straight line approach. An investigation of their financial statements reveals the following information.
|
McLead Corp. |
Gene Corp. |
|
|
Net income |
$ 300,000 |
$ 325,000 |
|
Sales |
1,100,000 |
990,000 |
|
Average total assets |
1,000,000 |
1,050,000 |
|
Average plant assets |
750,000 |
770,000 |
Instructions
(a) For each company, calculate the asset turnover ratio.
(b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales and produce net income.
Winterschid Company’s trial balance at December 31, 2010, is presented below. All 2010 transactions have been recorded except for the items described.
Unrecorded transactions 1. On May 1, 2010,Winterschid purchased equipment for $13,200 plus sales taxes of $600 (all paid in cash).
2. On July 1, 2010, Winterschid sold for $3,500 equipment which originally cost $5,000.
Accumulated depreciation on this equipment at January 1, 2010, was $1,800; 2010 depreciation prior to the sale of the equipment was $450.
3. On December 31, 2010,Winterschid sold for $9,000 on account inventory that cost $6,300.
4. Winterschid estimates that uncollectible accounts receivable at year end is $4,000.
5. The note receivable is a one year, 8% note dated April 1, 2010. No interest has been recorded.
6. The balance in prepaid insurance represents payment of a $3,600 6 month premium on September 1, 2010.
The financial statements and the Notes to Consolidated Financial Statements of PepsiCo, Inc. are presented in Appendix A.
Instructions
Refer to PepsiCo’s financial statements and answer the following questions.
(a) What was the total cost and book value of property, plant, and equipment at December 29, 2007?
(b) What method or methods of depreciation are used by the company for financial reporting purposes?
(c) What was the amount of depreciation and amortization expense for each of the three years 2005–2007?
(d) Using the statement of cash flows, what is the amount of capital spending in 2007 and 2006?
(e) Where does the company disclose its intangible assets, and what types of intangibles did it have at December 29, 2007?
Reimer Company and Lingo Company are two proprietorships that are similar in many respects. One difference is that Reimer Company uses the straight line method and Lingo Company uses the declining balance method at double the straight line rate. On January 2, 2008, both companies acquired the following depreciable assets.
|
Asset |
Cost |
Salvage Value |
Useful Life |
|
Building |
$320,000 |
$20,000 |
40 years |
|
Equipment |
110,000 |
10,000 |
10 years |
Including the appropriate depreciation charges, annual net income for the companies in the years 2008, 2009, and 2010 and total income for the 3 years were as follows.
|
2008 |
2009 |
2010 |
Total |
|
|
Reimer Company |
$84,000 |
$88,400 |
$90,000 |
$262,400 |
|
Lingo Company |
68,000 |
76,000 |
85,000 |
229,000 |
At December 31, 2010, the balance sheets of the two companies are similar except that Lingo
Company has more cash than Reimer Company.
Sally Vogts is interested in buying one of the companies. She comes to you for advice.
Instructions
With the class divided into groups, answer the following.
(a) Determine the annual and total depreciation recorded by each company during the 3 years.
(b) Assuming that Lingo Company also uses the straight line method of depreciation instead of the declining balance method as in (a), prepare comparative income data for the 3 years.
(c) Which company should Sally Vogts buy? Why?
Both the “All About You” story and the Feature Story at the beginning of the chapter discussed the company Rent A Wreck. Note that the tradename Rent A Wreck is a very important asset to the company, as it creates immediate product identification. As indicated in the chapter, companies invest substantial sums to ensure that their product is well known to the consumer.Test your knowledge of who owns some famous brands and their impact on the financial statements.
Instructions
(a) Provide an answer to the five multiple choice questions below.
(1) Which company owns both Taco Bell and Pizza Hut?
(a) McDonald’s.
(b) CKE.
(c) Yum Brands.
(d) Wendy’s.
(2) Dairy Queen belongs to:
(a) Breyer.
(b) Berkshire Hathaway.
(c) GE.
(d) The Coca Cola Company.
(3) Phillip Morris, the cigarette maker, is owned by:
(a) Altria.
(b) GE.
(c) Boeing.
(d) ExxonMobil.
(4) AOL, a major Internet provider, belongs to:
(a) Microsoft.
(b) Cisco.
(c) NBC.
(d) Time Warner.
(5) ESPN, the sports broadcasting network, is owned by:
(a) Procter & Gamble.
(b) Altria.
(c) Walt Disney.
(d) The Coca Cola Company.
(b) How do you think the value of these brands is reported on the appropriate company’s balance sheet?
Bill’s grandparents have been buying shares of stock for his college education fund since the day he was born. Yesterday, Bill received the annual report of Thompson Consolidated houlderpads, Inc., and is telling you about it. Bill says:
“I feel really good about the company because its financial statements were prepared and audited by a well known national accounting firm. Not only that, but the firm received an unqualified audit report. This means that the auditor checked out all the company’s transactions and that the company is healthy. Since the auditors think the company is doing well, I think I’ll invest some of my summer job savings in it.” How would you respond to your friend? Do you believe he has a good understanding of what information is conveyed by an auditors’ report? Discuss.
Selma Fromm is a recent graduate in accounting. She has taken a position with Hand Writer Company. The company has three divisions that manufacture three products: pencils, pens, and colored markers. Financial information for the most recent fiscal period for each division includes the following:
|
Pencils |
Pens |
Markers |
|
|
Division revenues |
$200,000 |
$300,000 |
$100,000 |
|
Division expenses |
140,000 |
160,000 |
60,000 |
|
Division assets |
600,000 |
1,000,000 |
200,000 |
One of Selma’s regular duties is to prepare an analysis of the performance of each division. Prepare an analysis of division performance from the information provided. Which of the divisions appears to be most profitable? Is this responsibility typical of the tasks often performed by accountants who work for business organizations? Explain.
Ima Crook is a sales clerk for Free Cash Company. Ima runs a cash register. Each day she obtains $200 from a supervisor and places the money in the cash register to make change. Customers bring goods to the sales counter, where Ima takes their money and writes out a sales slip using a form provided for this purpose. If requested by the customer, she writes out a separate slip for the customer. Ima works from 9 A.M. to 5 P.M. except for breaks and lunch when she is replaced by a coworker who runs the cash register for her. At 5 P.M. Ima takes all the cash from her cash register and puts it in an envelope along with the sales receipts and hands the envelope to a supervisor. Ima just bought a new $50,000 car and paid cash. What internal control problems exist in this situation? What can be done to solve the problems?
The Role of Accounting Regulation On Wednesday, July 10, 2002, the Wall Street Journal reported the following headlines:
Securities Threat1
Bush Crackdown on Business Fraud Signals New Era
Stream of Corporate Scandals Causes Bipartisan Outrage; Return of Big Government?
Fiery Rhetoric on Wall Street
President Bush’s tongue lashing of big business marks a swing of the American political pendulum away from a quarter century of bipartisan deference to capitalists. “We will use the full weight of the law to expose and root out corruption.”
“Book cooking” has eroded “the trust and the confidence that is absolutely vital to the function of our capital markets,” Rep. Patrick Toomey, a Republican from Pennsylvania, said.
Required Discuss the role of accounting regulation. Why is trust vital to the function of our capital markets?
Ethical Issues in Auditing Larry Clint is the president of Hometown Bank. The bank has several thousand depositors and makes loans to many local businesses and homeowners. Blanche Granite is a partner with a CPA firm hired to audit Hometown Bank. The financial statements the bank proposes to issue for the 2004 fiscal year include the following information.
|
Loans receivable |
$4,000,000 |
|
Total assets |
5,000,000 |
|
Net income |
1,000,000 |
During the audit, Blanche discovers that many of the loans were made for real estate development. Because of economic problems in the region, much of this real estate remains unsold or vacant. The current market value of the property is considerably less than its cost. Several of the developers are experiencing financial problems, and it appears unlikely that the bank will recover its loans if they default. Blanche described this problem to Larry and proposed a write down of the receivables to $2,800,000. The $1,200,000 write down would be written off against earnings for 2004. Larry is extremely upset by the proposal. He notes the write off would result in a reported loss for the bank for 2004. Also, the bank would be in jeopardy of falling below the equity requirements imposed by the bank regulatory board to which the bank is accountable. He fears the board would impose major constraints on the bank’s operations. Also, he fears depositors would lose confidence in the bank and withdraw their money, further compounding the bank’s financial problems. He cites several economic forecasts indicating an impending improvement in the region’s economy. Further, he notes the bank’s demise would be a major economic blow to the local economy and could precipitate the bankruptcy of some of the bank’s major customers.
Blanche acknowledges that Larry is correct in his perceptions of the possible outcomes of the write off. Larry proposes an alternative to Blanche. The bank will write down the receivables by $300,000 for 2004. The remaining losses will be recognized over the next three years, assuming property values have not improved. Larry also tells Blanche that if she is unwilling to accept his proposal, he will fire her firm and hire new auditors. The bank has been a longtime client of Blanche’s firm and is one of its major revenue producers. Blanche also recognizes Larry’s proposal is not consistent with accounting principles.
Required What are the ethical problems Blanche faces? What action would you recommend she take?
Evaluating the Quality of Financial Reports The following statements describe the annual report issued by Short Sheet Company for the fiscal year ended December 31, 2004.
A. The report was issued on October 1, 2005.
B. The balance sheet included management’s estimates of the increased value of certain fixed assets during 2004.
C. Procedures used to calculate revenues and expenses were different for 2004 than for 2003 and earlier years.
D. Short’s financial statements were audited by an accounting firm owned by the president’s brother.
E. Some of the company’s major liabilities were not included in the annual report.
Required For each statement, identify the qualitative characteristic that has been compromised.
Distinguishing Among Types of Accounts Bonner Systems uses the following accounts when preparing its financial reports.
|
Type of Account |
Financial Statement |
|||||
|
Asset |
Liability |
Equity |
Revenue |
Expense |
Income |
Balance |
|
1. Wages Payable |
||||||
|
2. Accounts Receivable |
||||||
|
3. Retained Earnings |
||||||
|
4. Buildings |
||||||
|
5. Supplies Used |
||||||
|
6. Inventory |
||||||
|
7. Sales (for cash) |
||||||
|
8. Accumulated Depreciation |
||||||
|
9. Loan from Bank |
||||||
|
10. Land |
||||||
|
11. Owners’ Investment |
||||||
|
12. Supplies |
||||||
|
13. Sales (on credit) |
||||||
|
14. Bonds Payable |
||||||
|
15. Unearned Revenue |
||||||
|
16. Wages Earned by Employees |
||||||
|
17. Utilities Consumed |
||||||
Required
A. Place a mark in the appropriate column to indicate the type of account.
B. Place a mark in the appropriate column to indicate on which financial statement that account is reported.
Interpreting Information Reported on Financial Statements The two most recent monthly balance sheets of Strauss Instrument Company are shown below. Also shown is the most recent monthly income statement.
|
Balance Sheet |
31 May |
30 Jun |
31 May |
30 Jun |
|
|
Assets: |
Liabilities and Owners’ Equity: |
||||
|
Cash |
$3,200 |
$1,375 |
Accounts payable |
$2,300 |
$2,300 |
|
Accounts receivable |
5,700 |
5,900 |
Wages payable |
1,900 |
1,400 |
|
Equipment |
26,300 |
26,300 |
Notes payable |
48,600 |
40,100 |
|
Building115,000 |
115,000 |
115,000 |
Owners’ investment |
43,000 |
47,000 |
|
Accumulated depreciation |
28,000 |
28,500 |
Retained earnings |
26,400 |
29,275 |
|
Total |
$122,200 |
$120,075 |
$122,200 |
$120,075 |
|
Income Statement for June |
|
|
Service revenues |
$7,300 |
|
Rent expense |
1,300 |
|
Wages expense |
1,900 |
|
Supplies expense |
400 |
|
Depreciation expense |
500 |
|
Interest expense |
325 |
|
Net income |
$2,875 |
Required From the financial statements presented, identify and record the transactions that occurred during June. Use the spreadsheet format shown on the next page to record the transactions. One transaction is shown as an example.
|
ASSETS |
= |
LIABILITIES |
+ |
OWNERS’ EQUITY |
|||
|
Accounts |
Cash |
Other |
Contributed |
Retained |
|||
|
Beginning Amounts |
3,200 |
+119,000 |
= |
52,800 |
+ |
43,000 |
26,400 |
|
Cash |
+7,100 |
||||||
|
Accounts Receivable |
+200 |
||||||
|
Service Revenues |
+7,300 |
Management Discussion and Analysis The letter to the shareholders from Douglas N. Daft, Chairman, Board of Directors, and Chief Executive Officer of Coca Cola is provided on the text’s Web site and on the student CD that accompanies this text. This letter appeared in the company’s 2001 annual report.
Required Read Chairman Daft’s letter and comment on the following:
A. Which segments of the market represent the largest growth for Coca Cola?
B. Comment on the level of detail contained in the letter. For example, are the bulleted points shown on the last page of the letter detailed, or general in nature?
C. The second paragraph of the chairman’s letter makes reference to the nature of the competitive environment. What is the tone of the second paragraph? What is Chairman Daft telling the reader?
Earnings Restatement and Stock Prices In April, 2001, the management of U.S. Aggregates, Inc., a producer of aggregates made of a combination of crushed stone, sand, and gravel, announced that the company would be restating its earnings for the first three quarters of 2000. After the announcement, the company’s stock price per share dropped more than 75% from its high for the period affected by the company’s restatement of earnings.
Financial irregularities of other companies have been announced in recent years. In late May, 2001, trading of the stock of U.S. Wireless Corporation was halted on the Nasdaq Stock Exchange when its share price dropped significantly. This sudden drop occurred when the company announced irregularities had been uncovered and it had replaced its chairman and chief executive. The price went from a high of $24.50 in March, 2000 to a low of $2.91.
Required
A. Did these companies practice full and fair disclosure? Why did the stock price of U.S. Aggregates and U.S. Wireless Corporation fall when investors learned that the company had produced financial information that was incorrect?
B. Do you believe “financial shenanigans” by management is an ethical issue? Explain.
Evaluating Internal Control Procedures Consider each of the following situations.
A. Sales clerks in a retail store are assigned to a specific cash register. They are given a cash drawer containing $100 in change at the beginning of their shifts. They are required to record the amount of each purchase in the cash register. The cash register records an identification and price for each item purchased. Cash payments are collected from customers and placed in the cash drawer. A copy of the cash register sales slip is given to the customer. At the end of each shift, the employee takes the cash drawer and cash register tape to a supervisor who counts the cash, verifies the sales, and signs an approval form. The sales clerk also signs the form that identifies the amount of cash and amount of sales for the day.
B. A ticket seller at a movie theater is issued a cash drawer with $100 in change and a roll of prenumbered tickets when the theater opens each day. The seller collects cash from customers and issues the tickets. Each customer hands a ticket to a ticket taker who tears the ticket in half and gives half back to the customer. At the end of the day, the ticket seller returns the cash drawer and tickets to a supervisor.
Required For each situation, discuss why the procedures are used and how they provide effective internal control.
Evaluating Internal Control The Spring Valley Church is a small congregation with about 50 members. The church is financed by member donations. Most of these donations are collected during the Sunday morning service. Many of the donations are in cash. Other donations are by checks made payable to the church. Harvey Plump has served as treasurer for the church since becoming a member a few years ago. The church accepted Harvey’s offer to serve as treasurer as an indication of his interest in being active in the church. Harvey listed several previous experiences with financial matters on his resume as qualifying him for the position. Once donations are collected each week, Harvey takes the money to the church office where he counts it. He makes out a deposit slip and deposits the money in the church’s account at a local bank. He records the deposit in the church’s check register. He writes checks to pay the church’s expenses. In some cases, he writes small checks to himself as reimbursement for incidental expenses he pays for the church. He opens bank statements received by the church each month and reconciles them with the church’s check register. Harvey prepares a monthly statement of cash received and disbursed that is distributed to members of the congregation. The church always seems to be lacking sufficient financial resources. A recent meeting was held to discuss expansion of the church’s building, but current finances seem to make expansion impossible. Some members don’t understand why the church’s financial condition appears to be so bleak, since they believe they are making large donations. The church has asked you to help them evaluate their financial situation.
Required Evaluate the internal control problems of the Spring Valley Church. What explanation can be provided for the church’s financial problems?
Examining an Audit Report Examine the auditors’ report provided as part of the 2002 annual report of Nike, Inc., and answer the following questions.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Nike, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(A)(1) on page 55 present fairly, in all material respects, the financial position of Nike, Inc. and its subsidiaries at May 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(A)(2) on page 55 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective June 1, 2001, the Company changed its method of accounting for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
June 27, 2002
Required
A. Who was Nike’s external auditor? What date did the auditor complete its audit work?
B. What was the auditor’s responsibility with respect to the company’s financial statements? What was the responsibility of management?
C. What kind of opinion did Nike’s auditors issue? Why is this opinion important to the company?
D. How does PricewaterhouseCoopers’ audit opinion differ from the Krispy Kreme’s opinion shown in this chapter?
African Lakes Company purchased a delivery truck. The total cash payment was $27,900, including the following items.
|
Negotiated purchase price |
$24,000 |
|
Installation of special shelving |
1,100 |
|
Painting and lettering |
900 |
|
Motor vehicle license |
100 |
|
Annual insurance policy |
500 |
|
Sales tax |
1,300 |
|
Total paid |
$27,900 |
Explain how each of these costs would be accounted for.
The following expenditures relating to plant assets were made by Spaulding Company during the first 2 months of 2010.
1. Paid $5,000 of accrued taxes at time plant site was acquired.
2. Paid $200 insurance to cover possible accident loss on new factory machinery while the machinery was in transit.
3. Paid $850 sales taxes on new delivery truck.
4. Paid $17,500 for parking lots and driveways on new plant site.
5. Paid $250 to have company name and advertising slogan painted on new delivery truck.
6. Paid $8,000 for installation of new factory machinery.
7. Paid $900 for one year accident insurance policy on new delivery truck.
8. Paid $75 motor vehicle license fee on the new truck.
Instructions
(a) Explain the application of the cost principle in determining the acquisition cost of plant assets.
(b) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited.
Trudy Company incurred the following costs.
|
1. Sales tax on factory machinery purchased |
$5,000 |
|
2. Painting of and lettering on truck immediately upon purchase |
700 |
|
3. Installation and testing of factory machinery |
2,000 |
|
4. Real estate broker’s commission on land purchased |
3,500 |
|
5. Insurance premium paid for first year’s insurance on new truck |
880 |
|
6. Cost of landscaping on property purchased |
7,200 |
|
7. Cost of paving parking lot for new building constructed |
17,900 |
|
8. Cost of clearing, draining, and filling land |
13,300 |
|
9. Architect’s fees on self constructed building |
10,000 |
Instructions
Indicate to which account Trudy would debit each of the costs.
Chris Rock has prepared the following list of statements about depreciation.
1. Depreciation is a process of asset valuation, not cost allocation.
2. Depreciation provides for the proper matching of expenses with revenues.
3. The book value of a plant asset should approximate its market value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue producing ability generally remain intact over time.
6. The revenue producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.
8. The balance in accumulated depreciation represents the total cost that has been charged to expense.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Jerry Grant, the new controller of Blackburn Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2010. His findings are as follows.
|
Accumulated |
Useful Life in Years |
||||||
|
Type of |
Date |
Depreciation |
Salvage Value |
||||
|
Asset |
Acquired |
Cost |
1/1/10 |
Old |
Proposed |
Old |
Proposed |
|
Building |
1/1/04 |
$800,000 |
$114,000 |
40 |
50 |
$40,000 |
$37,000 |
|
Warehouse |
1/1/05 |
100,000 |
25,000 |
25 |
20 |
5,000 |
3,600 |
All assets are depreciated by the straight line method. Blackburn Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Jerry’s proposed changes.
Instructions
(a) Compute the revised annual depreciation on each asset in 2010. (Show computations.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2010.
Presented below are selected transactions at Ingles Company for 2010.
|
Jan. 1 |
Sold a computer that was purchased on January 1, 2007.The computer cost $40,000. It had a useful life of 5 years with no salvage value.The computer was sold for $14,000. |
|
June 30 |
Retired a piece of machinery that was purchased on January 1, 2000.The machine cost $62,000 on that date. It had a useful life of 10 years with no salvage value. |
|
Dec. 31 |
Discarded a delivery truck that was purchased on January 1, 2006. The truck cost $39,000. It was depreciated based on a 6 year useful life with a $3,000 salvage value. |
Instructions
Journalize all entries required on the above dates, including entries to update depreciation, where applicable, on assets disposed of. Ingles Company uses straight line depreciation. (Assume depreciation is up to date as of December 31, 2009.)
Herzogg Company, organized in 2010, has the following transactions related to intangible assets.
|
1/2/10 |
Purchased patent (7 year life) |
$560,000 |
|
4/1/10 |
Goodwill purchased (indefinite life) |
360,000 |
|
7/1/10 |
10 year franchise; expiration date 7/1/2018 |
440,000 |
|
9/1/10 |
Research and development costs |
185,000 |
Instructions
Prepare the necessary entries to record these intangibles. All costs incurred were for cash. Make the adjusting entries as of December 31, 2010, recording any necessary amortization and reflecting all balances accurately as of that date.
Interpreting Cash Flows The statement of cash flows for Rowe Furniture Corporation is shown below. Based in Salem, Virginia, the firm manufactures upholstered household furniture including sofas, sofa beds, and chairs.
Required Use the statement of cash flows to answer the following questions.
A. What were Rowe’s primary sources of cash in 2001? Were these different than in the prior two years?
B. What were Rowe’s primary uses of cash in 2001? Were these different than in the prior two years?
C. What were the primary reasons for the decrease in cash flow from operating activities between 2000 and 2001?
D. Evaluate Rowe’s cash flows over the period shown. Has the company been able to finance its growth, dividends, and acquisition of treasury stock out of cash flow from operations? Explain.
E. Over the past three years, what were the primary reasons that cash flows from operations differed so much from net income?
F. The portion of the statement titled “Reconciliation of net earnings to net cash provided by operating activities” is a required disclosure. Of what does this section and presentation remind you? Might this disclosure requirement help explain why so few companies use the direct method? Explain.
|
The Rowe Companies Annual Report 2001 |
|||
|
Year Ended |
|||
|
12/2/01 |
12/3/00 (53 weeks) |
11/28/99 |
|
|
Increase (Decrease) In Cash |
|||
|
Cash flows from Operating Activities |
|||
|
Cash received from customers |
$329,683 |
$379,400 |
$295,563 |
|
Cash paid to suppliers and employees |
328,948 |
354,570 |
274,870 |
|
Income taxes paid, net of refunds |
585 |
6,183 |
7,726 |
|
Interest paid |
4,642 |
5,693 |
2,686 |
|
Interest received |
480 |
288 |
159 |
|
Other receipts—net |
1,109 |
1,156 |
1,684 |
|
Net cash and cash equivalents provided by (used in) |
|||
|
operating activities |
1,733 |
14,398 |
12,124 |
|
Cash flows from Investing Activities |
|||
|
Proceeds from sale of property and equipment |
1,056 |
21 |
19 |
|
Capital expenditures |
3,317 |
9,155 |
8,830 |
|
Payments to acquire businesses |
5,160 |
8,892 |
|
|
Net cash used in investing activities |
2,261 |
14,294 |
17,703 |
|
Cash flows from Financing Activities |
|||
|
Net borrowings (payments) under line of credit |
5,368 |
164 |
2,071 |
|
Proceeds from issuance of long term debt |
6,865 |
13,020 |
25,132 |
|
Payments to reduce long term debt |
3,821 |
11,922 |
14,522 |
|
Proceeds from loans against life insurance policies |
3,014 |
— |
— |
|
Proceeds from issuance of common stock |
27 |
51 |
460 |
|
Dividends paid |
1,379 |
1,849 |
1,714 |
|
Purchase of treasury stock |
16 |
951 |
3,224 |
|
Net cash provided by (used in) financing activities |
10,058 |
1,815 |
8,203 |
|
Net increase (decrease) in cash and cash equivalents |
6,064 |
1,711 |
2,624 |
|
Cash at beginning of year |
3,393 |
5,104 |
2,480 |
|
Cash at end of year |
$9,457 |
$3,393 |
$5,104 |
|
The Rowe Companies Annual Report 2001 |
|||
|
Year Ended |
|||
|
12/2/01 |
12/3/00 |
11/28/99 |
|
|
Net earnings (loss) |
$6,189 |
$3,544 |
$13,901 |
|
Adjustments to reconcile net earnings (loss) to net |
|||
|
cash provided by (used in) operating activities, net |
|||
|
of acquisition and disposition of businesses |
|||
|
Loss on disposition of Wexford |
— |
5,455 |
— |
|
Depreciation and amortization |
8,569 |
8,581 |
6,165 |
|
Provision for deferred compensation |
173 |
816 |
1,083 |
|
Payments made for deferred compensation |
813 |
160 |
319 |
|
Deferred income taxes |
1,001 |
2,099 |
472 |
|
Provision for losses on accounts receivable |
4,421 |
1,485 |
413 |
|
Loss (gain) on disposition of assets |
15 |
29 |
4 |
|
Change in operating assets and liabilities net of |
|||
|
effects of acquisition and disposition of businesses |
|||
|
Decrease (increase) in accounts receivable |
4,649 |
5,564 |
9,379 |
|
Decrease (increase) in inventories |
227 |
832 |
5,692 |
|
Decrease (increase) in prepaid expenses and other |
1,679 |
887 |
795 |
|
Decrease (increase) in other assets |
352 |
472 |
1,210 |
|
Increase (decrease) in accounts payable |
10,277 |
4,750 |
3,830 |
|
Increase (decrease) in accrued expenses |
4,433 |
1,715 |
2,170 |
|
Increase (decrease) in customer deposits |
403 |
1,105 |
2,425 |
|
Total adjustments |
4,456 |
10,854 |
1,777 |
|
Net cash provided by (used in) operating activities |
($1,733) |
$14,398 |
$12,124 |
Errors in Reporting Cash Flow from Operating Activities Starkovich Architects, Inc. uses the direct format to prepare the statement of cash flows. At year end 2004, the following comparative balance sheet and abbreviated income statement were available as shown.
|
31 Dec |
||||
|
Comparative Balance Sheet |
2004 |
2003 |
Income Statement for 2004 |
|
|
Cash |
$3,400 |
$2,750 |
Service revenue |
$73,000 |
|
Accounts receivable |
5,800 |
4,300 |
Commission revenue |
42,100 |
|
Inventory |
4,700 |
5,100 |
Advertising expense |
13,400 |
|
Land |
10,000 |
10,000 |
Rent expense |
24,000 |
|
Total assets |
$23,900 |
$22,150 |
Wages expense |
42,600 |
|
Rent payable |
$2,500 |
$2,900 |
Taxes expense |
12,000 |
|
Taxes payable |
1,600 |
1,600 |
Net income |
$23,100 |
|
Wages payable |
3,200 |
1,050 |
||
|
Common stock |
15,000 |
15,000 |
||
|
Retained earnings |
1,600 |
1,600 |
||
|
Total liabilities and equity |
$23,900 |
$22,150 |
||
From this information, the accounting staff prepared the operating activities section of the statement of cash flows shown on the following page using the direct format.
|
Starkovich Architects, Inc. |
|
|
Operating Activities |
$115,100 |
|
Cash received from customers |
13,400 |
|
Cash paid for advertising |
23,600 |
|
Cash paid for rent |
40,450 |
|
Cash paid for wages |
11,000 |
|
Cash paid for taxes |
$26,650 |
|
Cash provided by operating activities |
|
Required
A. What evidence can you identify to suggest that certain items are misstated in the computation of cash flow from operating activities? For each item that you believe is misstated, specify why you know this. (You may assume that the income statement and balance sheets are correct as presented.)
B. Prepare a revised computation of cash flow from operating activities incorporating the necessary changes.
Depreciation and Cash Flow A colleague is about to make a presentation to the management group regarding a $2 million capital investment proposal. She is quite sure that the management group will press her to identify a new source of financing to support the proposed investment. She shows you the operating activities section of the company’s most recent statement of cash flows. (Amounts are in thousands of dollars.)
Your colleague is aware that there are a variety of methods acceptable under GAAP by which depreciation expense can be computed. Further, she knows that the company currently uses a very conservative method that results in low depreciation expense, especially in the early years of an asset’s life. Your colleague is going to suggest that the firm use a more aggressive depreciation policy that will result in higher depreciation expense for the next several years.
Says she, “The higher depreciation expense will generate more cash from operating activities. According to the cash flow statement here, adding back greater depreciation expense will result in more cash provided by operating activities. See?” Assume it’s quite reasonable that the firm use a more aggressive depreciation method.
Required
A. What format is this company using to prepare the statement of cash flows?
B. Do you agree with your colleague’s thinking? Why or why not?
C. Construct a numerical example to prove your argument.
Evaluating Income and Cash Flows Selected financial statement information is reported below for Office Decor Company. All amounts are in thousands.
|
For the Year Ended December 31, 2004 |
|
|
Sales revenue |
$11,200 |
|
Cost of goods sold |
6,400 |
|
Operating expenses |
2,800 |
|
Net income |
2,000 |
|
Dividends paid |
1,000 |
|
31 Dec |
2004 |
2003 |
|
Cash |
$1,340 |
$1,940 |
|
Accounts receivable |
4,600 |
2,200 |
|
Inventories |
9,400 |
5,000 |
|
Accounts payable |
3,800 |
2,600 |
|
Notes payable |
10,000 |
6,000 |
Required Prepare a statement of cash flows (indirect format) for Office Decor, assuming that all important cash flow activities are reflected in the information provided above. Examine the financial information presented for Office Decor Company. What financial problems do you see? What are some potential causes of these problems?
Interpreting Cash Flows The operating activities section of Bernstein Company’s cash flow statement is reported below.
|
2004 |
2003 |
2002 |
|
|
Net income |
$391 |
$455 |
$467 |
|
Depreciation and amortization |
258 |
247 |
223 |
|
Special and nonrecurring items |
3 |
0 |
0 |
|
Changes in current assets and liabilities: |
|||
|
Accounts receivable |
220 |
102 |
66 |
|
Inventories |
112 |
73 |
45 |
|
Accounts payable |
15 |
22 |
19 |
|
Income taxes |
6 |
7 |
30 |
|
Other accrued expenses |
17 |
26 |
11 |
|
Cash flow provided by operations |
$318 |
$524 |
$639 |
Required
What does this information reveal about why cash flow from operations has decreased by 50% over the three year period? Be specific and explain the basis for your conclusions.
Interpreting the Cash Flow Statement Best Buy Company, Inc., a retailer of consumer electronics headquartered in Minnesota, recently reported the following partial cash flow statement and income statement.
|
(Dollars in millions) Year Ended |
|
|
Cash flows from operating activities |
|
|
Net income |
$570 |
|
Adjustments to reconcile net income to net cash: |
|
|
Depreciation and amortization |
309 |
|
Increase in accounts receivable |
18 |
|
Decrease in inventories |
330 |
|
Increase in other assets |
39 |
|
Increase in accounts payable |
529 |
|
Increase in accrued expenses and other |
557 |
|
Net cash provided by operating activities |
$1,578 |
|
Dollars in millions) Year Ended March 2, 2002 |
|
|
Revenues |
$19,597 |
|
Cost of goods sold |
15,167 |
|
Gross profit |
4,430 |
|
Selling, general, and administrative expenses |
3,493 |
|
Interest expense, net |
1 |
|
Income before provision for income taxes |
936 |
|
Provision for income taxes |
366 |
|
Net income |
$570 |
Required
Use the information from the financial statements to answer each of the following questions.
A. How much cash did Best Buy collect from customers in the fiscal year ended March 2, 2002?
B. How much cash did Best Buy pay out for inventory in the fiscal year ended March 2, 2002? The increase in Accounts Payable arose from purchases of inventory that had not yet been paid for.
C. How much cash did Best Buy pay out for selling, general, and administrative expenses in the fiscal year ended March 2, 2002? The changes in other assets and in accrued expenses and other are related to selling, general, and administrative expenses.
Comparing Cash Flows Summarized cash flow statements for 2001 are shown below for two computer industry firms:
Intel Corporation, based in Santa Clara, California, and Apple Computer, headquartered in Cupertino, California.
|
Intel |
Apple |
|
|
Net income |
$1,291 |
($25) |
|
Adjustments: |
||
|
Depreciation and amortization |
6,469 |
102 |
|
(Increase) decrease in accounts receivable |
1,561 |
487 |
|
(Increase) decrease in inventories |
24 |
22 |
|
(Increase) decrease in other assets |
898 |
118 |
|
Increase (decrease) in payables |
2,484 |
416 |
|
Changes in taxes |
84 |
36 |
|
Other adjustments |
979 |
67 |
|
Net cash provided by operating activities |
8,654 |
185 |
|
Net cash provided by (used in) investing activities |
195 |
892 |
|
Net cash provided by (used in) financing activities |
3,465 |
42 |
|
Net change in cash |
4,994 |
1,119 |
Required
Write a short report comparing the financial performance of the two companies.
In what important ways were the results for both companies similar? In what important ways were the results different?
Interpreting Cash Flows
Required Identify whether each of the following statements is true or false. Explain your answers. Write in complete sentences. Computations may be used as part of your explanation.
A. When a company prepares a cash flow statement using the indirect method, it adds depreciation expense to net income because depreciation is a source of cash during a fiscal period.
B. Alpha Company reported an increase in Accounts Receivable of $2 million during 2004. As a result, Alpha’s cash flow from operating activities was $2 million less than its operating revenues.
C. Beta Company purchased $40 million of merchandise inventory during 2004. Beta’s accounts payable increased from $5 million to $8 million during the year. Beta’s cash flow statement (indirect method) would report an adjustment to net income of =$3 million.
D. Delta Company reported cost of goods sold of $27 million for 2004. Its merchandise inventory increased by $8 million during the year. If all inventory purchased was paid for in cash, then Delta’s cash payments to suppliers of inventory during the year were $35 million.
E. Gamma Company reported the following:
|
Net cash flow for operating activities |
$80 |
|
Net cash flow from investing activities |
35 |
|
Net cash flow from financing activities |
50 |
|
Net change in cash |
$5 |
From this information, it appears that Gamma is facing financial problems.
The Differential Effect of Transactions on Net Income and Cash Flow During March, each of the following events occurred at Frolic Park, Inc.
|
Event |
Type |
Effect on |
Effect on |
|
1 |
Sold $18,000 of goods on credit to customers. Received a 25% down payment with the balance on account. |
||
|
2 |
Paid $500 cash for office supplies that will be used during April. |
||
|
3 |
Received $3,000 from a customer in full payment of her account balance. |
||
|
4 |
Borrowed $80,000 from a local bank to be repaid in monthly installments plus interest starting in April. |
||
|
5 |
Paid rent on the office space ($1,200 per month) for the months of February, March, and April. |
||
|
6 |
Distributed monthly paychecks to employees totaling $13,300. 30% was for work performed in February and the balance for work performed in March. |
||
|
7 |
Purchased new Internet server equipment at a cost of 50,000.00 |
||
|
8 |
Purchased a 3 year fire insurance policy at a total cost of 10,800. Its coverage began on March 1. |
||
|
9 |
Purchased merchandise from suppliers on credit at a cost of 70,000.00 |
||
|
10 |
Collected $22,000 from customers in payment of their accounts. 80% of this amount was from sales recorded in February and the balance was from March sales. |
||
|
11 |
Collected four months’ rent in advance (at $700 per month) from a tenant who will move in on April 1. |
||
|
12 |
Paid $45,000 to suppliers in partial payment for goods purchased in #9 above. |
||
|
13 |
Sold $33,000 of merchandise to customers on credit. |
||
|
14 |
Sold an investment in stocks and bonds for $28,000; the same amount that had been paid for it. A 3 year, 9% note receivable was accepted in full payment. |
Totals for March
Required
A. Identify whether each transaction is an operating, investing, or financing activity.
B. For each event, identify the effect it had on March’s net income and on March’s cash flow from operations.
C. What does this problem suggest to you about the hazards of trying to manage an organization with accrual basis accounting information only? Discuss.
Comparing Cash Flow Statements Among Firms Sheik, Speer, and Love are three companies in similar industries. Five years of summarized cash flow data are available for each firm. Year 5 is the most recent.
|
Year 5 |
Year 4 |
Year 3 |
Year 2 |
Year 1 |
|
|
Sheik Company: |
|||||
|
Operating activities |
$30 |
$31 |
$28 |
$26 |
$28 |
|
Investing activities |
3 |
1 |
6 |
5 |
4 |
|
Financing activities |
31 |
28 |
33 |
30 |
32 |
|
Speer Company: |
|||||
|
Operating activities |
15 |
3 |
7 |
14 |
26 |
|
Investing activities |
8 |
4 |
9 |
17 |
35 |
|
Financing activities |
6 |
0 |
3 |
4 |
11 |
|
Love Company: |
|||||
|
Operating activities |
9 |
6 |
3 |
2 |
1 |
|
Investing activities |
13 |
12 |
11 |
10 |
10 |
|
Financing activities |
8 |
7 |
8 |
10 |
9 |
Study the information carefully. What clues can you find in the information concerning what is (or has been) going on with each firm? Do their business histories appear similar or dissimilar? Does the situation of one or more firms appear more favorable than one or more of the others?
Required For each firm, describe and discuss what you have learned from reviewing its summarized cash flow information.
Interpreting the Cash Flow Statement Embarcadero Company’s most recent statement of cash flows is shown on the next page.
Required Use Embarcadero’s statement of cash flows to answer the following questions.
A. What was the primary source of cash inflow for the company?
B. Why was the company able to report a net cash inflow from operations when it incurred a net loss for the period?
C. What were the primary uses of cash during the period?
D. Did Receivables, Inventories, and Accounts Payable increase or decrease during the year?
E. If revenues (as reported on the income statement) were $3,960 for the year, how much cash was collected from customers during the year?
|
Embarcadero Company |
|
|
Operating activities |
|
|
Net loss |
($682) |
|
Adjustments to reconcile NI to cash flows: |
|
|
Depreciation and amortization |
592 |
|
Noncash gains and losses, net |
136 |
|
Changes in: |
|
|
Accounts receivable |
172 |
|
Inventories |
110 |
|
Other current assets |
24 |
|
Accounts payable |
98 |
|
Other current liabilities |
148 |
|
Cash provided by operations |
278 |
|
Investing activities |
|
|
Investments and acquisitions |
424 |
|
Capital expenditures |
42 |
|
Sales of investments |
206 |
|
Cash used by investing activities |
260 |
|
Financing activities |
|
|
Increase in long term debt |
1,014 |
|
Repurchase of common stock |
740 |
|
Dividends paid |
402 |
|
Cash provided by financing activities |
128 |
|
Decrease in cash |
($110) |
Interrelationships among the Income Statement, Balance Sheet, and Statement of Cash Flow Frontera Corporation reported the following income statement and comparative balance sheet for the year ended December 31, 2004.
|
Income Statement (for the Year Ended December 31, 2004) |
|
|
Sales revenue |
$6,930 |
|
Cost of goods sold |
3,660 |
|
Gross profit on sales |
3,270 |
|
Operating expenses: |
|
|
Wages |
855 |
|
Depreciation |
102 |
|
Rent |
546 |
|
Advertising |
1,224 |
|
Operating income |
543 |
|
Other revenues and expenses: |
|
|
Interest revenue |
84 |
|
Interest expense |
24 |
|
Income before taxes |
603 |
|
Income tax expense |
210 |
|
Net income |
$393 |
|
Balance Sheet (at December 31) |
2004 |
2003 |
|
Assets: |
||
|
Cash |
$482 |
$318 |
|
Accounts receivable |
246 |
189 |
|
Inventory |
471 |
483 |
|
Prepaid advertising |
54 |
21 |
|
Total current assets |
1,253 |
1,011 |
|
Buildings and equipment |
2,811 |
1,974 |
|
Accumulated depreciation |
922 |
820 |
|
Land |
350 |
300 |
|
Investments, long term |
250 |
400 |
|
Total assets |
$3,742 |
$2,865 |
|
Liabilities and stockholders’ equity: |
||
|
Rent payable |
$450 |
$478 |
|
Wages payable |
32 |
24 |
|
Total current liabilities |
482 |
502 |
|
Notes payable, long term |
1,150 |
750 |
|
Common stock |
1,400 |
1,100 |
|
Retained earnings |
710 |
513 |
|
Total liabilities and equity |
$3,742 |
$2,865 |
Frontera Corporation used the indirect format to prepare the statement of cash flows, but it has been misplaced and is not available.
Required Use your knowledge of financial statements to answer each of the questions that follow. For each item you list as part of your answer, describe fully why the item appears on the statement of cash flows.
A. Which line items from the income statement will also be found in the operating activities section of the statement of cash flows?
B. Which line items from the balance sheet contain information that will be reflected in the operating activities section?
C. Which line items from the income statement will also be found in the investing activities section?
D. Which line items from the balance sheet contain information that will be reflected in the investing activities section?
E. Which line items from the income statement will also be found in the financing activities section?
F. Which line items from the balance sheet contain information that will be reflected in the financing activities section?
Evaluating Income and Cash Flows Selected financial statement information is reported on the next page for Beltway Distributors, Inc.
Required
A. Prepare a statement of cash flows (indirect format) for Beltway Distributors, assuming that all important cash flow activities are reflected in the information provided.
B. Assume this has been the pattern of cash flows for several years. What does this imply about the firm’s business situation?
|
For the Fiscal Year Ended January 30, 2004 |
||
|
Sales revenue |
$35,400 |
|
|
Cost of goods sold |
22,700 |
|
|
Operating expenses (except depreciation) |
4,500 |
|
|
Depreciation expense |
2,900 |
|
|
Net income |
5,300 |
|
|
Dividends declared and paid |
5,000 |
|
|
For January 30 |
2004 |
2003 |
|
Cash |
$2,050 |
$1,950 |
|
Accounts receivable |
8,600 |
13,400 |
|
Inventories |
23,500 |
27,100 |
|
Accounts payable |
8,600 |
8,800 |
|
Bank loan payable |
18,700 |
30,000 |
Excel in Action The following information is available for The Book Wermz for November, 2004. All numbers are dollar amounts.
|
Cash balance, November 30 |
$12,307.99 |
|
Cash balance, October 31 |
15,389.55 |
|
Cash paid for debt repayment |
1,122.77 |
|
Cash paid for dividends |
1,500.00 |
|
Cash paid for equipment |
2,000.00 |
|
Cash paid for interest |
932.03 |
|
Cash paid for merchandise |
33,243.92 |
|
Cash paid for rent |
1,738.15 |
|
Cash paid for supplies |
2,576.93 |
|
Cash paid for taxes |
897.45 |
|
Cash paid for wages |
4,073.79 |
|
Cash received from customers |
45,003.48 |
|
Decrease in accounts receivable |
125 |
|
Depreciation expense |
817.2 |
|
Increase in accounts payable |
6,131.77 |
|
Increase in inventory |
8,438.37 |
|
Increase in supplies |
165.4 |
|
Increase in wages payable |
623.56 |
|
Net income |
2,447.45 |
Required Use the data provided to prepare a statement of cash flows for The Book Wermz for November using a spreadsheet. Prepare the statement using both the direct and indirect formats. Show cash outflows as negative amounts. Use the appropriate formatting buttons to include commas and dollar signs as needed. Use the Merge Cells and Bold buttons to position and format titles. The captions for the direct format statement should appear in column A and the amounts should appear in column B. The captions for the indirect format should appear in column D and the amounts should appear in column E. Use functions to sum subtotals and totals, such as =SUM(B5:B8), so that changes to any of the amounts being totaled will be automatically recalculated. Suppose net income had been $2,600 and the amount of cash received from customers had been $45,156.03. What would operating cash flow have been?
The statement of cash flows for the Halyard Exploration Company reported the following:
|
Cash paid for equipment |
$300,000 |
|
Cash paid to employees |
400,000 |
|
Cash paid to owners |
150,000 |
|
Cash paid to suppliers |
560,000 |
|
Cash received from creditors |
200,000 |
|
Cash received from customers |
1,200,000 |
What were Halyard’s net cash flows from operating, investing, and financing activities?
|
Operating |
Investing |
Financing |
|
a. $240,000 |
($300,000) |
$50,000 |
|
b. $500,000 |
($860,000) |
$200,000 |
|
c. $640,000 |
($860,000) |
$200,000 |
|
d. $240,000 |
($860,000) |
$200,000 |
General Mills, Inc., Statement of Cash Flows The General Mills 2002 Annual Report is reproduced in Appendix B at the end of the text.
Required Answer the following questions about the General Mills Consolidated Statement of Cash Flows.
A. What are the three categories of cash flows shown on the company’s cash flow statement?
B. Compare the net income figure to the amount of net cash provided by operating activities
for each of the three years. What do you observe?
C. Has the net cash provided by operating activities been large enough to meet the net investing cash outflow? Explain where the difference came from (or went).
D. Compare the dividend payments to the income amounts for the current year. (Note: You may find it helpful to calculate the dividend payout ratio, which is the total dividends for the period ÷ net income for the period.
Analysis of Corporate Financial Statements The 2002 financial statements for General Mills, Inc. are provided in Appendix B near the end of this text. Examine these statements and answer the following questions.
Required
A. What were General Mills’ major operating activities during 2002? What were the major differences between the accrual and cash flow effects of these activities?
B. What were the company’s returns on total assets (net income =total assets) for 2002 and 2001? Did the return improve or deteriorate from 2001?
C. If you owned 10,000 of the company’s common stock, what would be your claim on the company’s earnings for 2002? Was this a larger or smaller claim than you would have had for 2001?
D. What were the company’s major sources of cash for 2002? In general, what did the company do with the cash it received?
E. What were the major financing activities during 2002? In general, how would you describe the company’s financing activities overall during the last three years?
F. What major investing activities occurred in 2002?
G. As of the end of 2002, what were the company’s most important reported assets? What other resources may be important to the company that are not reported on its balance sheet?
Preparing Financial Statements Alice Springs Merchandise is a retail company that sells general household products. Account balances for the company’s fiscal years ended January 31, 2004, and 2005 are provided on the next page. Changes in balance sheet account balances also are provided. Additional information for the 2005 fiscal year includes the following:
• The company paid $38,802 for additional property and equipment and received cash from the sale of equipment of $1,967.
• Amounts borrowed or repaid are equal to changes in Notes Payable, Current and changes in Notes Payable, Long Term.
• The change in Common Stock is the amount of stock issued or repurchased during the year.
• The balance of Retained Earnings includes the effects of net income and dividends.
Required From the information provided, prepare the following in good form.
A. An income statement containing separate columns for 2005 and 2004.
B. A balance sheet containing separate columns for 2005 and 2004.
C. A schedule like Exhibit 3 in this chapter (page F183) that includes the adjustments necessary to calculate operating cash flow. The adjustments should be the changes in the appropriate account balances.
D. A statement of cash flows for 2005 using the direct method.
E. A statement of cash flows for 2005 using the indirect method.
|
2005 |
2004 |
Change |
|
|
Sales Revenue |
$589,351 |
$530,666 |
|
|
Cost of Goods Sold |
359,504 |
328,343 |
|
|
Wages Expense |
123,764 |
117,136 |
|
|
Rent Expense |
30,116 |
28,052 |
|
|
Depreciation Expense |
24,871 |
22,628 |
|
|
Supplies Expense |
13,555 |
10,751 |
|
|
Cash |
63,172 |
57,845 |
5,327 |
|
Accounts Receivable |
48,386 |
43,106 |
5,280 |
|
Merchandise Inventory |
130,247 |
117,202 |
13,045 |
|
Prepaid Rent |
2,530 |
2,314 |
216 |
|
Supplies |
1,129 |
952 |
177 |
|
Property and Equipment |
365,398 |
328,563 |
36,835 |
|
Accumulated Depreciation |
43,848 |
18,977 |
24,871 |
|
Accounts Payable |
25,953 |
23,674 |
2,279 |
|
Wages Payable |
10,272 |
9,500 |
772 |
|
Unearned Revenue |
12,966 |
11,675 |
1,291 |
|
Notes Payable, Current |
47,249 |
44,249 |
3,000 |
|
Notes Payable, Long Term |
214,838 |
222,467 |
7,629 |
|
Common Stock |
102,629 |
95,581 |
7,048 |
|
Retained Earnings |
153,105 |
123,860 |
29,245 |
|
Dividends Paid |
8,297 |
5,250 |
Abe Milton is the owner and sole proprietor of Honest Abe’s Used Cars. Abe needs a loan to help finance an expansion of his business. You are the loan manager of a local bank where Abe has applied for a loan. The loan application requires financial statements, which Abe has supplied. You asked Abe whether the statements were prepared according to GAAP and whether they have been independently verified. Abe says he doesn’t know anything about GAAP and that he does not permit anyone else to examine his financial information because he is afraid competitors will find out how well he is doing. He notes, however, that he is “Honest” Abe and that the financial statements are accurate.
Required Briefly explain to Abe why GAAP is important and why moral hazard is an issue of concern in making a loan decision.
Deborah Stinger works in the systems development department of a major company. She helped develop the company’s computerized accounting system. Occasionally, she fills in for one of the operators in the accounts payable department. This operator is responsible for processing checks to suppliers for purchases made by the company. While filling in, Deborah created an account of a fictitious company, just to see if the system could be tricked into writing checks for nonexistent purchases. She added data to the company’s file and entered some phony purchases. The computer wrote the checks, and they were mailed to a post office box Deborah opened. Over the last few years, Deborah has written over $80,000 in checks to her fictitious company.
Required Identify some internal control deficiencies in the accounting system that have allowed Deborah to embezzle money from her company.
Bay View Company reported the following information at the end of its most recent fiscal year.
|
Cash paid for fire insurance |
$5,000 |
|
Cash paid for dividends |
22,600 |
|
Cash paid to suppliers of inventory |
119,850 |
|
Cash paid for interest |
3,750 |
|
Cash collected from customers |
187,200 |
|
Cash received from disposal of equipment |
38,000 |
|
Cash paid for utilities |
9,400 |
|
Cash paid to employees |
31,500 |
|
Cash paid for equipment |
65,100 |
Determine each of the following amounts. Show your work neatly and clearly.
a. Net cash flow from operating activities (direct format)
b. Net cash flow from financing activities
c. Net cash flow from investing activities
All of the following statements apply to the statement of cash flows covering a given period. If a statement applies only to the direct format, write D in the space allowed. If a statement applies only to the indirect format, write I in the space allowed. If a statement applies to both formats, write B in the space allowed.
a. The amount of cash received from customers is listed.
b. A purpose of the statement is to reconcile the amount of cash generated by operating activities to the amount of net income generated by operating activities.
c. The amount by which cash receipts from customers differed from sales is reported.
d. Certain revenues and expenses that did not generate or consume cash are listed.
e. The amount of net income is listed on the face of the statement.
f. The amount of cash paid to suppliers of inventory is included.
g. The amount of cash paid for taxes is reported.
h. The amount of cash raised from selling bonds to investors is listed on the face of the statement.
i. The purpose of the statement is to reveal the amount of cash received from or paid out for specific operating activities.
j. The amount of cash paid to acquire land and buildings is included.
Each of the items found below might appear on a statement of cash flows.
|
Statement |
Statement |
Added or |
|
1. Decrease in taxes payable |
||
|
2. Cash paid to suppliers of inventory |
||
|
3. Dividends declared and paid |
||
|
4. Depreciation expense |
||
|
5. Sale of stock |
||
|
6. Increase in accounts receivable |
||
|
7. Cash collected from customers |
||
|
8. Purchase of plant assets |
||
|
9. Payments on long term debt |
||
|
10. Cash paid for taxes |
||
|
11. Increase in wages payable |
||
|
12. Purchase of treasury stock |
For each item, indicate answers as shown.
a. Would it appear on the statement of cash flows under the operating activities (O), investing activities (I), or financing activities (F) section?
b. Would it appear in the direct format (D), indirect format (I), or in both formats (B)?
c. Would it be added (1) or subtracted (2) in computing cash flow?
For each item in the following list, identify whether it would appear on the statement of cash flows (indirect format) as part of the computation of cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. Also, indicate whether the item is added or subtracted in computing cash flow using the indirect method of preparing the statement of cash flows.
a. Purchase of plant assets
b. Increase in accounts payable
c. Decrease in accounts receivable
d. Payment of long term debt
e. Net income
f. Depreciation expense
g. Payment of dividends
h. Issuing stock
i. Increase in inventory
j. Decrease in taxes payable
k. Disposal of plant assets
The following information is available for Guardian Company for the first month of 2004.
|
Revenues |
$15,000 |
|
Expenses |
8,000 |
|
Increase in accounts receivable |
700 |
|
Decrease in inventory |
1,200 |
|
Decrease in supplies |
400 |
|
Increase in accounts payable |
1,100 |
|
Decrease in wages payable |
900 |
|
Depreciation expense |
800 |
|
Patent expense |
300 |
Determine the cash flow from operating activities for the month.
Use the information provided in each of the following independent situations to answer the questions. For each situation, briefly explain the reasoning behind each of your calculations.
a. Cash paid to suppliers for merchandise during a period was $37,500. Accounts payable decreased during the period by $3,000. Inventory increased during the period by $3,500. What was the cost of goods sold for the period?
b. Interest paid during a period was $4,000. Interest payable decreased during the period by $1,200. What was the interest expense for the period?
c. Cash flow from operations for a period was $28,000. Current assets decreased during the period by $6,000. Current liabilities decreased during the period by $2,000. What was net income for the period?
d. Cash collected from customers for a fiscal period was $27,000. Accounts receivable increased during the period by $3,000. What was sales revenue for the period?
Use the information provided in each of the following independent situations to answer the questions. For each situation, briefly explain the reasoning behind each of your calculations.
a. Net cash flow from operations for a period was $30,000. Noncash revenues for the period were $11,000. Noncash expenses for the period were $13,200. What was net income for the period?
b. Wages expense for a period was $69,000. Wages payable increased during the period by $10,500. How much cash was paid to employees during the period?
c. Cash collected from customers for a fiscal period was $224,500. Sales revenue for the period was $241,000. Accounts receivable at the beginning of the period was $36,000. What was the balance in accounts receivable at the end of the period?
d. Net income for a period was $45,000. Current assets increased during the period by $7,500. Current liabilities increased during the period by $10,000. How much was cash flow from operations for the period?
Changes in account balances are shown in the following chart. For each item, where appropriate, indicate the adjustment that would be made to net income in the operating cash flow section of a cash flow statement using the indirect method and the reason for the adjustment. Item a is provided as an example.
|
Account Balance |
Adjustment and Reason |
|
a. Accounts receivable increased $10,000 |
Subtract $10,000 from net income |
|
b. Accounts payable increased $7,500 |
|
|
c. Inventory decreased $50,000 |
|
|
d. Notes payable increased $100,000 |
|
|
e. Equipment decreased $80,000 |
|
|
f. Prepaid insurance decreased $22,000 |
|
|
g. Wages payable decreased $8,000 |
|
|
h. Unearned revenue increased $13,000 |
The following information was reported by The Boeing Company in its 2000 annual report (in millions of dollars).
|
Decrease in inventories |
$1,097 |
|
Decrease in short term investments |
100 |
|
Depreciation and amortization |
1,479 |
|
Decrease in accounts payable |
311 |
|
Increase in accounts receivable |
768 |
|
Increase in income taxes payable |
421 |
|
Net earnings |
2,128 |
|
Other additions to net income |
1,796 |
What was Boeing’s cash flow from operating activities for the fiscal year?
Martha Rosenbloom holds stock in several major corporations. Each year she receives a copy of the companies’ annual reports. She looks at the pictures, reads the discussion by management, and examines some of the primary financial statement numbers. She has a pretty good understanding of some of the financial statement information. She tells her friends that she doesn’t know how to make heads or tails of the statement of cash flows, however. She doesn’t understand how depreciation and changes in current assets and liabilities have anything to do with cash. A mutual friend, Arthur Doyle, has found out that you are taking accounting and asks you to help Martha. Write Martha a letter explaining the cash flow from operating activities section of the statement of cash flows found in most annual reports. Martha’s address is 945 Oak Lane, Anytown, USA.
Great Adventure Travel Company had the following adjustments to net income when computing its cash flow from operations for the year just ended.
|
Net income |
$326,000 |
|
|
Add: Adjustments |
||
|
(1) Depreciation |
$13,000 |
|
|
(2) Decrease in accounts receivable |
2,000 |
|
|
(3) Increase in inventory |
4,500 |
|
|
(4) Decrease in accounts payable |
3,000 |
7,500 |
|
Cash flow from operations |
$333,500 |
a. Explain why it is generally necessary to make additions to and subtractions from net income when computing cash flow from operations in the indirect format.
b. For each adjustment (labeled 1 through 4), explain why that specific adjustment was necessary to determine cash flow from operations.
Bingle, Bangle, and Bungle all manufacture toys. At year end 2004, they reported the following information.
|
Bingle |
Bangle |
Bungle |
|
|
Cash flow from operating activities |
$6,862 |
$14,656 |
$3,052 |
|
Cash flow from (for) investing activities |
4,409 |
457 |
938 |
|
Cash flow from (for) financing activities |
834 |
12,476 |
2,307 |
Respond to each of the following questions.
a. Which company had the largest amount of cash flow from operating activities? Which had the smallest?
b. Would you generally expect cash flow associated with investing activities to be negative? Why or why not?
c. In what ways does Bingle appear to be different from the other two companies? What do these differences suggest about the companies?
Consider the pattern in following selected year end data for Landsdowne Company.
|
Year |
1 |
2 |
3 |
4 |
5 |
6 |
|
Cash flow from operating activities |
$20,000 |
$25,000 |
$18,000 |
$12,000 |
$6,000 |
$2,000 |
|
Receivables |
35,000 |
37,000 |
42,000 |
45,000 |
50,000 |
53,000 |
|
Inventory |
70,000 |
76,000 |
80,000 |
84,000 |
86,000 |
90,000 |
|
Payables |
24,000 |
28,000 |
32,000 |
46,000 |
57,000 |
66,000 |
|
Net income |
50,000 |
53,000 |
55,000 |
59,000 |
63,000 |
55,000 |
Provide an explanation for the changes over the six year period. Year 6 is the most recent year. What difficulties do you believe the company is facing?
Sommer Company has experienced the following results over the past three years.
|
Year |
1 |
2 |
3 |
|
(In thousands) |
|||
|
Net income (loss) |
$2,000 |
$10,000 |
$8,000 |
|
Depreciation and amortization |
9,000 |
11,000 |
14,000 |
|
Net cash flow from operating activities |
13,000 |
15,000 |
18,000 |
|
Net expenditures for plant assets |
9,000 |
6,000 |
5,000 |
The price of Sommer’s common stock has declined steadily over the three year period. At the end of year 3, it is trading at $10 per share. Early in year 4, Bottom Fischer, who specializes in taking over poorly performing businesses, has offered shareholders of Sommer $18 per share for their stock. Why would Fischer be willing to pay such an amount? What does he see in the company that suggests value?
Rockman Associates has reported the following selected account balances on its most recent balance sheet.
|
Account and balance |
Anticipated future event and cash flow |
|
a. Accounts receivable, $12,000 |
$12,000 of cash should be received from |
|
b. Prepaid insurance, $22,000 |
|
|
c. Merchandise, $50,000 |
|
|
d. Treasury stock, $33,000 |
|
|
e. Accounts payable, $6,500 |
|
|
f. Machinery, $92,000 |
|
|
g. Notes payable, long term, $88,000 |
|
|
h. Unearned revenue, $10,000 |
|
|
i. Taxes payable, $7,800 |
|
|
j. Retained earnings, $56,000 |
For each item, describe the anticipated future event and cash flow (if any) that is expected to occur and in which section of a future statement of cash flows it will appear. The first item is completed as an example.
Preparing a Statement of Cash Flows San Garza Properties has been in business for many years. On December 31, 2003, the firm’s cash balance was $9,121. During January of 2004, the 14 events below were recorded in the company’s accounting system.
|
ASSETS |
LIABILITIES |
OWNERS’ EQUITY |
|||
|
Date |
Accounts |
Cash |
Other |
Contributed |
Retained |
|
1 |
Cash |
18,000 |
|||
|
Bank Loan Payable |
18,000 |
||||
|
2 |
Rent Expense |
3,000 |
|||
|
Cash |
3,000 |
||||
|
3 |
Office Furniture |
5,500 |
|||
|
Cash |
5,000 |
||||
|
4 |
Merchandise |
9,000 |
|||
|
Accounts Payable |
9,000 |
||||
|
5 |
Cash |
10,000 |
|||
|
Common Stock |
10,000 |
||||
|
6 |
Advertising Expense |
2,200 |
|||
|
Cash |
2,200 |
||||
|
7 |
Accounts Receivable |
18,000 |
18,000 |
||
|
Sales Revenue |
|||||
|
8 |
Merchandise |
7,500 |
|||
|
Cost of Goods Sold |
7,500 |
||||
|
9 |
Cash |
8,100 |
|||
|
Accounts Receivable |
8,100 |
||||
|
10 |
Accounts Payable |
7,000 |
|||
|
Cash |
7000 |
||||
|
11 |
Computer Equipment |
4,800 |
|||
|
Cash |
4800 |
||||
|
12 |
Wages Expense |
1,400 |
|||
|
Wages Payable |
1,400 |
||||
|
13 |
Dividends |
2,000 |
|||
|
Cash |
2000 |
||||
|
14 |
Bank Loan Payable |
5,000 |
|||
|
Interest Expense |
135 |
||||
|
Cash |
5135 |
Required Prepare a statement of cash flows for the month of January 2004. Use good form and the direct format.
Preparing the Statement of Cash Flows (Direct Format) Planet Accessories Company reported the following balance sheet and income statement at year end 2004. In addition, dividends totaling $1,000 were paid.
Required
A. Assume the company uses the direct format to prepare its statement of cash flows. What amounts would be reported on the 2004 statement of cash flows for each of the following?
1. Cash collections from customers (Hint: Inspect Sales Revenue and the change in Accounts Receivable.)
2. Cash paid to suppliers of inventory (Hint: Assume all purchases were made for cash.)
3. Cash paid for insurance (Hint: Inspect the insurance expense account and the change in the prepaid insurance account.)
4. Cash paid for rent (Hint: Inspect Rent Expense and the change in Rent Payable.)
5. Cash paid for depreciation
6. Cash paid for wages
B. What items and amounts would be reported under cash flow from investing activities?
(Hint: Inspect the changes in long term asset accounts.)
C. What items and amounts would be reported under cash flow from financing activities? (Hint: Inspect the changes in long term liability and stockholders’ equity accounts.)
D. Prepare a statement of cash flows using the direct format.
|
Balance Sheets at December 31 |
2004 |
2003 |
Income Statement for 2004 |
|
|
Cash |
$826 |
$553 |
Sales revenue |
$135,800 |
|
Accounts receivable |
8,950 |
8,000 |
Cost of goods sold |
54,300 |
|
Inventories |
11,600 |
10,100 |
Gross profit |
81,500 |
|
Prepaid insurance |
400 |
300 |
Operating expenses: |
|
|
Property, plant and equipment |
8,750 |
3,735 |
Advertising |
17,029 |
|
Less: Accumulated depreciation |
2,900 |
1,900 |
Depreciation |
1,000 |
|
Land |
5,850 |
4,850 |
Insurance |
4,800 |
|
Total assets |
$33,476 |
$25,638 |
Rent |
14,255 |
|
Rent payable |
$3,750 |
$4,000 |
Wages |
33,400 |
|
Wages payable |
1,750 |
1,400 |
Operating income |
11,016 |
|
Loan payable, long term |
9,200 |
5,200 |
Interest expense |
650 |
|
Common stock, $1 par value |
5,400 |
4,400 |
Income before taxes |
10,366 |
|
Retained earnings |
17,950 |
12,212 |
Taxes |
3,628 |
|
Treasury stock |
4,574 |
1,574 |
Net income |
$6,738 |
|
Total liabilities and shareholders’ equity |
$33,476 |
$25,638 |
Reconciling Net Income and Cash Flow from Operations For the fiscal year just completed, Dollar Sine Enterprises had the following summary information available concerning operating activities. The company had no investing or financing activities this year.
|
Sales of merchandise to customers on credit |
$307,400 |
|
Sales of merchandise to customers for cash |
88,250 |
|
Cost of merchandise sold on credit |
200,000 |
|
Cost of merchandise sold for cash |
57,400 |
|
Purchases of merchandise from suppliers on credit |
233,700 |
|
Purchases of merchandise from suppliers for cash |
48,100 |
|
Collections from customers on accounts receivable |
321,000 |
|
Cash payments to suppliers on accounts payable |
293,600 |
|
Operating expenses (all paid in cash) |
93,500 |
Required
A. Determine the amount of:
1. net income for the year.
2. cash flow from operations for the year (direct format).
B. Indicate the direction and amounts by which each of these accounts changed during the year.
1. Accounts receivable
2. Merchandise inventory
3. Accounts payable
C. Using your results above, prepare the operating activities section of the statement of cash flows (indirect format).
Preparing a Statement of Cash Flow (Indirect Format) Reuben Corporation has completed its comparative balance sheet and income statement at year end 2004.
|
Comparative Balance Sheet |
2004 |
2003 |
Income Statement for 2004 |
|
|
Cash |
$4,400 |
$3,550 |
Sales revenue |
$355,000 |
|
Accounts receivable |
4,100 |
5,300 |
Cost of goods sold |
241,400 |
|
Inventory |
5,700 |
4,100 |
Gross profit |
$113,600 |
|
Prepaid advertising |
900 |
1,200 |
Operating expenses: |
|
|
Buildings and furnishings |
20,000 |
20,000 |
Advertising |
8,300 |
|
Accumulated depreciation |
6,000 |
5,000 |
Depreciation |
1,000 |
|
Land |
14,000 |
10,000 |
Insurance |
3,500 |
|
Total assets |
$43,100 |
$39,150 |
Rent |
31,200 |
|
Rent payable |
$2,800 |
$2,600 |
Wages |
57,380 |
|
Taxes payable |
1,600 |
2,000 |
Operating income |
12,220 |
|
Wages payable |
2,000 |
900 |
Interest expense |
1,450 |
|
Loan payable, long term |
14,000 |
22,250 |
Income before tax |
10,770 |
|
Common stock |
16,000 |
10,000 |
Taxes |
3,770 |
|
Retained earnings |
6,700 |
1,400 |
Net income |
$7,000 |
|
Total liabilities and equity |
$43,100 |
$39,150 |
Additional information:
1. A payment of $8,250 was made on the loan principal during the year.
2. Just before year end, a dividend was distributed to stockholders.
3. A parcel of land was acquired early in the year.
4. New shares of common stock were sold during the year.
Required Prepare a statement of cash flows in good form using the indirect format.
Preparing the Statement of Cash Flows (Indirect Format) Refer to the financial statement information in Problem P5 2 and use it to complete the requirements below.
Required
A. Assume the company uses the indirect format to prepare its statement of cash flows. What amounts would be reported on the 2004 statement of cash flows for each of the following?
1. Net income
2. Adjustment for depreciation expense
3. Adjustment for accounts receivable
4. Adjustment for inventories
5. Adjustment for prepaid insurance
6. Adjustment for rent payable
7. Adjustment for wages payable
B. What items and amounts would be reported under cash flow from investing activities? (Hint: Inspect the changes in long term asset accounts.)
C. What items and amounts would be reported under cash flow from financing activities? (Hint: Inspect the changes in long term liability and stockholders’ equity accounts.)
D. Prepare a statement of cash flows using the indirect format.
Colin Mochrie Company has the following balances in selected accounts on December 31, 2011.
|
Consulting Revenue |
$40,000 |
|
Insurance Expense |
2,100 |
|
Supplies Expense |
2,450 |
All the accounts have normal balances. Colin Mochrie Company debits prepayments to expense accounts when paid, and credits unearned revenues to revenue accounts when received. The following information below has been gathered at December 31, 2011.
1. Colin Mochrie Company paid $2,100 for 12 months of insurance coverage on June 1, 2011.
2. On December 1, 2011, Colin Mochrie Company collected $40,000 for consulting services to be performed from December 1, 2011, through March 31, 2012.
3. A count of supplies on December 31, 2011, indicates that supplies of $800 are on hand.
Instructions
Prepare the adjusting entries needed at December 31, 2011.
Tony Masasi started his own consulting firm, Masasi Company, Inc. on June 1, 2011.The trial balance at June 30 is shown below.
|
MASASI COMPANY, INC. Trial Balance June 30, 2011 |
|||
|
Account Number |
Debit |
Credit |
|
|
101 |
Cash |
$ 7,150 |
|
|
112 |
Accounts Receivable |
6,000 |
|
|
126 |
Supplies |
2,000 |
|
|
130 |
Prepaid Insurance |
3,000 |
|
|
157 |
Office Equipment |
15,000 |
|
|
201 |
Accounts Payable |
$ 4,500 |
|
|
209 |
Unearned Service Revenue |
4,000 |
|
|
311 |
Common Stock |
21,750 |
|
|
400 |
Service Revenue |
7,900 |
|
|
726 |
Salaries Expense |
4,000 |
|
|
729 |
Rent Expense |
1,000 |
|
|
$38,150 |
$38,150 |
||
In addition to those accounts listed on the trial balance, the chart of accounts for Masasi Company, Inc. also contains the following accounts and account numbers: No. 158 Accumulated Depreciation—Office Equipment, No. 212 Salaries Payable, No. 244 Utilities Payable, No. 631 Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 732 Utilities Expense. Other data:
1. Supplies on hand at June 30 are $600.
2. A utility bill for $150 has not been recorded and will not be paid until next month.
3. The insurance policy is for a year.
4. $2,500 of unearned service revenue has been earned at the end of the month.
5. Salaries of $2,000 are accrued at June 30.
6. The office equipment has a 5 year life with no salvage value. It is being depreciated at $250 per month for 60 months.
7. Invoices representing $1,000 of services performed during the month have not been recorded as of June 30. Visit the book’s companion website at www.wiley.com/college/weygandt, and choose the Student
Instructions
(a) Prepare the adjusting entries for the month of June. Use J3 as the page number for your journal.
(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance as beginning account balances and place a check mark in the posting reference column.
(c) Prepare an adjusted trial balance at June 30, 2011.
Neosho River Resort, Inc. opened for business on June 1 with eight air conditioned units. Its trial balance before adjustment on August 31 is as follows.
|
NEOSHO RIVER RESORT, INC. |
|||
|
Trial Balance |
|||
|
August 31, 2011 |
|||
|
Account Number |
Debit |
Credit |
|
|
101 |
Cash |
$ 19,600 |
|
|
126 |
Supplies |
3,300 |
|
|
130 |
Prepaid Insurance |
6,000 |
|
|
140 |
Land |
25,000 |
|
|
143 |
Cottages |
125,000 |
|
|
149 |
Furniture |
26,000 |
|
|
201 |
Accounts Payable |
$ 6,500 |
|
|
209 |
Unearned Rent Revenue |
7,400 |
|
|
275 |
Mortgage Payable |
80,000 |
|
|
311 |
Common Stock |
100,000 |
|
|
332 |
Dividends |
5,000 |
|
|
429 |
Rent Revenue |
80,000 |
|
|
622 |
Repair Expense |
3,600 |
|
|
726 |
Salaries Expense |
51,000 |
|
|
732 |
Utilities Expense |
9,400 |
|
|
$273,900 |
$273,900 |
In addition to those accounts listed on the trial balance, the chart of accounts for Neosho River Resort, Inc. also contains the following accounts and account numbers: No. 112 Accounts Receivable, No. 144 Accumulated Depreciation—Cottages ,No. 150 Accumulated Depreciation— Furniture ,No. 212 Salaries Payable ,No. 230 Interest Payable ,No. 320 Retained Earnings, No. 620 Depreciation Expense—Cottages, No. 621 Depreciation Expense—Furniture, No. 631 Supplies Expense, No. 718 Interest Expense, and No. 722 Insurance Expense. Other data:
1. Insurance expires at the rate of $400 per month.
2. A count on August 31 shows $600 of supplies on hand.
3. Annual depreciation is $6,000 on cottages and $2,400 on furniture.
4. Unearned rent revenue of $4,100 was earned prior to August 31.
5. Salaries of $400 were unpaid at August 31.
6. Rentals of $1,000 were due from tenants at August 31. (Use Accounts Receivable.)
7. The mortgage interest rate is 9% per year. (The mortgage was taken out on August 1.)
Instructions
(a) Journalize the adjusting entries on August 31 for the 3 month period June 1–August 31.
(b) Prepare a ledger using the three column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.)
(c) Prepare an adjusted trial balance on August 31.
(d) Prepare an income statement and a retained earnings statement for the 3 months ending August 31 and a balance sheet as of August 31.
Fernetti Advertising Agency, Inc. was founded by John Fernetti in January of 2010. Presented on page 138 are both the adjusted and unadjusted trial balances as of December 31, 2011.
|
FERNETTI ADVERTISING AGENCY, INC. Trial Balance December 31, 2011 |
||||
|
Unadjusted |
Adjusted |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Cash |
$ 11,000 |
$ 11,000 |
||
|
Accounts Receivable |
20,000 |
22,500 |
||
|
Art Supplies |
8,600 |
5,000 |
||
|
Prepaid Insurance |
3,350 |
2,500 |
||
|
Printing Equipment |
60,000 |
60,000 |
||
|
Accumulated Depreciation |
$ 28,000 |
$ 34,000 |
||
|
Accounts Payable |
5,000 |
5,000 |
||
|
Interest Payable |
–0– |
150 |
||
|
Notes Payable |
5,000 |
5,000 |
||
|
Unearned Advertising |
7,200 |
5,600 |
||
|
Salaries Payable |
–0– |
1,300 |
||
|
Common Stock |
25,000 |
25,000 |
||
|
Retained Earnings |
500 |
500 |
||
|
Dividends |
12,000 |
12,000 |
||
|
Advertising Revenue |
58,600 |
62,700 |
||
|
Salaries Expense |
10,000 |
11,300 |
||
|
Insurance Expense |
850 |
|||
|
Interest Expense |
350 |
500 |
||
|
Depreciation Expense |
6,000 |
|||
|
Art Supplies Expense |
3,600 |
|||
|
Rent Expense |
4,000 |
4,000 |
||
|
$129,300 |
$139,250 |
$139,250 |
||
Instructions
(a) Journalize the annual adjusting entries that were made.
(b) Prepare an income statement and a retained earnings statement for the year ending December 31, 2011, and a balance sheet at December 31.
(c) Answer the following questions.
(1) If the note has been outstanding 6 months, what is the annual interest rate on that note?
(2) If the company paid $12,500 in salaries in 2011, what was the balance in Salaries Payable on December 31, 2010?
On September 1, 2011, the account balances of Rand Equipment Repair, Inc. were as follows.
|
No. |
Debits |
No. |
Credits |
||
|
101 |
Cash |
$ 4,880 |
154 |
Accumulated Depreciation |
$ 1,500 |
|
112 |
Accounts Receivable |
3,520 |
201 |
Accounts Payable |
3,400 |
|
126 |
Supplies |
2,000 |
209 |
Unearned Service Revenue |
1,400 |
|
153 |
Store Equipment |
15,000 |
212 |
Salaries Payable |
500 |
|
311 |
Common Stock |
15,000 |
|||
|
320 |
Retained Earnings |
3,600 |
|||
|
$25,400 |
$25,400 |
During September the following summary transactions were completed. Sept. 8 Paid $1,400 for salaries due employees, of which $900 is for September.
10 Received $1,200 cash from customers on account.
12 Received $3,400 cash for services performed in September.
15 Purchased store equipment on account $3,000.
17 Purchased supplies on account $1,200.
20 Paid creditors $4,500 on account.
22 Paid September rent $500.
25 Paid salaries $1,250.
27 Performed services on account and billed customers for services provided $1,500.
29 Received $650 from customers for future service. Adjustment data consist of:
1. Supplies on hand $1,200.
2. Accrued salaries payable $400.
3. Depreciation is $100 per month.
4. Unearned service revenue of $1,450 is earned.
Instructions
(a) Enter the September 1 balances in the ledger accounts.
(b) Journalize the September transactions.
(c) Post to the ledger accounts. Use J1 for the posting reference. Use the following additional accounts: No. 400 Service Revenue, No. 615 Depreciation Expense, No. 631 Supplies Expense, No. 726 Salaries Expense, and No. 729 Rent Expense.
(d) Prepare a trial balance at September 30.
(e) Journalize and post adjusting entries.
(f) Prepare an adjusted trial balance.
(g) Prepare an income statement and a retained earnings statement for September and a balance sheet at September 30.
Givens Graphics Company, Inc. was organized on January 1, 2011, by Sue Givens.At the end of the first 6 months of operations, the trial balance contained the accounts on the next page.
|
Debits |
Credits |
||
|
Cash |
$ 9,500 |
Notes Payable |
$ 20,000 |
|
Accounts Receivable |
14,000 |
Accounts Payable |
9,000 |
|
Equipment |
45,000 |
Common Stock |
22,000 |
|
Insurance Expense |
1,800 |
Graphic Revenue |
52,100 |
|
Salaries Expense |
30,000 |
Consulting Revenue |
6,000 |
|
Supplies Expense |
3,700 |
||
|
Advertising Expense |
1,900 |
||
|
Rent Expense |
1,500 |
||
|
Utilities Expense |
1,700 |
||
|
$109,100 |
$109,100 |
||
Analysis reveals the following additional data.
1. The $3,700 balance in Supplies Expense represents supplies purchased in January.At June 30,$1,300 of supplies was on hand.
2. The note payable was issued on February 1. It is a 9%, 6 month note.
3. The balance in Insurance Expense is the premium on a one year policy, dated March 1, 2011.
4. Consulting fees are credited to revenue when received. At June 30, consulting fees of $1,500 are unearned.
5. Graphic revenue earned but unrecorded at June 30 totals $2,000.
6. Depreciation is $2,000 per year.
Instructions
(a) Journalize the adjusting entries at June 30. (Assume adjustments are recorded every 6 months.)
(b) Prepare an adjusted trial balance.
(c) Prepare an income statement and retained earnings statement for the 6 months ended June 30 and a balance sheet at June 30.
Ken Ham started his own consulting firm, Hambone Consulting, Inc. on May 1, 2011. The trial balance at May 31 is as follows.
|
HAMBONE CONSULTING, INC. Trial Balance May 31, 2011 |
|||
|
Account Number |
Debit |
Credit |
|
|
101 |
Cash |
$ 5,700 |
|
|
112 |
Accounts Receivable |
6,000 |
|
|
126 |
Supplies |
1,900 |
|
|
130 |
Prepaid Insurance |
3,600 |
|
|
149 |
Office Furniture |
10,200 |
|
|
201 |
Accounts Payable |
$ 4,500 |
|
|
209 |
Unearned Service Revenue |
2,000 |
|
|
311 |
Common Stock |
17,700 |
|
|
400 |
Service Revenue |
7,500 |
|
|
726 |
Salaries Expense |
3,400 |
|
|
729 |
Rent Expense |
900 |
|
|
$31,700 |
$31,700 |
||
In addition to those accounts listed on the trial balance, the chart of accounts for Hambone Consulting also contains the following accounts and account numbers: No. 150 Accumulated Depreciation—Office Furniture, No. 212 Salaries Payable, No. 229 Travel Payable, No. 631 Supplies Expense ,No. 717 Depreciation Expense ,No. 722 Insurance Expense, and No. 736 Travel Expense. Other data:
1. $900 of supplies have been used during the month.
2. Travel expense incurred but not paid on May 31, 2011, $250.
3. The insurance policy is for 2 years.
4. $400 of the balance in the unearned service revenue account remains unearned at the end of the month.
5. May 31 is a Wednesday, and employees are paid on Fridays. Hambone Consulting, Inc. has two employees, who are paid $800 each for a 5 day work week.
6. The office furniture has a 5 year life with no salvage value. It is being depreciated at $170 per month for 60 months.
7. Invoices representing $1,200 of services performed during the month have not been recorded as of May 31.
Instructions
(a) Prepare the adjusting entries for the month of May. Use J4 as the page number for your journal.
(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance as beginning account balances and place a check mark in the posting reference column.
(c) Prepare an adjusted trial balance at May 31, 2011.
The Mound View Motel, Inc. opened for business on May 1, 2011. Its trial balance before adjustment on May 31 is as follows.
|
MOUND VIEW MOTEL, INC. Trial Balance May 31, 2011 |
|||
|
Account |
|||
|
Number |
Debit |
Credit |
|
|
101 |
Cash |
$ 3,500 |
|
|
126 |
Supplies |
2,200 |
|
|
130 |
Prepaid Insurance |
2,280 |
|
|
140 |
Land |
12,000 |
|
|
141 |
Lodge |
60,000 |
|
|
149 |
Furniture |
15,000 |
|
|
201 |
Accounts Payable |
$ 4,800 |
|
|
209 |
Unearned Rent Revenue |
3,300 |
|
|
275 |
Mortgage Payable |
35,000 |
|
|
311 |
Common Stock |
46,380 |
|
|
429 |
Rent Revenue |
10,300 |
|
|
610 |
Advertising Expense |
600 |
|
|
726 |
Salaries Expense |
3,300 |
|
|
732 |
Utilities Expense |
900 |
|
|
$99,780 |
$99,780 |
||
In addition to those accounts listed on the trial balance, the chart of accounts for Mound View Motel also contains the following accounts and account numbers: No. 142 Accumulated Depreciation—Lodge, No. 150 Accumulated Depreciation—Furniture, No. 212 Salaries Payable, No. 230 Interest Payable, No. 320 Retained Earnings, No. 619 Depreciation Expense—Lodge, No. 621 Depreciation Expense—Furniture, No. 631 Supplies Expense, No. 718 Interest Expense, and No. 722 Insurance Expense. Other data:
1. Prepaid insurance is a 1 year policy starting May 1, 2011.
2. A count of supplies shows $750 of unused supplies on May 31.
3. Annual depreciation is $3,000 on the lodge and $2,700 on furniture.
4. The mortgage interest rate is 12%. (The mortgage was taken out on May 1.)
5. Two thirds of the unearned rent revenue has been earned.
6. Salaries of $750 are accrued and unpaid at May 31.
Instructions
(a) Journalize the adjusting entries on May 31.
(b) Prepare a ledger using the three column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.)
(c) Prepare an adjusted trial balance on May 31.
(d) Prepare an income statement and a retained earnings statement for the month of May and a balance sheet at May 31.
Poblano Co., Inc. was organized on July 1, 2011. Quarterly financial statements are prepared. The unadjusted and adjusted trial balances as of September 30 are shown below.
|
POBLANO CO., INC. Trial Balance September 30, 2011 |
||||
|
Unadjusted |
Adjusted |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Cash |
$ 8,700 |
$ 8,700 |
||
|
Accounts Receivable |
10,400 |
11,200 |
||
|
Supplies |
1,500 |
900 |
||
|
Prepaid Rent |
2,200 |
1,300 |
||
|
Equipment |
18,000 |
18,000 |
||
|
Accumulated Depreciation—Equipment |
$ 500 |
|||
|
Notes Payable |
$10,000 |
10,000 |
||
|
Accounts Payable |
2,500 |
2,500 |
||
|
Salaries Payable |
725 |
|||
|
Interest Payable |
100 |
|||
|
Unearned Rent Revenue |
1,900 |
1,050 |
||
|
Common Stock |
22,000 |
22,000 |
||
|
Dividends |
1,600 |
1,600 |
||
|
Commission Revenue |
16,000 |
16,800 |
||
|
Rent Revenue |
1,410 |
2,260 |
||
|
Salaries Expense |
8,000 |
8,725 |
||
|
Rent Expense |
1,900 |
2,800 |
||
|
Depreciation Expense |
500 |
|||
|
Supplies Expense |
600 |
|||
|
Utilities Expense |
1,510 |
1,510 |
||
|
Interest Expense |
100 |
|||
|
$53,810 |
$53,810 |
$55,935 |
$55,935 |
|
Instructions
(a) Journalize the adjusting entries that were made.
(b) Prepare an income statement and a retained earnings statement for the 3 months ending September 30 and a balance sheet at September 30.
(c) If the note bears interest at 12%, how many months has it been outstanding?
A review of the ledger of Obi Company at December 31, 2011, produces the following data pertaining to the preparation of annual adjusting entries.
1. Prepaid Insurance $9,900. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on April 1, 2010, for $7,200. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2011, for $4,500.This policy has a term of 2 years.
2. Unearned Subscriptions $45,000.The company began selling magazine subscriptions in 2011 on an annual basis. The magazine is published monthly. The selling price of a subscription is $45. A review of subscription contracts reveals the following.
|
Subscription Date |
Number of Subscriptions |
|
October 1 |
200 |
|
November 1 |
300 |
|
December 1 |
500 |
|
1,000 |
3. Notes Payable $100,000.This balance consists of a note for 9 months at an annual interest rate of 9%, dated November 1.
4. Salaries Payable $0.There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $700 each per week, and three employees earn $500 each per week. Assume December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.
Instructions
Prepare the adjusting entries at December 31, 2011.
On November 1, 2011, the account balances of Morelli Equipment Repair were as follows.
|
No. |
Debits |
No. |
Credits |
||
|
101 |
Cash |
$ 2,400 |
154 |
Accumulated Depreciation |
$ 2,000 |
|
112 |
Accounts Receivable |
4,250 |
201 |
Accounts Payable |
2,600 |
|
126 |
Supplies |
1,800 |
209 |
Unearned Service Revenue |
1,200 |
|
153 |
Store Equipment |
12,000 |
212 |
Salaries Payable |
700 |
|
311 |
Common Stock |
10,000 |
|||
|
320 |
Retained Earnings |
3,950 |
|||
|
$20,450 |
$20,450 |
||||
During November the following summary transactions were completed. Nov. 8 Paid $1,700 for salaries due employees, of which $700 is for October salaries.
10 Received $3,420 cash from customers on account.
12 Received $3,100 cash for services performed in November.
15 Purchased store equipment on account $2,000.
17 Purchased supplies on account $700.
20 Paid creditors on account $2,700.
22 Paid November rent $400.
25 Paid salaries $1,700.
27 Performed services on account and billed customers for services provided $900.
29 Received $600 from customers for future service.Adjustment data consist of:
1. Supplies on hand $1,200.
2. Accrued salaries payable $400.
3. Depreciation for the month is $200.
4. Unearned service revenue of $1,250 is earned.
Instructions
(a) Enter the November 1 balances in the ledger accounts.
(b) Journalize the November transactions.
(c) Post to the ledger accounts. Use J1 for the posting reference. Use the following additional accounts: No. 400 Service Revenue, No. 615 Depreciation Expense, No. 631 Supplies Expense, No. 726 Salaries Expense, and No. 729 Rent Expense.
(d) Prepare a trial balance at November 30.
(e) Journalize and post adjusting entries.
(f) Prepare an adjusted trial balance.
(g) Prepare an income statement and a retained earnings statement for November and a balance sheet at November 30.
Happy Camper Park, Inc. was organized on April 1, 2010, by Amaya Berge. Amaya is a good manager but a poor accountant .From the trial balance prepared by a part time bookkeeper ,Amaya prepared the following income statement for the quarter that ended March 31, 2011.
|
HAPPY CAMPER PARK, INC. Income Statement For the Quarter Ended March 31, 2011 |
||
|
Revenues |
||
|
Rental revenue |
$90,000 |
|
|
Operating expenses |
$ 5,200 |
|
|
Advertising |
29,800 |
|
|
Wages |
900 |
|
|
Utilities |
800 |
|
|
Depreciation |
4,000 |
|
|
Repairs |
$ 5,200 |
|
|
Total operating expenses |
||
|
Net income |
40,700 |
|
|
$49,300 |
||
Amaya thought that something was wrong with the statement because net income had never exceeded $20,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data. You first look at the trial balance. In addition to the account balances reported above in the income statement, the ledger contains the following additional selected balances at March 31, 2011.
|
Supplies |
$ 6,200 |
|
Prepaid Insurance |
7,200 |
|
Notes Payable |
12,000 |
You then make inquiries and discover the following.
1. Rental revenues include advanced rentals for summer occupancy $15,000.
2. There were $1,700 of supplies on hand at March 31.
3. Prepaid insurance resulted from the payment of a one year policy on January 1, 2011.
4. The mail on April 1, 2011, brought the following bills: advertising for week of March 24,$110; repairs made March 10, $260; and utilities, $180.
5. There are four employees, who receive wages totaling $300 per day. At March 31, 2 days’ wages have been incurred but not paid.
6. The note payable is a 3 month, 10% note dated January 1, 2011.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct income statement for the quarter ended March 31, 2011.
(b) Explain to Amaya the generally accepted accounting principles that she did not recognize in
preparing her income statement and their effect on her results.
Bluestem Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Bluestem’s chemical pesticides. In the coming year, Bluestem will have environmentally safe and competitive chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed any prior year’s. The decline in sales and profits appears to be a one year aberration. But even so, the company president fears a large dip in the current year’s profits. He believes that such a dip could cause a significant drop in the market price of Bluestem’s stock and make the company a takeover target. To avoid this possibility, the company president calls in Cathi Bell, controller, to discuss this period’s year end adjusting entries. He urges her to accrue every possible revenue and to defer as many expenses as possible. He says to Cathi,“We need the revenues this year, and next year can easily absorb expenses deferred from this year.We can’t let our stock price be hammered down!” Cathi didn’t get around to recording the adjusting entries until January 17, but she dated the entries December 31 as if they were recorded then. Cathi also made every effort to comply with the president’s request.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical considerations of (1) the president’s request and (2) Cathi’s dating the adjusting entries December 31?
(c) Can Cathi accrue revenues and defer expenses and still be ethical?
Companies must report or disclose in their financial statements information about all liabilities, including potential liabilities related to environmental cleanup. There are many situations in which you will be asked to provide personal financial information about your assets, liabilities, revenue, and expenses. Sometimes you will face difficult decisions regarding what to disclose and how to disclose it. Instructions Suppose that you are putting together a loan application to purchase a home. Based on your income and assets, you qualify for the mortgage loan, but just barely. How would you address each of the following situations in reporting your financial position for the loan application? Provide responses for each of the following questions.
(a) You signed a guarantee for a bank loan that a friend took out for $20,000. If your friend doesn’t pay, you will have to pay.Your friend has made all of the payments so far, and it appears he will be able to pay in the future.
(b) You were involved in an auto accident in which you were at fault.There is the possibility that you may have to pay as much as $50,000 as part of a settlement.The issue will not be resolved before the bank processes your mortgage request.
(c) The company at which you work isn’t doing very well, and it has recently laid off employees. You are still employed, but it is quite possible that you will lose your job in the next few months.
The following accounts were taken from the financial statements of Callahan Company.
______ Salaries payable
______ Service revenue
______ Interest payable
______ Goodwill
______ Short term investments
______ Mortgage note payable due in 3 years
______ Investment in real estate
______ Delivery truck
______ Accumulated depreciation
______ Depreciation expense
______ Common stock
______ Unearned revenue
Match each of the following accounts to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.”
Current assets (CA)
Long term investments (LTI)
Property, plant, and equipment (PPE)
Intangible assets (IA)
Current liabilities (CL)
Long term liabilities (LTL)
Stockholders’ equity (SE)
At the end of its first month of operations,Watson Answering Service Inc. has the following unadjusted trial balance
|
WATSON ANSWERING SERVICE INC. August 31, 2011 Trial Balance |
||
|
Cash |
Debit |
Credit |
|
Accounts Receivable |
$ 5,400 |
|
|
Supplies |
2,800 |
|
|
Prepaid Insurance |
1,300 |
|
|
Equipment |
2,400 |
|
|
Notes Payable |
$40,000 |
|
|
Accounts Payable |
2,400 |
|
|
Common Stock |
30,000 |
|
|
Dividends |
1,000 |
|
|
Service Revenue |
4,900 |
|
|
Salaries Expense |
3,200 |
|
|
Utilities Expense |
800 |
|
|
Advertising Expense |
400 |
|
|
$77,300 |
$77,300 |
|
Other data:
1. Insurance expires at the rate of $200 per month.
2. $1,000 of supplies are on hand at August 31.
3. Monthly depreciation on the equipment is $900.
4. Interest of $500 on the notes payable has accrued during August.
Instructions
(a) Prepare a worksheet.
(b) Prepare a classified balance sheet assuming $35,000 of the notes payable are long term.
(c) Journalize the closing entries.
Evaluating the Transformation Process Italiano Pizza Company has just completed its first month in business. The owners, Charla and Maria, had previously worked for a major pizza chain but were convinced that they could offer a better product in a better atmosphere. They knew the importance of accurate financial records and hired a bookkeeper. Yesterday, the bookkeeper hand delivered financial statements to the owners and announced her resignation. You have been retained by Charla and Maria to interpret the following financial information and explain its significance.
|
Italiano Pizza Company |
|||||
|
Balance sheet accounts |
Income statement accounts |
||||
|
Assets: |
Liabilities Owners” Equity: |
Revenues |
$4,000 |
||
|
Cash |
$2,240 |
Wages payable |
$180 |
Expenses: |
|
|
Food products |
980 |
Advertising payable |
400 |
Store rent |
800 |
|
Supplies |
1,000 |
Loan from bank |
6,800 |
Food products |
1,475 |
|
Prepaid rent |
2,400 |
Owners” investment |
4,340 |
Wages |
990 |
|
Equipment |
5,150 |
Advertising |
1,430 |
||
|
Accumulated |
Interest |
40 |
|||
|
depreciation |
50 |
Supplies |
375 |
||
|
Total$11,720 |
$11,720 |
Total |
$11,720 |
Depreciation |
50 |
|
Net income |
$1,160 |
||||
Required
A. Discuss whether the information provided could be helpful to the owners and, if so, describe how. If not, describe why not.
B. Identify at least 10 events that occurred as part of the transformation process during the firm”s first month in business. For each event, identify the amount of cash involved.
C. Did Charla and Maria make a good judgment when they decided to get into this business? Would you recommend that they continue with the pizza business or discontinue it? What additional information would be helpful to you in making such a recommendation?
The Financial Statements of General Mills, Inc. The General Mills 2002 Annual Report is reproduced in Appendix B at the end of the text.
Required
A. Answer the following questions about the General Mills Consolidated Statements of Earnings:
1. General Mills recorded sales of almost $8 billion. Is this the amount of cash collected? Explain.
2. Sales increased each year from 2000 to 2002. Compute the percentage increase for each year.
3. What is the largest expense for General Mills? Compute this expense as a percentage of sales for each of the three years. Is there a trend?
4. Compare the net income figures for three years. What do you observe?
5. Explain why a company”s stock price generally is influenced by the amount of net income.
6. General Mills paid dividends in 2002, 2001, and in 2000, yet the corresponding total dividend payments do not appear as expenses on the income statement. Why not?
B. Answer the following questions about the General Mills Consolidated Balance Sheets:
1. Why does a company have assets?
2. What is the total amount of assets at the end of 2002?
3. For 2002, compare the assets at the beginning of the year to the assets at the end of the year.
a. Compute the percentage increase in assets during the year.
b. Which type of assets account for most of the increase?
4. What two groups have contributed assets to General Mills and have claims on the company”s assets?
C. Answer the following questions about the General Mills Consolidated Statement of Stockholders” Equity:
1. General Mill”s total stockholders” equity has increased significantly from May 27, 2001 to May 26, 2002. What is the major cause of the increase in stockholders” equity?
2. The consolidated statement of stockholders” equity identifies comprehensive income.
Briefly explain the concept of comprehensive income. What kinds of activities are included in comprehensive income?
The following information reflects cash flow and other activities of Better Vision Eyeglass Company for three months ended March 31, 2004.
|
Paid for equipment |
$42,000 |
Paid to owners |
$12,000 |
|
Paid for income taxes |
3,000 |
Paid to suppliers |
39,000 |
|
Paid for insurance |
200 |
Depreciation expense |
13,000 |
|
Paid for interest |
450 |
Received from customers |
87,500 |
|
Paid for utilities |
790 |
Received from issuing long term debt |
23,000 |
|
Paid for advertising |
300 |
Received from sale of land |
19,500 |
|
Paid to employees |
18,000 |
Use this information to answer the following questions:
a. What was net cash flow from operating activities for the period?
b. What was net cash flow from financing activities for the period?
c. What was the net cash flow from investing activities for the period?
d. What was the net change in cash for the period?
For each of the items listed below, identify whether the item would appear on the statement of cash flows (direct format) as part of the computation of cash flow from operating activities, investing activities, financing activities, or would not appear at all. Also, indicate whether the item is added or subtracted in computing cash flow using the direct method of preparing the statement of cash flows.
a. Purchase of plant assets
b. Cash paid to suppliers
c. Cash collected from customers
d. Payment of long term debt
e. Net income
f. Depreciation expense
g. Payment of dividends
h. Issuing stock
i. Cash paid to employees
j. Cash paid for income taxes
k. Disposal of plant assets
;Mary Jansen is the assistant chief accountant at Casey Company, a manufacturer of computer chips and cellular phones. The company presently has total sales of $20 million. It isthe end of the first quarter. Mary is hurriedly trying to prepare a general ledger trial balanceso that quarterly financial statements can be prepared and released to management and the the amount of the difference to the Equipment account. She chose Equipment because it isone of the larger account balances; percentage wise, it will be the least misstated. Mary “plugs”that she had another few days to find the error but realizes that the financial statements arealready late.
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved in this case?
(c) What are Mary’s alternatives?
Every company needs to plan in order to move forward. Its top management must
think about where you want to be three to five years from now, and you need to start takingsteps now in order to get there.With some forethought, you can help yourself avoid a situation,like those described in the All About You feature in this chapter (p. 75), in which your résuméseems to need creative writing.
Instructions
Provide responses to each of the following items.
(a) Where would you like to be working in three to five years? Describe your plan for getting thereby identifying between five and 10 specific steps that you need to take in order to get there.
(b) In order to get the job you want, you will need a résumé.Your résumé is the equivalent of acompany’s annual report. It needs to provide relevant and reliable information about yourpast accomplishments so that employers can decide whether to “invest”in you. Do a searchon the Internet to find a good résumé format.What are the basic elements of a résumé?
(c) A company’s annual report provides information about a company’s accomplishments. In orderfor investors to use the annual report, the information must be reliable; that is, users musthave faith that the information is accurate and believable. How can you provide assurancthat the information on your résumé is reliable?
(d) Prepare a résumé assuming that you have accomplished the five to 10 specific steps you identifiedin part (a).Also, provide evidence that would give assurance that the information is reliable.
Numerous timing concepts are discussed on pages 98 and 99.A list of concepts is provided on the next page, on the left, with a description of the concept on the right.There are more descriptions provided than concepts. Match the description of the concept to the concept.
|
1. ____ Accrual basis accounting. |
(a) Monthly and quarterly time periods. |
|
2. ____ Calendar year. |
(b) Efforts (expenses) should be matched with accomplishments (revenues). |
|
3. ____ Time period assumption. |
(c) Accountants divide the economic life of a business into artificial time periods. |
|
4. ____ Expense recognition |
(d) Companies record revenues when they receive cash and record expenses when they pay out cash. |
|
(e) An accounting time period that is one year in length. |
|
|
(f) An accounting time period that starts on January 1 and ends on December 31. |
|
|
(g) Companies record transactions in the period in which the events occur. |
The ledger of Hammond, Inc. on March 31, 2011, includes the following selected accounts before adjusting entries.
|
Debit |
Credit |
|
|
Prepaid The ledger of Hammond, Inc. on March 31, 2011, includes the following selected Insurance |
3,600 |
|
|
Office Supplies |
2,800 |
|
|
Office Equipment |
25,000 |
|
|
Accumulated Depreciation—Office Equipment |
5,000 |
|
|
Unearned Revenue |
9,200 |
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The office equipment depreciates $200 a month.
4. One half of the unearned revenue was earned in March. Prepare the adjusting entries for the month of March.
Skolnick Co. was organized on April 1, 2011. The company prepares quarterly financial statements.The adjusted trial balance amounts at June 30 are shown below.
|
Debits |
Credits |
|||
|
Cash |
$ 6,700 |
Accumulated Depreciation— |
$ 850 |
|
|
Accounts Receivable |
600 |
Equipment |
||
|
Prepaid Rent |
900 |
Notes Payable |
5,000 |
|
|
Supplies |
1,000 |
Accounts Payable |
1,510 |
|
|
Equipment |
15,000 |
Salaries Payable |
400 |
|
|
Dividends |
600 |
Interest Payable |
50 |
|
|
Salaries Expense |
9,400 |
Unearned Rent |
500 |
|
|
Rent Expense |
1,500 |
Common Stock |
14,000 |
|
|
Depreciation Expense |
850 |
Commission Revenue |
14,200 |
|
|
Supplies Expense |
200 |
Rent Revenue |
800 |
|
|
Utilities Expense |
510 |
|||
|
Interest Expense |
50 |
|||
|
Total debits |
$37,310 |
Total credits |
$37,310 |
|
(a) Determine the net income for the quarter April 1 to June 30.
(b) Determine the total assets and total liabilities at June 30, 2011.
(c) Determine the amount that appears for Retained Earnings.
The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is:
|
a. Supplies |
600 |
|
|
Supplies Expense |
600 |
|
|
b. Supplies |
750 |
|
|
Supplies Expense |
750 |
|
|
c. Supplies Expense |
750 |
|
|
Supplies |
750 |
|
|
d. Supplies Expense |
600 |
|
|
Supplies |
600 |
8. Adjustments for prepaid expenses:
a. decrease assets and increase revenues.
b. decrease expenses and increase assets.
c. decrease assets and increase expenses.
d. decrease revenues and increase assets.
Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows:
|
a. Depreciation Expense |
1,000 |
|
|
Accumulated Depreciation— |
||
|
Queenan Company |
1,000 |
|
|
b. Depreciation Expense |
1,000 |
|
|
Delivery Equipment |
1,000 |
|
|
c. Depreciation Expense |
1,000 |
|
|
Accumulated Depreciation— |
||
|
Delivery Equipment |
1,000 |
|
|
d. Delivery Equipment Expense |
1,000 |
|
|
Accumulated Depreciation— |
||
|
Delivery Equipment |
1,000 |
Kathy Siska earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Kathy’s employer at September 30 is:
|
a. No entry is required. |
||
|
b. Salaries Expense |
400 |
|
|
Salaries Payable |
400 |
|
|
c. Salaries Expense |
400 |
|
|
Cash |
400 |
|
|
d. Salaries Payable |
400 |
|
|
Cash |
400 |
Numerous timing concepts are discussed on pages 98 and 99. A list of concepts is provided below, on the left, with a description of the concept on the right. There are more descriptions provided than concepts. Match the description of the concept to the concept.
|
1. ____ Cash basis accounting. |
(a) Monthly and quarterly time periods. |
|
2. ____ Fiscal year. |
(b) Accountants divide the economic life of a business into artificial time periods. |
|
3. ____ Revenue recognition principle. |
(c) Efforts (expenses) should be matched with accomplishments (revenues). |
|
4. ____ Expense recognition principle. |
(d) Companies record revenues when they receive cash and record expenses when they pay out cash. |
|
(e) An accounting time period that is one year in length. |
|
|
(f) An accounting time period that starts on January 1 and ends on December 31. |
|
|
(g) Companies record transactions in the period in which the events occur. |
|
|
(h) Recognize revenue in the accounting period in which it is earned. |
Danks Co. was organized on April 1, 2011. The company prepares quarterly financial statements. The adjusted trial balance amounts at June 30 are shown below.
|
Debits |
|
|
Cash |
$ 5,360 |
|
Accounts Receivable |
480 |
|
Prepaid Rent |
720 |
|
Supplies |
800 |
|
Equipment |
12,000 |
|
Dividends |
500 |
|
Salaries Expense |
7,520 |
|
Rent Expense |
1,200 |
|
Depreciation Expense |
700 |
|
Supplies Expense |
160 |
|
Utilities Expense |
410 |
|
Interest Expense |
40 |
|
Total debits |
$29,890 |
|
Credits |
|
|
Accumulated Depreciation— |
|
|
Equipment |
$ 700 |
|
Notes Payable |
4,000 |
|
Accounts Payable |
1,200 |
|
Salaries Payable |
300 |
|
Interest Payable |
40 |
|
Unearned Rent |
400 |
|
Common Stock |
11,200 |
|
Commission Revenue |
11,360 |
|
Rent Revenue |
690 |
|
Total credits |
$29,890 |
(a) Determine the net income for the quarter April 1 to June 30.
(b) Determine the total assets and total liabilities at June 30, 2011, for Danks Company.
(c) Determine the amount that appears for Retained Earnings at June 30, 2011.
Jo Seacat has prepared the following list of statements about the time period assumption.
1. Adjusting entries would not be necessary if a company’s life were not divided into artificial time periods.
2. The IRS requires companies to file annual tax returns.
3. Accountants divide the economic life of a business into artificial time periods, but each transaction affects only one of these periods.
4. Accounting time periods are generally a month, a quarter, or a year.
5. A time period lasting one year is called an interim period.
6. All fiscal years are calendar years, but not all calendar years are fiscal years.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Emeril Corporation encountered the following situations:
1. Emeril collected $1,000 from a customer in 2011 for services to be performed in 2012.
2. Emeril incurred utility expense which is not yet paid in cash or recorded.
3. Emeril’s employees worked 3 days in 2011, but will not be paid until 2012.
4. Emeril earned service revenue but has not yet received cash or recorded the transaction.
5. Emeril paid $2,000 rent on December 1 for the 4 months starting December 1.
6. Emeril received cash for future services and recorded a liability until the revenue was earned.
7. Emeril performed consulting services for a client in December 2011. On December 31, it billed the client $1,200.
8. Emeril paid cash for an expense and recorded an asset until the item was used up.
9. Emeril purchased $900 of supplies in 2011; at year end, $400 of supplies remain unused.
10. Emeril purchased equipment on January 1, 2011; the equipment will be used for 5 years.
11. Emeril borrowed $10,000 on October 1, 2011, signing an 8% one year note payable.
Instructions
Identify what type of adjusting entry (prepaid expense, unearned revenue, accrued expense, accrued revenue) is needed in each situation, at December 31, 2011.
Drew Carey Company has the following balances in selected accounts on December 31, 2011.
|
Accounts Receivable |
$ _0_ |
|
Accumulated Depreciation—Equipment |
_0_ |
|
Equipment |
7,000 |
|
Interest Payable |
_0_ |
|
Notes Payable |
10,000 |
|
Prepaid Insurance |
2,100 |
|
Salaries Payable |
_0_ |
|
Supplies |
2,450 |
|
Unearned Consulting Revenue |
40,000 |
All the accounts have normal balances.The information below has been gathered at December 31, 2011.
1. Drew Carey Company borrowed $10,000 by signing a 12%, one year note on September 1, 2011.
2. A count of supplies on December 31, 2011, indicates that supplies of $800 are on hand.
3. Depreciation on the equipment for 2011 is $1,000.
4. Drew Carey Company paid $2,100 for 12 months of insurance coverage on June 1, 2011.
5. On December 1, 2011, Drew Carey collected $40,000 for consulting services to be performed from December 1, 2011, through March 31, 2012.
6. Drew Carey performed consulting services for a client in December 2011.The client will be billed $4,200.
7. Drew Carey Company pays its employees total salaries of $9,000 every Monday for the preceding 5 day week (Monday through Friday). On Monday, December 29, employees were paid for the week ending December 26. All employees worked the last 3 days of 2011.
Instructions
Prepare adjusting entries for the seven items described above.
The ledger of Piper Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.
|
Debit |
Credit |
|
|
Prepaid Insurance |
$ 3,600 |
|
|
Supplies |
2,800 |
|
|
Equipment |
25,000 |
|
|
Accumulated Depreciation—Equipment |
$ 8,400 |
|
|
Notes Payable |
20,000 |
|
|
Unearned Rent Revenue |
9,900 |
|
|
Rent Revenue |
60,000 |
|
|
Interest Expense |
–0– |
|
|
Wages Expense |
14,000 |
An analysis of the accounts shows the following.
1. The equipment depreciates $400 per month.
2. One third of the unearned rent revenue was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $700.
5. Insurance expires at the rate of $200 per month.
Instructions Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
Andy Wright,D.D.S., opened a dental practice on January 1, 2011. During the first month of operations the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $875 of such services was earned but not yet recorded.
2. Utility expenses incurred but not paid prior to January 31 totaled $520.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3 year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4. Purchased a one year malpractice insurance policy on January 1 for $12,000.
5. Purchased $1,600 of dental supplies. On January 31, determined that $400 of supplies were on hand.
Instructions
Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation— Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
The trial balance for Pioneer Advertising Agency Inc. is shown in Illustration 3 3, p. 102. In lieu of the adjusting entries shown in the text at October 31, assume the following adjustment data.
1. Advertising supplies on hand at October 31 total $500.
2. Expired insurance for the month is $100.
3. Depreciation for the month is $50.
4. Unearned revenue earned in October totals $600.
5. Services provided but not recorded at October 31 are $300.
6. Interest accrued at October 31 is $70.
7. Accrued salaries at October 31 are $1,500.
An analysis of the accounts shows the following.
1. The equipment depreciates $400 per month.
2. One third of the unearned rent revenue was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $700.
5. Insurance expires at the rate of $200 per month.
Instructions
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense.
Andy Wright,D.D.S., opened a dental practice on January 1, 2011. During the first month of operations the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $875 of such services was earned but not yet recorded.
2. Utility expenses incurred but not paid prior to January 31 totaled $520.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3 year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4. Purchased a one year malpractice insurance policy on January 1 for $12,000.
5. Purchased $1,600 of dental supplies. On January 31, determined that $400 of supplies were on hand.
Instructions
Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation— Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.
|
SILA COMPANY Adjusted Trial Balance January 31, 2011 |
||
|
Debit |
Credit |
|
|
Supplies |
$ 850 |
|
|
Prepaid Insurance |
2,400 |
|
|
Salaries Payable |
950 |
|
|
Unearned Revenue |
400 |
|
|
Supplies Expense |
950 |
|
|
Insurance Expense |
400 |
|
|
Salaries Expense |
1,800 |
|
|
Service Revenue |
2,000 |
Instructions
Answer the following questions, assuming the year begins January 1.
(a) If the amount in Supplies Expense is the January 31 adjusting entry, and $500 of supplies was purchased in January, what was the balance in Supplies on January 1?
(b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for one year, what was the total premium and when was the policy purchased?
(c) If $3,500 of salaries was paid in January, what was the balance in Salaries Payable at December 31, 2010?
(d) If $1,600 was received in January for services performed in January, what was the balance in
Unearned Revenue at December 31, 2010?
</p;a>
The trial balances before and after adjustment for Garcia Company at the end of its fiscal year are presented below.
|
GARCIA COMPANY |
||||
|
Trial Balance |
||||
|
August 31, 2011 |
||||
|
Before Adjustment |
After Adjustment |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Cash |
$10,400 |
$10,400 |
||
|
Accounts Receivable |
8,800 |
9,800 |
||
|
Office Supplies |
2,300 |
700 |
||
|
Prepaid Insurance |
4,000 |
2,500 |
||
|
Office Equipment |
14,000 |
14,000 |
||
|
Accumulated Depreciation—Office Equipment |
$ 3,600 |
$ 4,500 |
||
|
Accounts Payable |
5,800 |
5,800 |
||
|
Salaries Payable |
–0– |
1,100 |
||
|
Unearned Rent Revenue |
1,500 |
600 |
||
|
Common Stock |
10,000 |
10,000 |
||
|
Retained Earnings |
5,600 |
5,600 |
||
|
Service Revenue |
34,000 |
35,000 |
||
|
Rent Revenue |
11,000 |
11,900 |
||
|
Salaries Expense |
17,000 |
18,100 |
||
|
Office Supplies Expense |
–0– |
1,600 |
||
|
Rent Expense |
15,000 |
15,000 |
||
|
Insurance Expense |
–0– |
1,500 |
||
|
Depreciation Expense |
–0– |
900 |
||
|
$71,500 |
$74,500 |
$74,500 |
||
Instructions
Prepare the adjusting entries that were made.
The following data are taken from the comparative balance sheets of Girard Billiards Club, which prepares its financial statements using the accrual basis of accounting.
|
December 31 |
2011 |
2010 |
|
Fees receivable from members |
$14,000 |
$ 9,000 |
|
Unearned fees revenue |
17,000 |
25,000 |
Fees are billed to members based upon their use of the club’s facilities. Unearned fees arise from the sale of gift certificates, which members can apply to their future use of club facilities. The 2011 income statement for the club showed that fees revenue of $153,000 was earned during the year.
Instructions
(Hint:You will probably find it helpful to use T accounts to analyze these data.)
(a) Prepare journal entries for each of the following events that took place during 2011.
(1) Fees receivable from 2010 were all collected.
(2) Gift certificates outstanding at the end of 2010 were all redeemed.
(3) An additional $35,000 worth of gift certificates were sold during 2011. A portion of these was used by the recipients during the year; the remainder was still outstanding at the end of 2011.
(4) Fees for 2011 for services provided to members were billed to members.
(5) Fees receivable for 2011 (i.e., those billed in item [4] above) were partially collected.
(b) Determine the amount of cash received by the club, with respect to fees, during 2011.
The following accounts are taken from the ledger of Boardin’ Company at December 31, 2011.
|
200 |
Notes Payable |
$20,000 |
101 |
Cash |
$ 6,000 |
|
311 |
Common Stock |
25,000 |
120 |
Supplies |
5,000 |
|
150 |
Equipment |
80,000 |
522 |
Supplies Expense |
2,000 |
|
332 |
Dividends |
8,000 |
220 |
Salaries Payable |
3,000 |
|
726 |
Salaries Expense |
38,000 |
201 |
Accounts Payable |
11,000 |
|
400 |
Service Revenue |
88,000 |
112 |
Accounts Receivable |
8,000 |
Prepare a trial balance in good form
Selected transactions for D. Reyes, an interior decorating firm, in its first month of business, are as follows.
Jan. 2 Invested $10,000 cash in the business in exchange for common stock.
3 Purchased used car for $4,000 cash for use in the business.
9 Purchased supplies on account for $500.
11 Billed customers $1,800 for services performed.
16 Paid $200 cash for advertising.
20 Received $700 cash from customers billed on January 11.
23 Paid creditor $300 cash on balance owed.
28 Declared and paid a $1,000 cash dividend.
Instructions
For each transaction indicate the following.
(a) The basic type of account debited and credited (asset, liability, stockholders’ equity).
(b) The specific account debited and credited (cash, rent expense, service revenue, etc.).
(c) Whether the specific account is increased or decreased.
(d) The normal balance of the specific account.
Use the following format, in which the January 2 transaction is given as an example.
|
Account Debited |
Account Credited |
|||||||
|
(a) |
(b) |
(c) |
(d) |
(a) |
(b) |
(c) |
(d) |
|
|
Basic |
Specific |
Normal |
Basic |
Specific |
Normal |
|||
|
Date |
Type |
Account |
Effect |
Balance |
Type |
Account |
Effect |
Balance |
|
Jan. 2 |
Asset |
Cash |
Increase |
Debit |
Stockholders’ |
Common |
Increase |
Credit |
Selected transactions from the journal of Teresa Gonzalez, investment broker, are presented below.
|
Date |
Account Titles and Explanation |
Ref. |
Debit |
Credit |
|
Aug. 1 |
Cash |
5,000 |
||
|
Common Stock |
5,000 |
|||
|
(Investment of cash for stock) |
||||
|
10 |
Cash |
2,400 |
||
|
Service Revenue |
2,400 |
|||
|
(Received cash for services provided) |
||||
|
Office Equipment |
5,000 |
|||
|
12 |
Cash |
1000 |
||
|
Notes Payable |
4000 |
|||
|
(Purchased office equipment for cash |
||||
|
and notes payable) |
||||
|
25 |
Account Receivable |
1,600 |
||
|
Service Revenue |
1,600 |
|||
|
(Billed clients for services provided) |
||||
|
31 |
Cash |
900 |
||
|
Accounts Receivable |
900 |
|||
|
(Receipt of cash on account) |
Instructions
(a) Post the transactions to T accounts.
(b) Prepare a trial balance at August 31, 2011.
The bookkeeper for Sam Kaplin Equipment Repair made a number of errors in journalizing and posting, as described below.
1. A credit posting of $400 to Accounts Receivable was omitted.
2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense.
3. A collection from a customer of $100 in payment of its account owed was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100.
4. A credit posting of $300 to Property Taxes Payable was made twice.
5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25.
6. A debit of $475 to Advertising Expense was posted as $457.
Instructions
For each error:
(a) Indicate whether the trial balance will balance.
(b) If the trial balance will not balance, indicate the amount of the difference.
(c) Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example.
|
(a) |
(b) |
(c) |
|
|
Error |
In Balance |
Difference |
Larger Column |
|
(1) |
No |
$400 |
debit |
The accounts in the ledger of Sanford Delivery Service contain the following balances
on July 31, 2011.
|
Accounts Receivable |
$ 7,642 |
Prepaid Insurance |
$ 1,968 |
|
Accounts Payable |
8,396 |
Repair Expense |
961 |
|
Cash |
? |
Service Revenue |
10,610 |
|
Delivery Equipment |
49,360 |
Dividends |
700 |
|
Gas and Oil Expense |
758 |
Common Stock |
40,000 |
|
Insurance Expense |
523 |
Salaries Expense |
4,428 |
|
Notes Payable |
18,450 |
Salaries Payable |
815 |
|
Retained Earnings |
4,636 |
Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amount for Cash.
The statement of cash flows classifies each transaction as an operating activity, an investing activity, or a financing activity. Operating activities are the types of activities the company performs to generate profits. Investing activities include the purchase of long lived assets such as equipment or the purchase of investment securities. Financing activities are borrowing money, issuing shares of stock, and paying dividends. Presented below are the following transactions
1. Issued stock for $20,000 cash.
2. Issued note payable for $10,000 cash.
3. Purchased office equipment for $11,000 cash.
4. Received $15,000 cash for services provided.
5. Paid $1,000 cash for rent.
6. Paid $600 cash dividend to stockholders.
7. Paid $6,500 cash for salaries.
Instructions
Classify each of these transactions as operating, investing, or financing activities.
Frontier Park was started on April 1 by C. J. Mendez and associates. The following selected events and transactions occurred during April.
Apr. 1 Stockholders invested $40,000 cash in the business in exchange for common stock.
4 Purchased land costing $30,000 for cash.
8 Incurred advertising expense of $1,800 on account.
11 Paid salaries to employees $1,500.
12 Hired park manager at a salary of $4,000 per month, effective May 1.
13 Paid $1,500 cash for a one year insurance policy.
17 Declared and paid a $1,000 cash dividend.
20 Received $5,700 in cash for admission fees.
25 Sold 100 coupon books for $25 each. Each book contains 10 coupons that entitle the holder to one admission to the park.
30 Received $8,900 in cash admission fees.
30 Paid $900 on balance owed for advertising incurred on April 8. Mendez uses the following accounts: Cash, Prepaid Insurance, Land, Accounts Payable, Unearned Admission Revenue, Common Stock; Dividends; Admission Revenue, Advertising Expense, and Salaries Expense.
Instructions
Journalize the April transactions.
Jane Kent is a licensed CPA. During the first month of operations of her business, Jane Kent, Inc., the following events and transactions occurred.
May 1 Stockholders invested $25,000 cash in exchange for common stock.
2 Hired a secretary receptionist at a salary of $2,000 per month.
3 Purchased $2,500 of supplies on account from Read Supply Company.
7 Paid office rent of $900 cash for the month.
11 Completed a tax assignment and billed client $2,100 for services provided.
12 Received $3,500 advance on a management consulting engagement.
17 Received cash of $1,200 for services completed for H. Arnold Co.
31 Paid secretary receptionist $2,000 salary for the month.
31 Paid 40% of balance due Read Supply Company. Jane uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Revenue, No. 311 Common Stock; No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.
Instructions
(a) Journalize the transactions.
(b) Post to the ledger accounts.
(c) Prepare a trial balance on May 31, 2011.
Jack Shellenkamp owns and manages a computer repair service, which had the following trial balance on December 31, 2010 (the end of its fiscal year).
|
BYTE REPAIR SERVICE, INC. |
||
|
Trial Balance |
||
|
December 31, 2010 |
||
|
Cash |
$ 8,000 |
|
|
Accounts Receivable |
15,000 |
|
|
Parts Inventory |
13,000 |
|
|
Prepaid Rent |
3,000 |
|
|
Shop Equipment |
21,000 |
|
|
Accounts Payable |
$19,000 |
|
|
Common Stock |
30,000 |
|
|
Retained Earnings |
11,000 |
|
|
$60,000 |
$60,000 |
Summarized transactions for January 2011 were as follows:
1. Advertising costs, paid in cash, $1,000.
2. Additional repair parts inventory acquired on account $4,000.
3. Miscellaneous expenses, paid in cash, $2,000.
4. Cash collected from customers in payment of accounts receivable $14,000.
5. Cash paid to creditors for accounts payable due $15,000.
6. Repair parts used during January $4,000. (Hint: Debit this to Repair Parts Expense.)
7. Repair services performed during January: for cash $6,000; on account $9,000.
8. Wages for January, paid in cash, $3,000.
9. Dividends during January were $3,000.
Instructions
(a) Open T accounts for each of the accounts listed in the trial balance, and enter the opening balances for 2011.
(b) Prepare journal entries to record each of the January transactions. (Omit explanations.)
(c) Post the journal entries to the accounts in the ledger. (Add accounts as needed.)
(d) Prepare a trial balance as of January 31, 2011.
The trial balance of the Sterling Company shown below does not balance.
|
STERLING COMPANY |
||
|
Trial Balance |
||
|
May 31, 2011 |
||
|
Cash |
Debit |
Credit |
|
Accounts Receivable |
$ 5,850 |
$ 2,750 |
|
Prepaid Insurance |
700 |
|
|
Equipment |
8,000 |
|
|
Accounts Payable |
4,500 |
|
|
Property Taxes Payable |
560 |
|
|
Common Stock |
11,700 |
|
|
Service Revenue |
6,690 |
|
|
Salaries Expense |
4,200 |
|
|
Advertising Expense |
1,100 |
|
|
Property Tax Expense |
800 |
|
|
$26,800 |
$20,050 |
Your review of the ledger reveals that each account has a normal balance.You also discover the following errors.
1. The totals of the debit sides of Prepaid Insurance, Accounts Payable, and Property Tax Expense were each understated $100.
2. Transposition errors were made in Accounts Receivable and Service Revenue. Based on postings made, the correct balances were $2,570 and $6,960, respectively.
3. A debit posting to Salaries Expense of $200 was omitted.
4. A $1,000 cash dividend was debited to Common Stock for $1,000 and credited to Cash for $1,000.
5. A $520 purchase of supplies on account was debited to Equipment for $520 and credited to Cash for $520.
6. A cash payment of $450 for advertising was debited to Advertising Expense for $45 and credited to Cash for $45.
7. A collection from a customer for $210 was debited to Cash for $210 and credited to Accounts Payable for $210.
Instructions
Prepare a correct trial balance. Note that the chart of accounts includes the following: Dividends and Supplies. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.)
The Lake Theater opened on April 1.All facilities were completed on March 31.At this time, the ledger showed: No. 101 Cash $6,000, No. 140 Land $10,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) $8,000, No. 157 Equipment $6,000, No. 201 Accounts Payable $2,000,No. 275 Mortgage Payable $8,000, and No. 311 Common Stock $20,000. During April, the following events and transactions occurred.
Apr. 2 Paid film rental of $800 on first movie.
3 Ordered two additional films at $1,000 each.
9 Received $2,800 cash from admissions.
10 Made $2,000 payment on mortgage and $1,000 for accounts payable due.
11 Lake Theater contracted with R.Wynns Company to operate the concession stand. Wynns is to pay 17% of gross concession receipts (payable monthly) for the right to operate the concession stand.
12 Paid advertising expenses $500.
20 Received one of the films ordered on April 3 and was billed $1,000. The film will be shown in April.
25 Received $5,200 cash from admissions.
29 Paid salaries $2,000.
30 Received statement from R.Wynns showing gross concession receipts of $1,000 and the balance due to The Lake Theater of $170 ($1,000 _ 17%) for April.Wynns paid one half of the balance due and will remit the remainder on May 5.
30 Prepaid $900 rental on special film to be run in May. In addition to the accounts identified above, the chart of accounts shows: No. 112 Accounts Receivable, No. 136 Prepaid Rentals, No. 405 Admission Revenue, No. 406 Concession Revenue,
No. 610 Advertising Expense, No. 632 Film Rental Expense, and No. 726 Salaries Expense.
Instructions
(a) Enter the beginning balances in the ledger as of April 1. Insert a check mark (?) in the reference column of the ledger for the beginning balance.
(b) Journalize the April transactions.
(c) Post the April journal entries to the ledger. Assume that all entries are posted from page 1 of the journal.
(d) Prepare a trial balance on April 30, 2011.
Hyzer Disc Golf Course was opened on March 1 by Barry Schultz. The following selected events and transactions occurred during March:
Mar. 1 Invested $20,000 cash in the business in exchange for common stock.
3 Purchased Heeren’s Golf Land for $15,000 cash. The price consists of land $12,000, shed $2,000, and equipment $1,000. (Make one compound entry.)
5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $700.
6 Paid cash $600 for a one year insurance policy.
10 Purchased golf discs and other equipment for $1,050 from Innova Company payable in 30 days.
18 Received $340 in cash for golf fees earned.
19 Sold 100 coupon books for $10 each. Each book contains 4 coupons that enable the holder to play one round of disc golf.
25 Declared and paid an $800 cash dividend.
30 Paid salaries of $250.
30 Paid Innova Company in full.
31 Received $200 cash for fees earned. Barry Schultz uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Unearned Revenue, Common Stock, Dividends, Golf Revenue, Advertising Expense, and Salaries Expense. Instructions Journalize the March transactions.
Maria Juarez is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.
April 1 Stockholders invested $40,000 cash in exchange for common stock.
1 Hired a secretary receptionist at a salary of $600 per week payable monthly.
2 Paid office rent for the month $1,000.
3 Purchased dental supplies on account from Smile Company $4,000.
10 Provided dental services and billed insurance companies $5,100.
11 Received $1,000 cash advance from Trudy Borke for an implant.
20 Received $2,100 cash for services completed and delivered to John Stanley.
30 Paid secretary receptionist for the month $2,400.
30 Paid $1,600 to Smile Company for accounts payable due. Maria uses the following chart of accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 201 Accounts Payable, No. 209 Unearned Revenue, No. 311 Common Stock; No. 400 Service Revenue, No. 726 Salaries Expense, and No. 729 Rent Expense.
Instructions
(a) Journalize the transactions.
(b) Post to the ledger accounts.
(c) Prepare a trial balance on April 30, 2011.
Slowhand Services was formed on May 1, 2011. The following transactions took place during the first month. Transactions on May 1:
1. Stockholders invested $50,000 cash in exchange for common stock.
2. Hired two employees to work in the warehouse. They will each be paid a salary of $2,800 per month.
3. Signed a 2 year rental agreement on a warehouse; paid $24,000 cash in advance for the first year.
4. Purchased furniture and equipment costing $30,000. A cash payment of $10,000 was made immediately; the remainder will be paid in 6 months.
5. Paid $1,800 cash for a one year insurance policy on the furniture and equipment. Transactions during the remainder of the month:
6. Purchased basic office supplies for $500 cash.
7. Purchased more office supplies for $1,500 on account.
8. Total revenues earned were $20,000—$8,000 cash and $12,000 on account.
9. Paid $400 to suppliers for accounts payable due.
10. Received $3,000 from customers in payment of accounts receivable.
11. Received utility bills in the amount of $200, to be paid next month.
12. Paid the monthly salaries of the two employees, totalling $5,600.
Instructions
(a) Prepare journal entries to record each of the events listed. (Omit explanations.)
(b) Post the journal entries to T accounts.
(c) Prepare a trial balance as of May 31, 2011.
The trial balance of Syed Moiz Co. shown below does not balance.
|
SYED MOIZ CO. Trial Balance June 30, 2011 |
||
|
Debit |
Credit |
|
|
Cash |
$ 3,340 |
|
|
Accounts Receivable |
$ 2,731 |
|
|
Supplies |
1,200 |
|
|
Equipment |
2,600 |
|
|
Accounts Payable |
3,666 |
|
|
Unearned Revenue |
1,100 |
|
|
Common Stock |
8,000 |
|
|
Dividends |
800 |
|
|
Service Revenue |
2,480 |
|
|
Salaries Expense |
3,200 |
|
|
Office Expense |
810 |
|
|
$12,441 |
$17,486 |
Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.
1. Cash received from a customer in payment of its account was debited for $480, and Accounts Receivable was credited for the same amount.The actual collection was for $840.
2. The purchase of a computer on account for $620 was recorded as a debit to Supplies for $620 and a credit to Accounts Payable for $620.
3. Services were performed on account for a client for $890. Accounts Receivable was debited for $890, and Service Revenue was credited for $89.
4. A debit posting to Salaries Expense of $700 was omitted.
5. A payment of a balance due for $306 was credited to Cash for $306 and credited to Accounts Payable for $360.
6. The payment of a $600 cash dividend was debited to Salaries Expense for $600 and credited to Cash for $600.
Instructions
Prepare a correct trial balance. (Hint: It helps to prepare the correct journal entry for the transaction described and compare it to the mistake made.)
The Josie Theater, owned by Josie Micheals, will begin operations in March. The Josie will be unique in that it will show only triple features of sequential theme movies. As of March 1, the ledger of Josie showed: No. 101 Cash $9,000, No. 140 Land $24,000, No. 145 Buildings (concession stand, projection room, ticket booth, and screen) $10,000, No. 157 Equipment $10,000, No. 201 Accounts Payable $7,000, and No. 311 Common Stock $46,000. During the month of March the following events and transactions occurred. Mar. 2 Rented the three Indiana Jones movies to be shown for the first 3 weeks of March.The film rental was $3,500; $1,500 was paid in cash and $2,000 will be paid on March 10.
3 Ordered the Lord of the Rings movies to be shown the last 10 days of March. It will cost $200 per night.
9 Received $4,000 cash from admissions.
10 Paid balance due on Indiana Jones movies rental and $2,100 on March 1 accounts payable.
11 Josie Theater contracted with Stephanie Becker to operate the concession stand. Becker is to pay 15% of gross concession receipts (payable monthly) for the right to operate the concession stand.
12 Paid advertising expenses $450.
20 Received $5,000 cash from customers for admissions.
20 Received the Lord of Rings movies and paid the rental fee of $2,000.
31 Paid salaries of $2,500. 31 Received statement from Stephanie Becker showing gross receipts from concessions of $6,000 and the balance due to Josie Theater of $900 ($6,000 _ 15%) for March. Becker paid one half the balance due and will remit the remainder on April 5. 31 Received $9,000 cash from customers for admissions. In addition to the accounts identified above, the chart of accounts includes: No. 112 Accounts Receivable, No. 405 Admission Revenue, No. 406 Concession Revenue, No. 610 Advertising Expense, No. 632 Film Rental Expense, and No. 726 Salaries Expense.
Instructions
(a) Enter the beginning balances in the ledger. Insert a check mark (?) in the reference column of the ledger for the beginning balance.
(b) Journalize the March transactions.
(c) Post the March journal entries to the ledger. Assume that all entries are posted from page 1 of the journal.
(d) Prepare a trial balance on March 31, 2011.
Financial Reporting Problem: Pepsico, Inc.
The financial statements of PepsiCo, Inc. are presented in Appendix A. The notes accompanying the statements contain the following selected accounts, stated in millions of dollars. Accounts Payable Income Taxes Payable Accounts Receivable Interest Expense Property, Plant, and Equipment Inventory
Instructions
(a) Answer the following questions.
(1) What is the increase and decrease side for each account?
(2) What is the normal balance for each account?
(b) Identify the probable other account in the transaction and the effect on that account when:
(1) Accounts Receivable is decreased.
(2) Accounts Payable is decreased.
(3) Inventory is increased.
(c) Identify the other account(s) that ordinarily would be involved when:
(1) Interest Expense is increased.
(2) Property, Plant, and Equipment is increased.
Comparative Analysis Problem: PepsiCo, Inc. vs. The Coca Cola Company
PepsiCo’s financial statements are presented in Appendix A. Financial statements of The Coca Cola Company are presented in Appendix B.
Instructions
(a) Based on the information contained in the financial statements, determine the normal balance of the listed accounts for each company.
Pepsi Coca Cola
1. Inventory 1. Accounts Receivable
2. Property, Plant, and Equipment 2. Cash and Cash Equivalents
3. Accounts Payable 3. Cost of Goods Sold (expense)
4. Interest Expense 4. Sales (revenue)
(b) Identify the other account ordinarily involved when:
(1) Accounts Receivable is increased.
(2) Wages Payable is decreased.
(3) Property, Plant, and Equipment is increased.
(4) Interest Expense is increased.
Exploring the Web
Much information about specific companies is available on the World Wide Web. Such information includes basic descriptions of the company’s location, activities, industry, financial health, and financial performance.
Address: biz.yahoo.com/i, or go to www.wiley.com/college/weygandt Steps
1. Type in a company name, or use index to find company name.
2. Choose Profile. Perform instructions (a)–(c) on the next page.
3. Click on the company’s specific industry to identify competitors. Perform instructions (d)–(g) on the next page.
Instructions
Answer the following questions.
(a) What is the company’s industry?
(b) What was the company’s total sales?
(c) What was the company’s net income?
(d) What are the names of four of the company’s competitors?
(e) Choose one of these competitors.
(f)+ What is this competitor’s name? What were its sales? What was its net income?
(g) Which of these two companies is larger by size of sales? Which one reported higher net income?
Lisa Ortega operates Ortega Riding Academy. The academy’s primary sources of revenue are riding fees and lesson fees, which are paid on a cash basis. Lisa also boards horses for owners, who are billed monthly for boarding fees. In a few cases, boarders pay in advance of expected use. For its revenue transactions, the academy maintains the following accounts: No. 1 Cash, No. 5 Boarding Accounts Receivable, No. 27 Unearned Boarding Revenue, No. 51 Riding Revenue, No. 52 Lesson Revenue, and No. 53 Boarding Revenue. The academy owns 10 horses, a stable, a riding corral, riding equipment, and office equipment. These assets are accounted for in accounts No. 11 Horses, No. 12 Building, No. 13 Riding Corral, No. 14 Riding Equipment, and No. 15 Office Equipment. For its expenses, the academy maintains the following accounts: No. 6 Hay and Feed Supplies, No. 7 Prepaid Insurance, No. 21 Accounts Payable, No. 60 Salaries Expense, No. 61 Advertising Expense, No. 62 Utilities Expense, No. 63 Veterinary Expense, No. 64 Hay and Feed Expense, and No. 65 Insurance Expense. Ortega makes periodic payments of cash dividends to stockholders. To record stockholders’ equity in the business and dividends, Ortega maintains three accounts: No. 50 Common Stock, No. 51 Retained Earnings, and No. 52 Dividends. Ortega asks you to review the following eight entries of the 50 entries made during the month.In each case, the explanation for the entry is correct.
|
May 1 |
Cash |
18,000 |
|
|
Common Stock |
18,000 |
||
|
(Invested $18,000 cash in exchange for stock) |
|||
|
5 |
Cash |
250 |
|
|
Riding Revenue |
250 |
||
|
(Received $250 cash for lessons provided) |
|||
|
7 |
Cash |
300 |
|
|
Boarding Revenue |
300 |
||
|
(Received $300 for boarding of horses |
|||
|
beginning June 1) |
|||
|
Riding Equipment |
|||
|
14 |
Cash |
800 |
|
|
(Purchased desk and other office |
800 |
||
|
equipment for $800 cash) |
|||
|
15 |
Salaries Expense |
400 |
|
|
Cash |
400 |
||
|
(Issued dividend checks to stockholders) |
|||
|
20 |
Cash |
148 |
|
|
Riding Revenue |
148 |
||
|
(Received $184 cash for riding fees) |
|||
|
30 |
Veterinary Expense |
75 |
|
|
Accounts Payable |
75 |
||
|
(Received bill of $75 from veterinarian for |
|||
|
services rendered) |
|||
|
31 |
Hay and Feed Expense |
1,700 |
|
|
0 |
1,700 |
||
|
(Purchased an estimated 2 months’ |
|||
|
supply of feed and hay for $1,700 on account) |
Instructions
With the class divided into groups, answer the following.
(a) Identify each journal entry that is correct.For each journal entry that is incorrect, prepare theentry that should have been made by the bookkeeper.
(b) Which of the incorrect entries would prevent the trial balance from balancing?
(c) What was the correct net income for May, assuming the bookkeeper reported net income of$4,500 after posting all 50 entries?
(d) What was the correct cash balance at May 31, assuming the bookkeeper reported a balanceof $12,475 after posting all 50 entries (and the only errors occurred in the items listedabove)?
The ledger of Hickory Hills Corporation contains the following accounts: Common Stock, Preferred Stock, Treasury Stock, Paid in Capital in Excess of Par—Preferred Stock, Paid in Capital in Excess of Stated Value—Common Stock, Paid in Capital from Treasury Stock, and Retained Earnings.
Instructions
Classify each account using the following table headings.
|
Paid in Capital |
||||
|
Capital |
Retained |
|||
|
Account |
Stock |
Additional |
Earnings |
Other |
Alexia Corporation was organized on January 1, 2012. It is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.
|
Jan. |
10 |
Issued 80,000 shares of common stock for cash at $4 per share. |
|
Mar. |
1 |
Issued 5,000 shares of preferred stock for cash at $105 per share. |
|
Apr. |
1 |
Issued 24,000 shares of common stock for land. The asking price of the land was |
|
$90,000. The fair value of the land was $85,000. |
||
|
May |
1 |
Issued 80,000 shares of common stock for cash at $4.50 per share. |
|
Aug. |
1 |
Issued 10,000 shares of common stock to attorneys in payment of their bill of $30,000 |
|
for services provided in helping the company organize. |
||
|
Sept. |
1 |
Issued 10,000 shares of common stock for cash at $5 per share. |
|
Nov. |
1 |
Issued 1,000 shares of preferred stock for cash at $109 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J5 as the posting reference.)
(c) Prepare the paid in capital section of stockholders’ equity at December 31, 2012.
Brandon Corporation had the following stockholders’ equity accounts on January 1, 2012: Common Stock ($5 par) $500,000, Paid in Capital in Excess of Par—Common Stock $200,000, and Retained Earnings $100,000. In 2012, the company had the following treasury stock transactions.
|
Mar. |
1 |
Purchased 5,000 shares at $9 per share. |
|
June |
1 |
Sold 1,000 shares at $12 per share. |
|
Sept. |
1 |
Sold 2,000 shares at $10 per share. |
|
Dec. |
1 |
Sold 1,000 shares at $6 per share. |
Brandon Corporation uses the cost method of accounting for treasury stock. In 2012, the company reported net income of $30,000.
Instructions
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2012, for net income.
(b) Open accounts for (1) Paid in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J10 as the posting reference.
(c) Prepare the stockholders’ equity section for Jacobsen Corporation at December 31, 2012.
The stockholders’ equity accounts of Ashley Corporation on January 1, 2012, were as follows.
|
Preferred Stock (8%, $50 par, cumulative, 10,000 shares authorized) |
$ 400,000 |
|
Common Stock ($1 stated value, 2,000,000 shares authorized) |
1,000,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
100,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,450,000 |
|
Retained Earnings |
1,816,000 |
|
Treasury Stock (10,000 common shares) |
50,000 |
During 2012, the corporation had the following transactions and events pertaining to its stockholders’ equity.
|
Feb. |
1 |
Issued 25,000 shares of common stock for $120,000. |
|
Apr. |
14 |
Sold 6,000 shares of treasury stock—common for $33,000. |
|
Sept. |
3 |
Issued 5,000 shares of common stock for a patent valued at $35,000. |
|
Nov. |
10 |
Purchased 1,000 shares of common stock for the treasury at a cost of $6,000. |
|
Dec. |
31 |
Determined that net income for the year was $452,000. |
No dividends were declared during the year.
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J5 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2012, including the disclosure of the preferred dividends in arrears.
Mary Corporation is authorized to issue 20,000 shares of $50 par value, 10% preferred stock and 125,000 shares of $3 par value common stock. On January 1, 2012, the ledger contained the following stockholders’ equity balances.
|
Preferred Stock (10,000 shares) |
$500,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
75,000 |
|
Common Stock (70,000 shares) |
210,000 |
|
Paid in Capital in Excess of Par—Common Stock |
700,000 |
|
Retained Earnings |
300,000 |
|
Preferred Stock (10,000 shares) |
$500,000 |
During 2012, the following transactions occurred.
|
Feb. |
1 |
Issued 2,000 shares of preferred stock for land having a fair value of $125,000. |
|
Mar. |
1 |
Issued 1,000 shares of preferred stock for cash at $65 per share. |
|
July |
1 |
Issued 16,000 shares of common stock for cash at $7 per share. |
|
Sept. |
1 |
Issued 400 shares of preferred stock for a patent. The asking price of the patent was |
|
$30,000. Market values were preferred stock $70 and patent indeterminable. |
||
|
Dec. |
1 |
Issued 8,000 shares of common stock for cash at $7.50 per share. |
|
Dec. |
31 |
Net income for the year was $260,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 for the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2012.
The following stockholders’ equity accounts arranged alphabetically are in the ledger of Desiree Corporation at December 31, 2012.
|
Common Stock ($5 stated value) |
$2,000,000 |
|
Paid in Capital from Treasury Stock |
10,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,600,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
679,000 |
|
Preferred Stock (8%, $50 par, noncumulative) |
800,000 |
|
Retained Earnings |
1,748,000 |
|
Treasury Stock (10,000 common shares) |
130,000 |
Instructions
Prepare a stockholders’ equity section at December 31, 2012.
Leigh Corporation has been authorized to issue 20,000 shares of $100 par value, 10%, noncumulative preferred stock and 1,000,000 shares of no par common stock. The corporation assigned a $2.50 stated value to the common stock. At December 31, 2012, the ledger contained the following balances pertaining to stockholders’ equity.
|
Preferred Stock |
$ 120,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
20,000 |
|
Common Stock |
1,000,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
1,800,000 |
|
Treasury Stock (1,000 common shares) |
13,000 |
|
Paid in Capital from Treasury Stock |
500 |
|
Retained Earnings |
82,000 |
The preferred stock was issued for land having a fair value of $140,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $13. In December, 500 shares of treasury stock were sold for $14 per share. No dividends were declared in 2012.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2012.
Joanjim Corporation was organized on January 1, 2012. It is authorized to issue 20,000 shares of 6%, $40 par value preferred stock, and 500,000 shares of no par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.
|
Jan. 10 |
Issued 100,000 shares of common stock for cash at $3 per share. |
|
Mar. 1 |
Issued 10,000 shares of preferred stock for cash at $55 per share. |
|
Apr. 1 |
Issued 25,000 shares of common stock for land. The asking price of the land was |
|
$90,000. The company’s estimate of fair value of the land was $75,000. |
|
|
May 1 |
Issued 75,000 shares of common stock for cash at $4 per share. |
|
Aug. 1 |
Issued 10,000 shares of common stock to attorneys in payment of their bill for $50,000 |
|
for services provided in helping the company organize. |
|
|
Sept. 1 |
Issued 5,000 shares of common stock for cash at $6 per share. |
|
Nov. 1 |
Issued 2,000 shares of preferred stock for cash at $60 per share. |
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare the paid in capital section of stockholders’ equity at December 31, 2012.
Dougherty Corporation had the following stockholders’ equity accounts on January 1, 2012: Common Stock ($1 par) $400,000, Paid in Capital in Excess of Par—Common Stock $500,000, and Retained Earnings $100,000. In 2012, the company had the following treasury stock transactions.
|
Mar. 1 |
Purchased 5,000 shares at $7 per share. |
|
June 1 |
Sold 1,000 shares at $10 per share. |
|
Sept. 1 |
Sold 2,000 shares at $9 per share. |
|
Dec. 1 |
Sold 1,000 shares at $5 per share. |
Dougherty Corporation uses the cost method of accounting for treasury stock. In 2012, the company reported net income of $80,000.
Instructions
(a) Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2012, for net income.
(b) Open accounts for (1) Paid in Capital from Treasury Stock, (2) Treasury Stock, and (3) Retained Earnings. Post to these accounts using J12 as the posting reference.
(c) Prepare the stockholders’ equity section for Dougherty Corporation at December 31, 2012.
The stockholders’ equity accounts of Joey Corporation on January 1, 2012, were as follows.
|
Preferred Stock (10%, $100 par, noncumulative, 5,000 shares authorized) |
$ 300,000 |
|
Common Stock ($5 stated value, 300,000 shares authorized) |
1,000,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
20,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
425,000 |
|
Retained Earnings |
488,000 |
|
Treasury Stock (5,000 common shares) |
40,000 |
During 2012, the corporation had the following transactions and events pertaining to its stockholders’ equity.
|
Feb. 1 |
Issued 3,000 shares of common stock for $25,500. |
|
Mar. 20 |
Purchased 1,500 additional shares of common treasury stock at $8 per share. |
|
June 14 |
Sold 4,000 shares of treasury stock—common for $36,000. |
|
Sept. 3 |
Issued 2,000 shares of common stock for a patent valued at $19,000. |
|
Dec. 31 |
Determined that net income for the year was $350,000. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use J1 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2012.
Dominick Corporation is authorized to issue 10,000 shares of $40 par value, 10% preferred stock and 200,000 shares of $5 par value common stock. On January 1, 2012, the ledger contained the following stockholders’ equity balances.
|
Preferred Stock (5,000 shares) |
$200,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
60,000 |
|
Common Stock (70,000 shares) |
350,000 |
|
Paid in Capital in Excess of Par—Common Stock |
700,000 |
|
Retained Earnings |
300,000 |
During 2012, the following transactions occurred.
|
Feb. 1 |
Issued 1,000 shares of preferred stock for land having a fair value of $65,000. |
|
Mar. 1 |
Issued 2,000 shares of preferred stock for cash at $60 per share. |
|
July 1 |
Issued 20,000 shares of common stock for cash at $5.80 per share. |
|
Sept. 1 |
Issued 800 shares of preferred stock for a patent. The asking price of the patent was |
|
$60,000. Market values were preferred stock $65 and patent, indeterminable. |
|
|
Dec. 1 |
Issued 10,000 shares of common stock for cash at $6 per share. |
|
Dec. 31 |
Net income for the year was $210,000. No dividends were declared. |
Instructions
(a) Journalize the transactions and the closing entry for net income.
(b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J2 as the posting reference.)
(c) Prepare a stockholders’ equity section at December 31, 2012.
The following stockholders’ equity accounts arranged alphabetically are in the ledger of Dillon Corporation at December 31, 2012.
|
Common Stock ($10 stated value) |
$1,200,000 |
|
Paid in Capital from Treasury Stock |
6,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
690,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
288,400 |
|
Preferred Stock (8%, $100 par, noncumulative) |
300,000 |
|
Retained Earnings |
826,000 |
|
Treasury Stock (8,000 common shares) |
88,000 |
Instructions
Prepare a stockholders’ equity section at December 31, 2012.
Geoffery Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2012, the ledger contained the following balances pertaining to stockholders’ equity.
|
Preferred Stock $ 240,000 |
$ 240,000 |
|
Paid in Capital in Excess of Par—Preferred Stock 56,000 |
56,000 |
|
Common Stock 2,000,000 |
2,000,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock 4,400,000 |
4,400,000 |
|
Treasury Stock (1,000 common shares) 22,000 |
22,000 |
|
Paid in Capital from Treasury Stock 3,000 |
3,000 |
|
Retained Earnings 56 |
560,000 |
The preferred stock was issued for land having a fair value of $296,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2012.
Instructions
(a) Prepare the journal entries for the:
(1) Issuance of preferred stock for land.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(4) Sale of treasury stock for cash.
(b) Prepare the stockholders’ equity section at December 31, 2012.
The stockholders’ meeting for Strauder Corporation has been in progress for some time. Thechief financial officer for Strauder is presently reviewing the company’s financial statements and is explaining the items that comprise the stockholders’ equity section of the balance sheet for the current year. The stockholders’ equity section of Strauder Corporation at December 31, 2012, is as follows.
STRAUDER CORPORATION
Balance Sheet (partial)
December 31, 2012
|
Paid in capital |
|
|
Capital stock |
|
|
Preferred stock, authorized 1,000,000 shares |
|
|
cumulative, $100 par value, $8 per share, 6,000 |
|
|
shares issued and outstanding |
$ 600,000 |
|
Common stock, authorized 5,000,000 shares, $1 par |
|
|
value, 3,000,000 shares issued, and 2,700,000 |
|
|
outstanding |
3,000,000 |
|
Total capital stock |
3,600,000 |
|
Additional paid in capital |
|
|
In excess of par—preferred stock |
$ 50,000 |
|
In excess of par—common stock |
25,000,000 |
|
Total additional paid in capital |
25,050,000 |
|
Total paid in capital |
28,650,000 |
|
Retained earnings |
900,000 |
|
Total paid in capital and retained earnings |
29,550,000 |
|
Less: Treasury stock (300,000 common shares) |
9,300,000 |
|
Total stockholders’ equity |
$20,250,000 |
At the meeting, stockholders have raised a number of questions regarding the stockholders’ equity section.
Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Strauder Corporation.
(a) “What does the cumulative provision related to the preferred stock mean?”
(b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?”
(c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders’ equity. Why is treasury stock not reported as an asset if it has a debit balance?”
The R&D division of Marco Chemical Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern states of the United States. The president of Marco is anxious to get the chemical on the market to boost Marco’s profits. He believes his job is in jeopardy because of decreasing sales and profits. Marco has an opportunity to sell this chemical in Central American countries, where the laws are much more relaxed than in the United States.
The director of Marco’s R&D division strongly recommends further testing in the laboratory for side effects of this chemical on other insects, birds, animals, plants, and even humans. He cautions the president, “We could be sued from all sides if the chemical has tragic side effects that we didn’t even test for in the labs.” The president answers, “We can’t wait an additional year for your lab tests. We can avoid losses from such lawsuits by establishing a separate wholly owned corporation to shield Marco Corp. from such lawsuits. We can’t lose any more than our investment in the new corporation, and we’ll invest just the patent covering this chemical. We’ll reap the benefits if the chemical works and is safe, and avoid the losses from lawsuits if it’s a disaster.” The following week Marco creates a new wholly owned corporation called Brecht Inc., sells the chemical patent to it for $10, and watches the spraying begin.
Instructions
(a) Who are the stakeholders in this situation?
(b) Are the president’s motives and actions ethical?
(c) Can Marco shield itself against losses of Brecht Inc.?
A high percentage of Americans own stock in corporations. As a shareholder in a corporation, you will receive an annual report. One of the goals of this course is for you to learn how to navigate your way around an annual report.
Instructions
Use the annual report provided in Appendix A to answer the following questions.
(a) What CPA firm performed the audit of PepsiCo’s financial statements?
(b) What was the amount of PepsiCo’s earnings per share in 2009?
(c) What was net revenue in 2009?
(d) How many shares of treasury stock did the company have at the end of 2009?
(e) How much cash did PepsiCo spend on capital expenditures in 2009?
(f) Over what life does the company depreciate its buildings?
(g) What was the total amount of dividends paid in 2009?
Sorocaba Co. had the following transactions during the current period.
|
Mar. 2 |
Issued 5,000 shares of $1 par value ordinary shares to attorneys in payment of a bill for $30,000 |
|
for services provided in helping the company to incorporate. |
|
|
June 12 |
Issued 60,000 shares of $1 par value ordinary shares for cash of $375,000. |
|
July 11 |
Issued 1,000 shares of $100 par value preference shares for cash at $110 per share. |
|
Nov. 28 |
Purchased 2,000 treasury shares for $80,000. |
Instructions
Journalize the above transactions.
Selected transactions for the Finney Company are presented in journal form below.Post the transactions to T accounts. Make one T account for each item and determine each account’s ending balance.
|
Date |
Account Titles and Explanation |
Ref. |
Debit |
Credit |
|
May 5 |
Accounts Receivable |
5,000 |
||
|
Service Revenue |
5,000 |
|||
|
(Billed for services provided) |
||||
|
12 |
Cash |
2,400 |
||
|
Accounts Receivable |
2,400 |
|||
|
(Received cash in payment of account) |
||||
|
15 |
Cash |
3,000 |
||
|
Service Revenue |
3,000 |
|||
|
(Received cash for services provided) |
An inexperienced bookkeeper prepared the following trial balance. Prepare a correct trial balance, assuming all account balances are normal.
|
KWUN COMPANY Trial Balance December 31, 2011 |
||
|
Debit |
Credit |
|
|
Cash |
$14,800 |
|
|
Prepaid Insurance |
$ 3,500 |
|
|
Accounts Payable |
3,000 |
|
|
Unearned Revenue |
2,200 |
|
|
Common Stock |
13,000 |
|
|
Dividends |
4,500 |
|
|
Service Revenue |
25,600 |
|
|
Salaries Expense |
18,600 |
|
|
Rent Expense |
2,400 |
|
|
$35,600 |
$52,000 |
Josh Borke recorded the following transactions during the month of April.
|
April 3 |
Cash |
3,400 |
|
|
Photography Revenue |
3,400 |
||
|
April 16 |
Rent Expense |
600 |
|
|
Cash |
600 |
||
|
April 20 |
Salaries Expense |
300 |
|
|
Cash |
300 |
Post these entries to the Cash T account of the general ledger to determine the ending balance in cash.The beginning balance in cash on April 1 was $1,600.
The partners in River Song Company decide to liquidate the firm when the balance sheet shows the following.
|
RIVER SONG COMPANY |
|||
|
Balance Sheet |
|||
|
May 31, 2012 |
|||
|
Assets |
Liabilities and Owners’ Equity |
||
|
Cash |
$ 27,500 |
Notes payable |
$ 13,500 |
|
Accounts receivable |
25,000 |
Accounts payable |
27,000 |
|
Allowance for doubtful accounts |
(1,000) |
Salaries and wages payable |
4,000 |
|
Inventory |
34,500 |
A. Mangold, capital |
33,000 |
|
Equipment |
21,000 |
S. Otis, capital |
21,000 |
|
Accumulated depreciation—equipment |
(5,500) |
P. Tyler, capital |
3,000 |
|
Total |
$101,500 |
Total |
$101,500 |
The partners share income and loss 5 : 3 : 2. During the process of liquidation, the following transactions were completed in the following sequence.
1. A total of $55,000 was received from converting noncash assets into cash.
2. Gain or loss on realization was allocated to partners.
3. Liabilities were paid in full.
4. P. Tyler paid his capital deficiency.
5. Cash was paid to the partners with credit balances.
Instructions
(a) Prepare the entries to record the transactions.
(b) Post to the cash and capital accounts.
(c) Assume that Tyler is unable to pay the capital deficiency.
(1) Prepare the entry to allocate Tyler’s debit balance to Mangold and Otis.
(2) Prepare the entry to record the final distribution of cash.
At April 30, partners’ capital balances in SCJ Company are: G. Cooper $52,000, C. Jones $54,000, and J. Simmonds $18,000. The income sharing ratios are 5 : 4 : 1, respectively. On May 1, the SCJR Company is formed by admitting J. Redfern to the firm as a partner.
Instructions
(a) Journalize the admission of Redfern under each of the following independent assumptions.
(1) Redfern purchases 50% of Simmonds’s ownership interest by paying Simmonds $16,000 in cash.
(2) Redfern purchases 331/3% of Jones’s ownership interest by paying Jones $15,000 in cash.
(3) Redfern invests $66,000 for a 30% ownership interest, and bonuses are given to the old partners.
(4) Redfern invests $46,000 for a 30% ownership interest, which includes a bonus to the new partner.
(b) Jones’s capital balance is $32,000 after admitting Redfern to the partnership by investment.
If Jones’s ownership interest is 20% of total partnership capital, what were (1) Redfern’s cash investment and (2) the bonus to the new partner?
On December 31, the capital balances and income ratios in SAR Company are as follows.
|
Partner |
Capital Balance |
Income Ratio |
|
Spargo |
$60,000 |
50% |
|
Ames |
40,000 |
30% |
|
Ruscoe |
26,000 |
20% |
Instructions
(a) Journalize the withdrawal of Ruscoe under each of the following assumptions.
(1) Each of the continuing partners agrees to pay $18,000 in cash from personal funds to purchase Ruscoe’s ownership equity. Each receives 50% of Ruscoe’s equity.
(2) Ames agrees to purchase Ruscoe’s ownership interest for $25,000 cash.
(3) Ruscoe is paid $34,000 from partnership assets, which includes a bonus to the retiring partner.
(4) Ruscoe is paid $22,000 from partnership assets, and bonuses to the remaining partners are recognized.
(b) If Ames’s capital balance after Ruscoe’s withdrawal is $42,400, what were (1) the total bonus to the remaining partners and (2) the cash paid by the partnership to Ruscoe?
The post closing trial balances of two proprietorships on January 1, 2012, are presented below.
|
Skorr Company |
Crane Company |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Cash |
$ 10,000 |
$ 8,000 |
||
|
Accounts receivable |
18,000 |
30,000 |
||
|
Allowance for doubtful accounts |
$ 2,000 |
$ 3,000 |
||
|
Inventory |
35,000 |
20,000 |
||
|
Equipment |
60,000 |
35,000 |
||
|
Accumulated depreciation—equipment |
28,000 |
15,000 |
||
|
Notes payable |
20,000 |
|||
|
Accounts payable |
30,000 |
40,000 |
||
|
Skorr, capital |
43,000 |
|||
|
Crane, capital |
35,000 |
|||
|
$123,000 |
$123,000 |
$93,000 |
$93,000 |
Skorr and Crane decide to form a partnership, Commander Company, with the following agreed upon valuations for noncash assets.
|
Skorr Company |
Crane Company |
|
|
Accounts receivable |
$18,000 |
$30,000 |
|
Allowance for doubtful accounts |
2,500 |
4,000 |
|
Inventory |
38,000 |
25,000 |
|
Equipment |
40,000 |
22,000 |
All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that Skorr will invest an additional $3,500 in cash, and Crane will invest an additional $16,000 in cash.
Instructions
(a) Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership.
(b) Journalize the additional cash investment by each partner.
(c) Prepare a classified balance sheet for the partnership on January 1, 2012.
At the end of its first year of operations on December 31, 2012, SHB Company’s accounts show the following.
|
Partner |
Drawings |
Capital |
|
Staal |
$15,000 |
$40,000 |
|
Harris |
10,000 |
25,000 |
|
Blaine |
5,000 |
15,000 |
The capital balance represents each partner’s initial capital investment. Therefore, net income or net loss for 2012 has not been closed to the partners’ capital accounts.
Instructions
(a) Journalize the entry to record the division of net income for 2012 under each of the independent assumptions shown on the next page.
(1) Net income is $50,000. Income is shared 5 : 3 : 2.
(2) Net income is $40,000. Staal and Harris are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally.
(3) Net income is $37,000. Each partner is allowed interest of 10% on beginning capital balances. Staal is given a $20,000 salary allowance. The remainder is shared equally.
(b) Prepare a schedule showing the division of net income under assumption (3) above.
(c) Prepare a partners’ capital statement for the year under assumption (3) above.
The partners in Tallis Company decide to liquidate the firm when the balance sheet shows the following.
|
TALLIS COMPANY |
|||
|
Balance Sheet |
|||
|
April 30, 2012 |
|||
|
Assets |
Liabilities and Owners’ Equity |
||
|
Cash |
$30,000 |
Notes payable |
$20,000 |
|
Accounts receivable |
25,000 |
Accounts payable |
30,000 |
|
Allowance for doubtful accounts |
(2,000) |
Salaries and wages payable |
2,500 |
|
Inventory |
35,000 |
Laszlo, capital |
28,000 |
|
Equipment |
20,000 |
Alaya, capital |
13,650 |
|
Accumulated depreciation—equipment |
(8,000) |
Octavian, capital |
5,850 |
|
Total |
$100,000 |
Total |
$100,000 |
The partners share income and loss 5 : 3 : 2. During the process of liquidation, the transactions below were completed in the following sequence.
1. A total of $57,000 was received from converting noncash assets into cash.
2. Gain or loss on relization was allocated to partners.
3. Liabilities were paid in full.
4. Cash was paid to the partners with credit balances.
Instructions
(a) Prepare a schedule of cash payments.
(b) Prepare the entries to record the transactions.
(c) Post to the cash and capital accounts.
At April 30, partners’ capital balances in ZCF Company are: Zachary $30,000. Cross $16,000, and Flane $15,000. The income sharing ratios are 5 : 3 : 2, respectively. On May 1, the ZCFC Company is formed by admitting Chantho to the firm as a partner.
Instructions
(a) Journalize the admission of Chantho under each of the following independent assumptions.
(1) Chantho purchases 50% of Flane’s ownership interest by paying Flane $6,000 in cash.
(2) Chantho purchases 50% of Cross’s ownership interest by paying Cross $10,000 in cash.
(3) Chantho invests $29,000 cash in the partnership for a 40% ownership interest that includes a bonus to the new partner.
(4) Chantho invests $24,000 in the partnership for a 20% ownership interest, and bonuses are given to the old partners.
(b) Cross’s capital balance is $24,000 after admitting Chantho to the partnership by investment. If Cross’s ownership interest is 24% of total partnership capital, what were (1) Chantho’s cash investment and (2) the total bonus to the old partners?
On December 31, the capital balances and income ratios in Noma Company are as follows.
|
Partner |
Capital Balance |
Income Ratio |
|
Morgan |
$100,000 |
60% |
|
White |
51,000 |
30 |
|
Ogden |
25,000 |
10 |
Instructions
(a) Journalize the withdrawal of Ogden under each of the following independent assumptions.
(1) Each of the remaining partners agrees to pay $15,000 in cash from personal funds to purchase Ogden’s ownership equity. Each receives 50% of Ogden’s equity.
(2) White agrees to purchase Ogden’s ownership interest for $22,000 in cash.
(3) From partnership assets, Ogden is paid $34,000, which includes a bonus to the retiring partner.
(4) Ogden is paid $19,000 from partnership assets. Bonuses to the remaining partners are recognized.
(b) If White’s capital balance after Ogden’s withdrawal is $55,000, what were (1) the total bonus to the remaining partners and (2) the cash paid by the partnership to Ogden?
Richard Powers and Jane Keckley, two professionals in the finance area, have worked for Eberhart Leasing for a number of years. Eberhart Leasing is a company that leases high tech medical equipment to hospitals. Richard and Jane have decided that, with their financial expertise, they might start their own company to provide consulting services to individuals interested in leasing equipment. One form of organization they are considering is a partnership.
If they start a partnership, each individual plans to contribute $50,000 in cash. In addition, Richard has a used IBM computer that originally cost $3,700, which he intends to invest in the partnership. The computer has a present fair value of $1,500. Although both Richard and Jane are financial wizards, they do not know a great deal about how a partnership operates. As a result, they have come to you for advice.
Instructions
With the class divided into groups, answer the following.
(a) What are the major disadvantages of starting a partnership?
(b) What type of document is needed for a partnership, and what should this document contain?
(c) Both Richard and Jane plan to work full time in the new partnership. They believe that net income or net loss should be shared equally. However, they are wondering how they can provide compensation to Richard Powers for his additional investment of the computer. What would you tell them?
(d) Richard is not sure how the computer equipment should be reported on his tax return. What would you tell him?
(e) As indicated above, Richard and Jane have worked together for a number of years. Richard’s skills complement Jane’s and vice versa. If one of them dies, it will be very difficult for the other to maintain the business, not to mention the difficulty of paying the deceased partner’s estate for his or her partnership interest. What would you advise them to do?
Elizabeth and Laurie operate a beauty salon as partners who share profits and losses equally. The success of their business has exceeded their expectations; the salon is operating quite profitably. Laurie is anxious to maximize profits and schedules appointments from 8 a.m. to 6 p.m. daily, even sacrificing some lunch hours to accommodate regular customers. Elizabeth schedules her appointments from cash than Laurie does, but, she says, “Laurie, you needn’t worry, I never make a withdrawal without you knowing about it, so it is properly recorded in my drawing account and charged against my capital at the end of the year.” Elizabeth’s withdrawals to date are double Laurie’s.
Instructions
(a) Who are the stakeholders in this situation?
(b) Identify the problems with Elizabeth’s actions and discuss the ethical considerations of her actions.
(c) How might the partnership agreement be revised to accommodate the differences in Elizabeth’s and Laurie’s work and withdrawal habits?
As the text in this chapter indicates, the partnership form of organization has advantages and disadvantages. The chapter noted that different types of partnerships have been developed to minimize some of these disadvantages. Alternatively, an individual or company can choose the proprietorship or corporate form of organization.
Instructions
Go to two local businesses that are different, such as a restaurant, a retailer, a construction company, or a professional office (dentist, doctor, etc.), and find the answers to the following questions.
(a) What form of organization do you use in your business?
(b) What do you believe are the two major advantages of this form of organization for your business?
(c) What do you believe are the two major disadvantages of this form of organization for your business?
(d) Do you believe that eventually you may choose another form of organization?
(e) Did you have someone help you form this organization (attorney, accountant, relative, etc.)?
The Rolman Corporation is authorized to issue 1,000,000 shares of $5 par value common stock. In its first year, the company has the following stock transactions.
|
Jan. |
10 |
Issued 400,000 shares of stock at $8 per share. |
|
July |
1 |
Issued 100,000 shares of stock for land. The land had an asking price of $900,000. The |
|
stock is currently selling on a national exchange at $8.25 per share. |
||
|
Sept. |
1 |
Purchased 10,000 shares of common stock for the treasury at $9 per share. |
|
Dec. |
1 |
Sold 4,000 shares of the treasury stock at $10 per share. |
Instructions
(a) Journalize the transactions.
(b) Prepare the stockholders’ equity section assuming the company had retained earnings of $200,000 at December 31.
Angela has prepared the following list of statements about corporations.
1. A corporation is an entity separate and distinct from its owners.
2. As a legal entity, a corporation has most of the rights and privileges of a person.
3. Most of the largest U.S. corporations are privately held corporations.
4. Corporations may buy, own, and sell property; borrow money; enter into legally binding contracts; and sue and be sued.
5. The net income of a corporation is not taxed as a separate entity.
6. Creditors have a legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts.
7. The transfer of stock from one owner to another requires the approval of either the corporation or other stockholders.
8. The board of directors of a corporation legally owns the corporation.
9. The chief accounting officer of a corporation is the controller.
10. Corporations are subject to less state and federal regulations than partnerships or proprietorships.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Angela (see E13 1) has studied the information you gave her in that exercise and has come to you with more statements about corporations.
1. Corporation management is both an advantage and a disadvantage of a corporation compared to a proprietorship or a partnership.
2. Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.
3. When a corporation is formed, organization costs are recorded as an asset.
4. Each share of common stock gives the stockholder the ownership rights to vote at stockholder meetings, share in corporate earnings, keep the same percentage ownership when new shares of stock are issued, and share in assets upon liquidation.
5. The number of issued shares is always greater than or equal to the number of authorized shares.
6. A journal entry is required for the authorization of capital stock.
7. Publicly held corporations usually issue stock directly to investors.
8. The trading of capital stock on a securities exchange involves the transfer of already issued shares from an existing stockholder to another investor.
9. The market value of common stock is usually the same as its par value.
10. Retained earnings is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
As an auditor for the CPA firm of Valente and Ardvino, you encounter the following situations in auditing different clients.
1. PM Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $20 par value common stock. The owners’ asking price for the land was $120,000, and the fair value of the land was $115,000.
2. Paul Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 20,000 shares of its $10 par value stock. At the time of the exchange, the land was advertised for sale at $250,000. The stock was selling at $12 per share.
Instructions
Prepare the journal entries for each of the situations above.
On January 1, 2012, the stockholders’ equity section of Joshua Corporation shows: Common stock ($5 par value) $1,500,000; paid in capital in excess of par $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred.
|
Mar. 1 |
Purchased 50,000 shares for cash at $15 per share. |
|
July 1 |
Sold 10,000 treasury shares for cash at $17 per share. |
|
Sept. 1 |
Sold 8,000 treasury shares for cash at $14 per share. |
Instructions
(a) Journalize the treasury stock transactions.
(b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.
Carolyn Corporation recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review his textbooks on the topic of corporation accounting. During the first month, the accountant made the following entries for the corporation’s capital stock.
|
May |
2 |
Cash |
130,000 |
|
|
Capital Stock |
130,000 |
|||
|
(Issued 10,000 shares of $10 par value |
||||
|
common stock at $13 per share) |
||||
|
10 |
Cash |
600,000 |
||
|
Capital Stock |
600,000 |
|||
|
(Issued 10,000 shares of $50 par value |
||||
|
preferred stock at $60 per share) |
||||
|
15 |
Capital Stock 15,000 |
15,000 |
||
|
Cash 15,000 |
15,000 |
|||
|
(Purchased 1,000 shares of common stock |
||||
|
for the treasury at $15 per share) |
||||
|
31 |
Cash |
8,000 |
||
|
Capital Stock |
5,000 |
|||
|
Gain on Sale of Stock |
3,000 |
|||
|
(Sold 500 shares of treasury stock at $16 |
||||
|
per share) |
Instructions
On the basis of the explanation for each entry, prepare the entry that should have been made for the capital stock transactions.
The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Borkowski Corporation at December 31, 2012.
|
Common Stock ($5 stated value) |
$1,700,000 |
|
Paid in Capital in Excess of Par—Preferred Stock |
280,000 |
|
Paid in Capital in Excess of Stated Value—Common Stock |
900,000 |
|
Preferred Stock (8%, $100 par, noncumulative) |
500,000 |
|
Retained Earnings |
1,134,000 |
|
Treasury Stock (10,000 common shares) |
120,000 |
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2012.
The stockholders’ equity section of Erik Corporation at December 31 is as follows.
|
ERIK CORPORATION |
|
|
Balance Sheet (partial) |
|
|
Paid in capital |
|
|
Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued |
|
|
and outstanding |
$ 300,000 |
|
Common stock, no par, 750,000 shares authorized, 600,000 shares issued |
1,200,000 |
|
Total paid in capital |
1,500,000 |
|
Retained earnings |
1,858,000 |
|
Total paid in capital and retained earnings |
3,358,000 |
|
Less: Treasury stock (10,000 common shares) |
(64,000) |
|
Total stockholders’ equity |
$3,294,000 |
Instructions
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
In a recent year, the stockholders’ equity section of Aluminum Company of America (Alcoa) showed the following (in alphabetical order): additional paid in capital $6,101, common stock $925, preferred stock $55, retained earnings $7,428, and treasury stock 2,828. All dollar data are in millions.
The preferred stock has 557,740 shares authorized, with a par value of $100 and an annual $3.75 per share cumulative dividend preference. At December 31, 557,649 shares of preferred are issued and 546,024 shares are outstanding. There are 1.8 billion shares of $1 par value common stock authorized, of which 924.6 million are issued and 844.8 million are outstanding at December 31.
Instructions
Prepare the stockholders’ equity section, including disclosure of all relevant data.
Obtain the annual reports of 10 companies, 2 from each of 5 different industries. Most companies’ financial statements can be downloaded from their Web sites.
1. Compute each company’s gross profit percentage and rate of inventory turnover for the most recent 2 years. If annual reports are unavailable or do not provide enough data for multiple year computations, you can gather financial statement data from Moody’s Industrial Manual.
2. For the industries of the companies you are analyzing, obtain the industry averages for gross profit percentage and inventory turnover from Robert Morris Associates, Annual Statement Studies; Dun and Bradstreet, Industry Norms and Key Business Ratios; or Leo Troy, Almanac of Business and Industrial Financial Ratios.
3. How well does each of your companies compare to the other company in its industry? How well do your companies compare to the average for their industry? What insight about your companies can you glean from these ratios?
4. Write a memo to summarize your findings, stating whether your group would invest in each of the companies it has analyzed.
On January 1, 2012, the ledger of Montoya Company contains the following liability accounts.
|
Accounts Payable |
$52,000 |
|
Sales Taxes Payable |
7,700 |
|
Unearned Service Revenue |
16,000 |
During January, the following selected transactions occurred.
|
Jan. |
5 |
Sold merchandise for cash totaling $22,680, which includes 8% sales taxes. |
|
12 |
Provided services for customers who had made advance payments of $10,000. (Credit |
|
|
Service Revenue.) |
||
|
14 |
Paid state revenue department for sales taxes collected in December 2011 ($7,700). |
|
|
20 |
Sold 800 units of a new product on credit at $50 per unit, plus 8% sales tax. This new |
|
|
product is subject to a 1 year warranty. |
||
|
21 |
Borrowed $18,000 from DeKalb Bank on a 3 month, 8%, $18,000 note. |
|
|
25 |
Sold merchandise for cash totaling $12,420, which includes 8% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2) estimated warranty liability, assuming warranty costs are expected to equal 7% of sales of the new product. (Hint: Use one third of a month for the DeKalb Bank note.)
(c) Prepare the current liabilities section of the balance sheet at January 31, 2012. Assume no change in accounts payable.
Hira Hardware has four employees who are paid on an hourly basis plus time and a half for all hours worked in excess of 40 a week. Payroll data for the week ended March 15, 2012, are presented below.
|
Federal |
||||
|
Hours |
Hourly |
Income Tax |
United |
|
|
Employee |
Worked |
Rate |
Withholdings |
Fund |
|
Joe Hana |
40 |
$15.00 |
$? |
$5.00 |
|
Mary Alina |
42 |
15.00 |
? |
5.00 |
|
Andy Silva |
44 |
13.00 |
60 |
8.00 |
|
Kim Gomez |
46 |
13.00 |
61 |
5.00 |
Hana and Alina are married. They claim 0 and 4 withholding allowances, respectively. The following tax rates are applicable: FICA 8%, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%.
Instructions
(a) Prepare a payroll register for the weekly payroll. (Use the wage bracket withholding table in the text for federal income tax withholdings.)
(b) Journalize the payroll on March 15, 2012, and the accrual of employer payroll taxes.
(c) Journalize the payment of the payroll on March 16, 2012.
(d) Journalize the deposit in a Federal Reserve bank on March 31, 2012, of the FICA and federal income taxes payable to the government.
The following payroll liability accounts are included in the ledger of Wimble Company on January 1, 2012.
|
FICA Taxes Payable |
$ 760.00 |
|
Federal Income Taxes Payable |
1,204.60 |
|
State Income Taxes Payable |
108.95 |
|
Federal Unemployment Taxes Payable |
288.95 |
|
State Unemployment Taxes Payable |
1,954.40 |
|
Union Dues Payable |
870.00 |
|
U.S. Savings Bonds Payable |
360.00 |
In January, the following transactions occurred.
|
Jan. |
10 |
Sent check for $870.00 to union treasurer for union dues. |
|
12 |
Remitted check for $1,964.60 to the Federal Reserve bank for FICA taxes and federal |
|
|
income taxes withheld. |
||
|
15 |
Purchased U.S. Savings Bonds for employees by writing check for $360.00. |
|
|
17 |
Paid state income taxes withheld from employees. |
|
|
20 |
Paid federal and state unemployment taxes. |
|
|
31 |
Completed monthly payroll register, which shows office salaries $26,600, store wages |
|
|
$28,400, FICA taxes withheld $4,400, federal income taxes payable $2,158, state income |
||
|
taxes payable $454, union dues payable $400, United Fund contributions payable $1,888, |
||
|
and net pay $45,700. |
||
|
31 |
Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accrued adjustments pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 8%, federal unemployment taxes 0.8%, and state unemployment taxes 5.4%.
* 2. Vacation pay: 6% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjustments pertaining to employee compensation at January 31.
For the year ended December 31, 2012, Telmarine Electrical Repair Company reports the following summary payroll data.
|
Gross earnings: |
|
|
Administrative salaries |
$200,000 |
|
Electricians’ wages |
370,000 |
|
Total |
$570,000 |
|
Deductions: |
|
|
FICA taxes |
$ 38,800 |
|
Federal income taxes withheld |
174,400 |
|
State income taxes withheld (3%) |
17,100 |
|
United Fund contributions payable |
27,500 |
|
Health insurance premiums |
17,200 |
|
Total |
$275,000 |
Telmarine Company’s payroll taxes are: FICA 8%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to FICA taxes total $485,000, and gross earnings subject to unemployment taxes total $135,000.
Instructions
(a) Prepare a summary journal entry at December 31 for the full year’s payroll.
(b) Journalize the adjusting entry at December 31 to record the employer’s payroll taxes.
(c) The W 2 Wage and Tax Statement requires the following dollar data.
|
Wages, Tips, |
Federal Income |
State Income |
FICA |
FICA Tax |
|
Other Compensation |
Tax Withheld |
Tax Withheld |
Wages |
Withheld |
On January 1, 2012, the ledger of Tyrus Company contains the following liability accounts.
|
Accounts Payable |
$30,000 |
|
Sales Taxes Payable |
5,000 |
|
Unearned Service Revenue |
12,000 |
During January, the following selected transactions occurred.
|
Jan. |
1 |
Borrowed $20,000 in cash from Platteville Bank on a 4 month, 6%, $20,000 note. |
|
5 |
Sold merchandise for cash totaling $9,752, which includes 6% sales taxes. |
|
|
12 |
Provided services for customers who had made advance payments of $8,000. (Credit |
|
|
Service Revenue.) |
||
|
14 |
Paid state treasurer’s department for sales taxes collected in December 2011, $5,000. |
|
|
20 |
Sold 900 units of a new product on credit at $44 per unit, plus 6% sales tax. This new |
|
|
product is subject to a 1 year warranty. |
||
|
25 |
Sold merchandise for cash totaling $16,536, which includes 6% sales taxes. |
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2) estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the new product.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2012. Assume no change in accounts payable.
The following are selected transactions of Karolina Company. Karolina prepares financial statements quarterly.
|
Jan. |
2 |
Purchased merchandise on account from Pavel Company, $20,000, terms 2/10, n/30. |
|
(Karolina uses the perpetual inventory system.) |
||
|
Feb. |
1 |
Issued a 12%, 2 month, $20,000 note to Pavel in payment of account. |
|
Mar. |
31 |
Accrued interest for 2 months on Pavel note. |
|
Apr. |
1 |
Paid face value and interest on Pavel note. |
|
July |
1 |
Purchased equipment from Filipensky Equipment paying $12,000 in cash and signing |
|
a 10%, 3 month, $25,000 note. |
||
|
Sept. |
30 |
Accrued interest for 3 months on Filipensky note. |
|
Oct. |
1 |
Paid face value and interest on Filipensky note. |
|
Dec. |
1 |
Borrowed $15,000 from the Federated Bank by issuing a 3 month, 12% note with a |
|
face value of $15,000. |
||
|
Dec. |
31 |
Recognized interest expense for 1 month on Federated Bank note. |
Instructions
(a) Prepare journal entries for the above transactions and events.
(b) Post to the accounts, Notes Payable, Interest Payable, and Interest Expense.
(c) Show the balance sheet presentation of notes and interest payable at December 31.
(d) What is total interest expense for the year?
The following payroll liability accounts are included in the ledger of Patteri Company on January 1, 2012.
|
FICA Taxes Payable |
$ 540 |
|
Federal Income Taxes Payable |
1,100 |
|
State Income Taxes Payable |
210 |
|
Federal Unemployment Taxes Payable |
54 |
|
State Unemployment Taxes Payable |
365 |
|
Union Dues Payable |
200 |
|
U.S. Savings Bonds Payable |
300 |
In January, the following transactions occurred.
|
Jan. |
10 |
Sent check for $200 to union treasurer for union dues. |
|
12 |
Remitted check for $1,640 to the Federal Reserve bank for FICA taxes and federal |
|
|
income taxes withheld. |
||
|
15 |
Purchased U.S. Savings Bonds for employees by writing check for $300. |
|
|
17 |
Paid state income taxes withheld from employees. |
|
|
20 |
Paid federal and state unemployment taxes. |
|
|
31 |
Completed monthly payroll register, which shows office salaries $17,400, store wages |
|
|
$22,500, FICA taxes withheld $3,192, federal income taxes payable $2,540, state income |
||
|
taxes payable $500, union dues payable $300, United Fund contributions payable |
||
|
$1,300, and net pay $32,068. |
||
|
31 |
Prepared payroll checks for the net pay and distributed checks to employees. |
At January 31, the company also makes the following accruals pertaining to employee compensation.
1. Employer payroll taxes: FICA taxes 8%, state unemployment taxes 5.4%, and federal unemployment taxes 0.8%.
2. Vacation pay: 5% of gross earnings.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjustments pertaining to employee compensation at January 31.
For the year ended December 31, 2012, Radar Company reports the following summary payroll data.
|
Gross earnings: |
Deductions: |
||
|
Administrative salaries |
$150,000 |
FICA taxes |
$ 29,600 |
|
Electricians’ wages |
240,000 |
Federal income taxes withheld |
78,000 |
|
Total |
$390,000 |
State income taxes withheld (3%) |
11,700 |
|
United Fund contributions payable |
17,000 |
||
|
Health insurance premiums |
12,000 |
||
|
Total |
$148,300 |
Radar Company’s payroll taxes are: FICA 8%, state unemployment 2.5% (due to a stable employment record), and 0.8% federal unemployment. Gross earnings subject to FICA taxes total $370,000, and gross earnings subject to unemployment taxes total $90,000.
Instructions
(a) Prepare a summary journal entry at December 31 for the full year’s payroll.
(b) Journalize the adjusting entry at December 31 to record the employer’s payroll taxes.
(c) The W 2 Wage and Tax Statement requires the dollar data shown below.
|
Wages, Tips, |
Federal Income |
State Income |
FICA |
FICA Tax |
|
Other Compensation |
Tax Withheld |
Tax Withheld |
Wages |
Withheld |
Complete the required data for the following employees.
Wright Company’s balance sheet at December 31, 2011, is presented below.
|
WRIGHT COMPANY |
|||
|
Balance Sheet |
|||
|
December 31, 2011 |
|||
|
Cash |
$ 30,000 |
Accounts Payable |
$ 13,750 |
|
Inventory |
30,750 |
Interest Payable |
250 |
|
Prepaid Insurance |
6,000 |
Notes Payable |
50,000 |
|
Equipment |
38,000 |
Owner’s Capital |
40,750 |
|
$104,750 |
$104,750 |
During January 2012, the following transactions occurred. (Wright Company uses the perpetual inventory system.)
1. Wright paid $250 interest on the note payable on January 1, 2012. The note is due December 31, 2013.
2. Wright purchased $241,100 of inventory on account.
3. Wright sold for $480,000 cash, inventory which cost $265,000. Wright also collected $28,800 in sales taxes.
4. Wright paid $230,000 in accounts payable.
5. Wright paid $17,000 in sales taxes to the state.
6. Paid other operating expenses of $20,000.
7. On January 31, 2012, the payroll for the month consists of salaries and wages of $60,000. All salaries and wages are subject to 8% FICA taxes. A total of $8,900 federal income taxes are withheld. The salaries and wages are paid on February 1.
Adjustment data:
8. Interest expense of $250 has been incurred on the notes payable.
9. The insurance for the year 2012 was prepaid on December 31, 2011.
10. The equipment was acquired on December 31, 2011, and will be depreciated on a straight line basis over 5 years with a $2,000 salvage value.
11. Employer’s payroll taxes include 8% FICA taxes, a 5.4% state unemployment tax, and an 0.8% federal unemployment tax.
Instructions
(You may need to set up T accounts to determine ending balances.)
(a) Prepare journal entries for the transactions listed above and the adjusting entries.
(b) Prepare an adjusted trial balance at January 31, 2012.
(c) Prepare an income statement, an owner’s equity statement for the month ending January 31,2012, and a classified balance sheet as of January 31, 2012.
Kensingtown Processing Company provides word processing services for business clients and students in a university community. The work for business clients is fairly steady throughout the year. The work for students peaks significantly in December and May as a result of term papers, research project reports, and dissertations.
Two years ago, the company attempted to meet the peak demand by hiring part time help. This led to numerous errors and much customer dissatisfaction. A year ago, the company hired four experienced employees on a permanent basis in place of part time help. This proved to be much better in terms of productivity and customer satisfaction. But, it has caused an increase in annual payroll costs and a significant decline in annual net income.
Recently, Valarie Flynn, a sales representative of Metcalfe Services Inc., has made a proposal to the company. Under her plan, Metcalfe will provide up to four experienced workers at a daily rate of $75 per person for an 8 hour workday. Metcalfe workers are not available on an hourly basis. Kensingtown would have to pay only the daily rate for the workers used.
The owner of Kensingtown Processing, Donna Bell, asks you, as the company’s accountant, to prepare a report on the expenses that are pertinent to the decision. If the Metcalfe plan is adopted, Donna will terminate the employment of two permanent employees and will keep two permanent employees.
At the moment, each employee earns an annual income of $21,000. Kensingtown pays 8% FICA taxes, 0.8% federal unemployment taxes, and 5.4% state unemployment taxes. The unemployment taxes apply to only the first $7,000 of gross earnings. In addition, Kensingtown pays $40 per month for each employee for medical and dental insurance. Donna indicates that if the Metcalfe Services plan is accepted, her needs for temporary workers will be as follows.
|
Number |
Working |
|
|
Months |
of Employees |
Days per Month |
|
January–March |
2 |
20 |
|
April–May |
3 |
25 |
|
June–October |
2 |
18 |
|
November–December |
3 |
23 |
Instructions
With the class divided into groups, answer the following.
(a) Prepare a report showing the comparative payroll expense of continuing to employ permanent workers compared to adopting the Metcalfe Services Inc. plan.
(b) What other factors should Donna consider before finalizing her decision?
Daniel Longan owns and manages Daniel’s Restaurant, a 24 hour restaurant near the city’s medical complex. Daniel employs 9 full time employees and 16 part time employees. He pays all of the full time employees by check, the amounts of which are determined by Daniel’s public accountant, Gina Watt. Daniel pays all of his part time employees in currency. He computes their wages and withdraws the cash directly from his cash register.
Gina has repeatedly urged Daniel to pay all employees by check. But as Daniel has told his competitor and friend, Steve Hill, who owns the Greasy Diner, “My part time employees prefer the currency over a check. Also, I don’t withhold or pay any taxes or worker’s compensation insurance on those cash wages because they go totally unrecorded and unnoticed.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the legal and ethical considerations regarding Daniel’s handling of his payroll?
(c) Gina Watt is aware of Daniel’s payment of the part time payroll in currency. What are her ethical responsibilities in this case?
(d) What internal control principle is violated in this payroll process?
As indicated in the All About You feature medical costs are substantial and rising. But will they be the most substantial expense over your lifetime? Not likely. Will it be housing or food? Again, not likely. The answer is taxes. On average, Americans work 99 days to afford their taxes. Companies, too, have large tax burdens. They look very hard at tax issues in deciding where to build their plants and where to locate their administrative headquarters.
Instructions
(a) Determine what your state income taxes are if your taxable income is $60,000 and you file as a single taxpayer in the state in which you live.
(b) Assume that you own a home worth $200,000 in your community and the tax rate is 2.1%. Compute the property taxes you would pay.
(c) Assume that the total gasoline bill for your automobile is $1,200 a year (300 gallons at $4 per gallon). What are the amounts of state and federal taxes that you pay on the $1,200?
(d) Assume that your purchases for the year total $9,000. Of this amount, $5,000 was for food and prescription drugs. What is the amount of sales tax you would pay on these purchases? (Many states do not levy a sales tax on food or prescription drugs. Does yours?)
(e) Determine what your Social Security taxes are if your income is $60,000.
(f) Determine what your federal income taxes are if your taxable income is $60,000 and you file as a single taxpayer.
(g) Determine your total taxes paid based on the above calculations, and determine the percentage of income that you would pay in taxes based on the following formula: Total taxes paid 4 Total income.
The partners of Grafton Company have decided to liquidate their business. Noncash assets were sold for $115,000. The income ratios of the partners Kale D., Croix D., and Marais K. are 2:3:3, respectively. Complete the following schedule of cash payments for Grafton Company.
|
Noncash |
Kale D., |
Croix D., |
Marais K., |
|||
|
Item |
Cash |
+ Assets |
= Liabilities |
+ Capital |
+ Capital |
+ Capital |
|
Balances before liquidation |
10,000 |
85,000 |
40,000 |
15,000 |
35,000 |
5,000 |
|
Sale of noncash assets |
||||||
|
and allocation of gain |
||||||
|
New balances |
||||||
|
Pay liabilities |
||||||
|
New balances |
||||||
|
Cash distribution to |
||||||
|
partners |
||||||
|
Final balances |
Kessington Company wishes to liquidate the firm by distributing the company’s cash to the three partners. Prior to the distribution of cash, the company’s balances are: Cash $45,000; Rollings, Capital (Cr.) $28,000; Havens, Capital (Dr.) $12,000; and Ostergard, Capital (Cr.) $29,000. The income ratios of the three partners are 4:4:2, respectively. Prepare the entry to record the absorption of Havens’ capital deficiency by the other partners and the distribution of cash to the partners with credit balances.
The partners of CS Company have decided to liquidate their business. Noncash assets were sold for $125,000. The income ratios of the partners Arabella, Duffl epud, and Davies are 3 : 2 : 3, respectively. Complete the following schedule of cash payments for CS Company
|
Noncash |
Kale D., |
Croix D., |
Marais K., |
|||
|
Item |
Cash |
+ Assets |
= Liabilities |
+ Capital |
+ Capital |
+ Capital |
|
Balances before liquidation |
15,000 |
90,000 |
40,000 |
15,000 |
35,000 |
5,000 |
|
Sale of noncash assets |
||||||
|
and allocation of gain |
||||||
|
New balances |
||||||
|
Pay liabilities |
||||||
|
New balances |
||||||
|
Cash distribution to |
||||||
|
partners |
||||||
|
Final balances |
Rhince and Rynelf decide to merge their proprietorships into a partnership called Dawn Treader Company. The balance sheet of Rynelf Co. shows:
|
Accounts receivable |
$16,000 |
|
|
Less: Allowance for doubtful accounts |
1,200 |
$14,800 |
|
Equipment |
20,000 |
|
|
Less: Accumulated depreciation—equip. |
7,000 |
13,000 |
The partners agree that the net realizable value of the receivables is $13,500 and that the fair value of the equipment is $11,000. Indicate how the accounts should appear in the opening balance sheet of the partnership.
David Tennant has prepared the following list of statements about partnerships.
1. A partnership is an association of three or more persons to carry on as co owners of a business for profit.
2. The legal requirements for forming a partnership can be quite burdensome.
3. A partnership is not an entity for financial reporting purposes.
4. The net income of a partnership is taxed as a separate entity.
5. The act of any partner is binding on all other partners, even when partners perform business acts beyond the scope of their authority.
6. Each partner is personally and individually liable for all partnership liabilities.
7. When a partnership is dissolved, the assets legally revert to the original contributor.
8. In a limited partnership, one or more partners have unlimited liability and one or more partners have limited liability for the debts of the firm.
9. Mutual agency is a major advantage of the partnership form of business.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Aikman (beginning capital, $60,000) and Rory (beginning capital $90,000) are partners. During 2012, the partnership earned net income of $70,000, and Aikman made drawings of $18,000 while Rory made drawings of $24,000.
Instructions
(a) Assume the partnership income sharing agreement calls for income to be divided 45% to Aikman and 55% to Rory. Prepare the journal entry to record the allocation of net income.
(b) Assume the partnership income sharing agreement calls for income to be divided with a salary of $30,000 to Aikman and $25,000 to Rory, with the remainder divided 45% to Aikman and 55% to Rory. Prepare the journal entry to record the allocation of net income.
(c) Assume the partnership income sharing agreement calls for income to be divided with a salary of $40,000 to Aikman and $35,000 to Rory, interest of 10% on beginning capital, and the remainder divided 50%–50%. Prepare the journal entry to record the allocation of net income.
(d) Compute the partners’ ending capital balances under the assumption in part (c).
The post closing trial balances of two proprietorships on January 1, 2012, are presented below.
|
Williams Compan0079 |
Jones Company |
|||
|
Dr. |
Cr. |
Dr. |
Cr. |
|
|
Cash |
$ 14,000 |
$12,000 |
||
|
Accounts receivable |
17,500 |
26,000 |
||
|
Allowance for doubtful accounts |
$ 3,000 |
$ 4,400 |
||
|
Inventory |
26,500 |
18,400 |
||
|
Equipment |
45,000 |
29,000 |
||
|
Accumulated depreciation—equipment |
24,000 |
11,000 |
||
|
Notes payable |
18,000 |
15,000 |
||
|
Accounts payable |
22,000 |
31,000 |
||
|
Williams, capital |
36,000 |
|||
|
Jones, capital |
24,000 |
|||
|
$103,000 |
$103,000 |
$85,400 |
$85,400 |
|
Williams and Jones decide to form a partnership, Wijo Company, with the following agreed upon valuations for noncash assets.
|
Williams Company |
Jones Company |
|
|
Accounts receivable |
$17,500 |
$26,000 |
|
Allowance for doubtful accounts |
4,500 |
4,000 |
|
Inventory |
28,000 |
20,000 |
|
Equipment |
23,000 |
16,000 |
All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietorships. Further, it is agreed that Williams will invest an additional $5,000 in cash, and Jones will invest an additional $19,000 in cash.
Instructions
(a) Prepare separate journal entries to record the transfer of each proprietorship’s assets and liabilities to the partnership.
(b) Journalize the additional cash investment by each partner.
(c) Prepare a classified balance sheet for the partnership on January 1, 2012.
At the end of its first year of operations on December 31, 2012, LAD Company’s accounts show the following.
|
Partner |
Drawings |
Capital |
|
Rory Lachelle |
$23,000 |
$48,000 |
|
Andy Andoh |
14,000 |
30,000 |
|
Francine Dalek |
10,000 |
25,000 |
The capital balance represents each partner’s initial capital investment. Therefore, net income or net loss for 2012 has not been closed to the partners’ capital accounts.
Instructions
(a) Journalize the entry to record the division of net income for the year 2012 under each of the following independent assumptions.
(1) Net income is $30,000. Income is shared 6 : 3 : 1.
(2) Net income is $37,000. Lachelle and Andoh are given salary allowances of $15,000 and $10,000, respectively. The remainder is shared equally.
(3) Net income is $19,000. Each partner is allowed interest of 10% on beginning capital balances. Lachelle is given a $12,000 salary allowance. The remainder is shared equally.
(b) Prepare a schedule showing the division of net income under assumption (3) above.
(c) Prepare a partners’ capital statement for the year under assumption (3) above.
Suppose a Best Buy store in Orlando, Florida, ended May 20X6 with 800,000 units of merchandise that cost an average of $7 each. Suppose the store then sold 600,000 units for $5.0 million during June. Further, assume the store made 2 large purchases during June as follows:
|
June 6 |
100,000 units @ $6 |
= |
$ 600,000 |
|
21 |
400,000 units @ $5 |
= |
2,000,000 |
1. At June 30, the store manager needs to know the store’s gross profit under both FIFO and LIFO. Supply this information.
2. What caused the FIFO and LIFO gross profit figures to differ? (Challenge).
Deitrick Guitar Company is nearing the end of its worst year ever. With 3 weeks until year end, it appears that net income for the year will have decreased by 20% from last year. Jim Deitrick, the president and principal stockholder, is distressed with the year’s results. Deitrick asks you, the financial vice president, to come up with a way to increase the business’s net income. Inventory quantities are a little higher than normal because sales have been slow during the last few months. Deitrick uses the LIFO inventory method, and inventory costs have risen dramatically during the latter part of the year.
Required
Write a memorandum to Jim Deitrick to explain how the company can increase its net income for the year. Explain your reasoning in detail. Deitrick is a man of integrity, so your plan must be completely ethical.
This exercise tests your understanding of the various inventory methods. In the space provided, write the name of the inventory method that best fits the description. Assume that the cost of inventory is rising.
1. Generally associated with saving income taxes.
2. Results in a cost of ending inventory that is close to the current cost of replacing the inventory.
3. Used to account for automobiles, jewelry, and art objects.
4. Provides a middle ground measure of ending inventory and cost of goods sold.
5. Maximizes reported income.
6. Matches the most current cost of goods sold against sales revenue.
7. Results in an old measure of the cost of ending inventory.
8. Writes inventory down when replacement cost drops below historical cost.
9. Enables a company to buy high cost inventory at year end and thereby decrease reported income and income tax.
10. Enables a company to keep reported income from dropping lower by liquidating older layers of inventory.
Supply the missing income statement amounts for each of the following companies (amounts adapted, in millions or billions):
|
Company |
Net Sales |
Beginning Inventory |
Purchases |
Ending Inventory |
Cost of Goods Sold |
Gross Profit |
|
Krispy Kreme |
$543 |
$29 |
$470 |
$24 |
(a) |
(b) |
|
Hewlitt Packard |
74 |
7 |
(c) |
8 |
(d) |
19 |
|
PepsiCo |
(e) |
(f) |
16 |
2 |
16 |
19 |
|
Best Buy |
31 |
2 |
24 |
(g) |
23 |
(h) |
Prepare the income statement for Krispy Kreme Doughnuts, Inc., in millions of dollar for the year ended January 31, 2006. Use the cost of goods sold model to compute cost of goods sold. Krispy Kreme’s operating and other expenses, as adapted, for the year were $2,040. Ignore income tax.
Turner & Taft, a partnership, had these inventory data:
|
Ending inventory at: |
20X3 |
20X4 |
|
FIFO cost |
$18,000 |
$ 20,000 |
|
LIFO cost |
14,000 |
18,000 |
|
Cost of goods sold at: |
||
|
FIFO cost |
$ 85,500 |
|
|
LIFO cost |
92,800 |
|
|
Sales revenue |
138,000 |
Turner & Taft need to know the company’s gross profit percentage and rate of inventory turnover for 20X4 under
1. FIFO 2. LIFO
Which method makes the business look better on
3. Gross profit percentage? 4. Inventory turnover?
For each of the following situations, identify the inventory method that you would use or, given the use of a particular method, state the strategy that you would follow to accomplish your goal:
a. Inventory costs are increasing. Your company uses LIFO and is having an unexpectedly good year. It is near year end, and you need to keep net income from increasing too much in order to save on income tax.
b. Suppliers of your inventory are threatening a labor strike, and it may be difficult for your company to obtain inventory. This situation could increase your income taxes.
c. Company management, like that of IBM and Pier 1 Imports, prefers a middle of the road inventory policy that avoids extremes.
d. Inventory costs are decreasing, and your company’s board of directors wants to minimize income taxes.
e. Inventory costs are increasing, and the company prefers to report high income.
f. Inventory costs have been stable for several years, and you expect costs to remain stable for the indefinite future. (Give the reason for your choice of method.)
Suppose Saks Fifth Avenue, the specialty retailer, had these records for ladies’ evening gowns during 20X9.
|
Beginning inventory (40 @ $1,000) |
$ 40,000 |
|
Purchase in February (20 @ $1,100) |
22,000 |
|
Purchase in June (50 @ $1,200) |
60,000 |
|
Purchase in December (30 @ $1,300) |
39,000 |
|
Goods available |
$161,000 |
Assume sales of evening gowns totaled 120 units during 20X9 and that Saks uses the LIFO method to account for inventory. The income tax rate is 40%.
Required
1. Compute Sak’s cost of goods sold for evening gowns in 20X9.
2. Compute what cost of goods sold would have been if Saks had purchased enough inventory in December—at $1,300 per evening gown—to keep year end inventory at the same level it was at the beginning of the year, 40 units. (Challenge).
Riverside Software began January with $3,500 of merchandise inventory. During January, Riverside made the following entries for its inventory transactions:
|
Inventory |
6,000 |
|
|
Accounts Payable |
6,000 |
|
|
Accounts Receivable |
7,200 |
|
|
Sales Revenue |
7,200 |
|
|
Cost of Goods Sold |
5,500 |
|
|
Inventory |
5,500 |
How much was Riverside’s inventory at the end of January?
a. Zero
b. $4,000
c. $4,500
d. $5,000
Tulsa, Inc., reported the following data:
|
Freight in |
$ 20,000 |
Sales returns |
$ 10,000 |
|
Purchases |
205,000 |
Purchase returns |
6,000 |
|
Beginning inventory |
50,000 |
Sales revenue |
490,000 |
|
Purchase discounts |
4,000 |
Ending inventory |
40,000 |
Tulsa’s gross profit percentage is
a. 47.9%.
b. 52.1%.
c. 53.1%.
d. 54.0%.
Westside Copiers has recently been plagued with lackluster sales. The rate of inventory turnover has dropped, and some of the company’s merchandise is gathering dust. At the same time, competition has forced some of Westside’s suppliers to lower the prices that Westside will pay when it replaces its inventory. It is now December 31, 20X7. The current replacement cost of Westside’s ending inventory is $6,800,000, which is far less than Westside paid for the goods, $8,900,000. Before any adjustments at the end of the period, Westside’s Cost of Goods Sold account has a balance of $36,400,000. What accounting action should Westside Copiers take in this situation? Give any journal entry required. At what amount should Westside report Inventory on the balance sheet? At what amount should Westside report Cost of Goods Sold on the income statement? Discuss the accounting principle or concept that is most relevant to this situation.
The notes are part of the financial statements. They give details that would clutter the statements. This case will help you learn to use a company’s inventory notes. Refer to YUM! Brands’ statements and related notes in Appendix A at the end of the book and answer the following questions:
1. How much was YUM’s merchandise inventory at December 30, 2006? At December 30,
2005?
2. How does YUM value its inventories? Which cost method does the company use?
3. How much were Yum’s purchases of food and paper inventory during the year ended December 30, 2006?
4. Did YUM’s gross profit percentage on company sales improve or deteriorate in 2006 compared to 2005?
5. Would you rate YUM’s rate of inventory turnover as fast or slow in comparison to most other companies? Explain your answer.
Pier 1 Imports financial statements in Appendix B at the end of this book. Show amounts in millions and round to the nearest $1 million.
1. Three important pieces of inventory information are (a) the cost of inventory on hand, (b) the cost of goods sold, and (c) the cost of inventory purchases. Identify or compute each of these items for Pier 1 at the end of 2006.
2. Which item in requirement 1 is most directly related to cash flow? Why? (Challenge)
3. Assume that all inventory purchases were made on account, and that only inventory purchases increased Accounts Payable. Compute Pier 1’s cash payments for inventory during
4. How does Pier 1 value its inventories? Which costing method does Pier 1 use?
5. Did Pier 1’s gross profit percentage and rate of inventory turnover improve or deteriorate in 2006 (versus 2005)? Consider the overall effect of these 2 ratios. Did Pier 1 improve during 2006? How did these factors affect the net loss for 2006? Pier 1’s inventories totaled $374 million at the end of 2004. Round decimals to 3 places.
Town & Country Gift Ideas began 20X6 with 60,000 units of inventory that cost $36,000. During 20X6, Town & Country purchased merchandise on account for $352,500 as follows:
|
Purchase 1 |
(100,000 units costing) |
$ 65,000 |
|
Purchase 2 |
(270,000 units costing) |
175,500 |
|
Purchase 3 |
(160,000 units costing) |
112,000 |
Cash payments on account totaled $326,000 during the year. Town & Country’s sales during 20X6 consisted of 520,000 units of inventory for $660,000, all on account. The company uses the FIFO inventory method. Cash collections from customers were $630,000. Operating expenses totaled $240,500, of which Town & Country paid $211,000 in cash. Town & Country credited Accrued Liabilities for the remainder. At December 31, Town & Country accrued income tax expense at the rate of 35% of income before tax.
Required
1. Make summary journal entries to record Town & Country’s transactions for the year, assuming the company uses a perpetual inventory system.
2. Determine the FIFO cost of Town & Country’s ending inventory at December 31, 20X6 2 ways:
a. Use a T account.
b. Multiply the number of units on hand by the unit cost.
3. Show how Town & Country would compute cost of goods sold for 20X6.
4. Prepare Town & Country’s income statement for 20X6. Show totals for the gross profit and income before tax.
5. Determine Town & Country’s gross profit percentage, rate of inventory turnover, and net income as a percentage of sales for the year. In Town & Country’s industry, a gross profit percentage of 40%, an inventory turnover of 6 times per year, and a net income percentage of 7% are considered excellent. How well does Town & Country compare to these industry averages?
Manatee uses a FIFO inventory system. Cost of goods sold for the period is:
a. $330
b. $347
c. $355
d. $365
|
Units |
Unit Cost |
Total Cost |
Units Sold |
|
|
Beginning inventory |
20 |
$6 |
$120 |
|
|
Purchase on May 23 |
30 |
7 |
210 |
|
|
Purchase on Nov.5 |
15 |
? |
120 |
|
|
Sales |
50 |
8 |
? |
Manatee’s LIFO cost of ending inventory would be:
a. $161
b. $90
c. $208
d. $225
|
Units |
Unit Cost |
Total Cost |
Units Sold |
|
|
Beginning inventory |
20 |
$6 |
$120 |
|
|
Purchase on May 23 |
30 |
7 |
210 |
|
|
Purchase on Nov.5 |
15 |
? |
120 |
|
|
Sales |
50 |
8 |
? |
Manatee’s average cost of ending inventory is:
a. $161
b. $90
c. $104
d. $225
|
Units |
Unit Cost |
Total Cost |
Units Sold |
|
|
Beginning inventory |
20 |
$6 |
$120 |
|
|
Purchase on May 23 |
30 |
7 |
210 |
|
|
Purchase on Nov.5 |
15 |
? |
120 |
|
|
Sales |
50 |
8 |
? |
Determine whether each of the following actions in buying, selling, and accounting for inventories is ethical or unethical. Give your reason for each answer.
1. In applying the lower of cost or market rule to inventories, Terre Haute Industries recorded an excessively low market value for ending inventory. This allowed the company to pay less income tax for the year.
2. Laminated Photo Film purchased lots of inventory shortly before year end to increase the LIFO cost of goods sold and decrease reported income for the year.
3. Madison, Inc., delayed the purchase of inventory until after December 31, 20X4, to keep 20X3’s cost of goods sold from growing too large. The delay in purchasing inventory helped net income of 20X3 to reach the level of profit demanded by the company’s investors.
4. Dover Sales Company deliberately overstated ending inventory in order to report higher profits (net income).
5. Brazos Corporation deliberately overstated purchases to produce a high figure for cost of goods sold (low amount of net income). The real reason was to decrease the company’s income tax payments to the government.
Accounting records for Allegheny Corporation yield the following data for the year ended December 31, 20X8 (amounts in thousands):
|
Inventory, December 31, 20X7 |
$ 370 |
|
Purchases of inventory (on account) |
1,200 |
|
Sales of inventory—80% on account; 20% for cash (cost $900) |
2,000 |
|
Inventory at FIFO cost, December 31, 20X8 |
670 |
Required
1. Journalize Allegheny’s inventory transactions for the year under the perpetual system. Show all amounts in thousands.
2. Report ending inventory, sales, cost of goods sold, and gross profit on the appropriate financial statement (amounts in thousands).
(Learning Objective 1, 2: Analyzing inventory transactions) McKinley, Inc., inventory records for a particular development program show the following at October 31:
|
Oct. 1 |
Beginning inventory |
5 units @ 160 |
= |
$ 800 |
|
15 |
Purchase |
11 units @ 170 |
= |
1,870 |
|
26 |
Purchase |
5 units @ 180 |
= |
900 |
At October 31, 8 of these programs are on hand. Journalize for McKinley:
1. Total October purchases in one summary entry. All purchases were on credit.
2. Total October sales and cost of goods sold in 2 summary entries. The selling price was $500 per unit and all sales were on credit. McKinley uses the FIFO inventory method.
3. Under FIFO, how much gross profit would McKinley earn on these transactions? What is the FIFO cost of McKinley’s ending inventory?
MusicBiz.net specializes in sound equipment. Because each inventory item is expensive, MusicBiz uses a perpetual inventory system. Company records indicate the following data for a line of speakers:
|
Date |
||||
|
June |
Item |
Quantity |
Unit Cost |
Sale Price |
|
1 |
Balance |
5 |
$90 |
|
|
6 |
Purchase |
12 |
95 |
|
|
8 |
Sale |
3 |
$150 |
|
|
30 |
Sale |
8 |
155 |
Required
1. Determine the amounts that MusicBiz should report for cost of goods sold and ending inventory 2 ways:
a. FIFO b. LIFO
2. MusicBiz uses the FIFO method. Prepare MusicBiz’s income statement for the month ended June 30, 20X5, reporting gross profit. Operating expenses totaled $320, and the income tax rate was 40%.
About receivables and uncollectibles. For the true false questions, explain any answers that turn out to be false.
1. True or false? Credit sales increase receivables. Collections and write offs decrease receivables.
2. Which receivables figure, the total amount that customers owe the company, or the net amount the company expects to collect, is more interesting to investors as they consider buying the company’s stock? Give your reason. (Challenge)
3. Show how to determine net accounts receivable.
4. True or false? The direct write off method of accounting for uncollectibles understates assets.
5. Ohio Bank lent $100,000 to Cincinnati Company on a 6 month, 6% note. Which party has interest receivable? Which party has interest payable? Interest expense? Interest revenue? How much interest will these organizations record 1 month after Cincinnati Company signs the note?
6. When Ohio Bank accrues interest on the Cincinnati Company note, show the directional effects on the bank’s assets, liabilities, and equity (increase, decrease, or no effect).
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