Chapter 1: Business, Accounting, and You Short Exerciseslessons.pennfoster.com › pdf › SP1107.pdf · 2017-11-30 · (5-10 min.) S 1-5 Assets = Liabilities + Stockholder’s Equity
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Exercises (10-15 min.) E 1-23B Corner Grocery Corp. $45,000 + $27,900 = $72,900 Sampson Hardware, Inc. $104,000 - $44,000 = $60,000 Perfect Cleaners, Inc. $108,800 - $92,600 = $16,200 (10-15 min.) E 1-24B Req. 1 Total Total Total Assets − Stockholders’ Equity = Liabilities Beginning….. $84,000 − $56,000 = $28,000 Ending……… $153,000 − $91,000 = $62,000 Increase during the year = $ 34,000 Req. 2 Possible reasons for the increase in Liabilities may include:
Made purchases on account
Borrowed money on a note payable
(10-15 min.) E 1-25B Req. 1 Total Total Total Assets − Liabilities = Stockholders’ Equity Beginning….. $50,000 − $40,000 = $10,000 Ending……… $57,000 − $8,000 = $49,000 Increase during the year = $ 39,000
For the Year Ended December 31, 2014 Service Revenue $161,000 Expenses Salaries expense $43,000 Rent expense 18,000 Utilities expense 12,600 Supplies expense 3,400 Property tax expense 2,400 Total expenses 79,400 Net income $ 81,600 Results of operations for 2014: Net income of $81,600.
Alden Consulting, Inc. Statement of Retained Earnings
For the Year Ended December 31, 2014 Retained earnings, Jan. 1, 2014 $0 Add: Net income 81,600 Subtotal 81,600 Less: Dividends 60,000 Retained earnings, Dec. 31, 2014 $21,600 The dividends for the year were $60,000 ($0 + $81,600 - $21,600). (15-20 min.) E 1-30B Req 1 Hastings, Inc. Beginning: Assets $ 83,000 − Liabilities 36,000 = Stockholders’ Equity $ 47,000
- Beginning Stockholders’ equity 47,000 = Change in Stockholders’ equity 84,000 - Sale of stock 20,000
= Change in retained earnings 64,000 + Dividends 71,000 = Net income $135,000
Note: The change in Retained earnings equals Net income minus Dividends. So, Dividends are added back to the change in Retained earnings to arrive at Net income.
Req. 2 a. Total assets = $74,200 ($65,600+ $3,800 + $1,300 + $3,500) b. Total liabilities = $3,500 c. Total stockholder’s equity = $70,700 ($70,000 + $3,800 - $2,400 - $700) d. Net income for June = $1,400 ($3,800 − $2,400)
Year Ended December 31, 2014 Service revenue $88,000 Expenses Salaries expense $13,000 Insurance expense 8,000 Advertising expense 5,500 Total expenses 26,500 Net Income $61,500 b.
McKnight, Inc. Statement of Retained Earnings Year Ended December 31, 2014
Retained earnings, December 31, 2013 $23,500 Add: Net income 61,500 Subtotal 85,000 Less: Dividends 40,000 Retained earnings, December 31, 2014 $45,000 c.
McKnight, Inc. Balance Sheet
December 31, 2014 ASSETS LIABILITIES
Cash $17,000 Accounts payable $ 9,000 Accounts receivable 8,000 Note payable 16,000 Equipment 65,000 Total liabilities 25,000 STOCKHOLDERS’ EQUITY Common stock 20,000 Retained earnings 45,000 Total stockholders’ equity 65,000 Total liabilities and Total assets $90,000 stockholders’ equity $90,000
Cash $24,800 Accounts payable $ 13,700 Accounts receivable 15,100 Salaries payable 4,750 Supplies 2,250 Note payable 75,000 Land 40,000 Total liabilities 93,450 Equipment 51,000 Building 142,000 STOCKHOLDERS’ EQUITY Common stock 75,000 Retained earnings 106,700 Total stockholders’ equity 181,700 Total liabilities and Total assets $275,150 stockholders’ equity $275,150 Req. 4 a. $59,100 (Net profit = net income). b. Increase of $31,100 ($59,100 Net income minus $28,000 Dividends).
c. $275,150 (Total economic resources = total assets). d. $ 93,450 (Total owed = total liabilities).
Cash Accounts payable Dec 1 4,325 Dec 2 1,600 Dec 19 375 Dec 1 875Dec 4 900 Dec 19 375 Dec 8 225Dec 11 1,500 Dec 28 2,500 Bal. 725Dec 15 5,000 Bal. 7,250
Year Ended December 31, 2014 Service revenue $101,700Expenses Salaries expense $48,750 Rent expense 11,340 Utilities expense 6,750 Insurance expense 5,300 Supplies expense 1,840 Total expenses 73,980 Net Income $27,720
Baker Consulting , Inc. Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings, January 1, 2014 $12,320Add: Net income 27,720 Subtotal 40,040Less: Dividends 15,000Retained earnings, December 31, 2014 $25,040
You would record $915 of service revenue at the end of July. Under the accrual basis of accounting, revenues are recorded when earned regardless of when cash is received. Therefore, both the $750 you have received as well as the $165 that is still owed to you would be recorded as service revenue.
The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue.
Req 2
Journal
DATE ACCOUNTS POST REF. Dr.
Cr.
Cash 170 Unearned service revenue 170 Collect revenue in advance. Accounts receivable 375 Service revenue 375 Accrue service revenue. Cash 80 Service revenue 80 Collect cash for services performed
Missing amounts are in italics. A B C D Beginning prepaid insurance $ 400 600 $ 1,100 $ 800 Payments for Prepaid insurance during the year 1,500 $1,000 2,200 900 Total amount to account for 1,900 1,600 3,300 1,700 Ending Prepaid insurance 700 400 300 1,200 Insurance expense $1,200 $ 1,200 $ 3,000 $ 500
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
A. Insurance expense 1,200 Prepaid insurance 1,200 Record insurance expense.
a. Salaries expense 4,500 Salaries payable 4,500 b. Unearned service revenue 1,250 Service revenue 1,250 c. Depreciation expense 1,900 Accumulated depreciation 1,900
d. Rent expense 350
Prepaid rent 350 e. Interest receivable 980 Interest revenue 980
a. Accounts receivable 1,650 Service revenue 1,650 Accrue revenue. b. Unearned service sevenue 350 Service revenue 350 Record revenue earned. c. Supplies expense ($900 − $240) 660 Supplies 660 Record supply expense. d. Salaries expense 980 Salaries payable 980 Accrue salary expense.
a. To record supplies used b. To record depreciation expense on equipment c. To record depreciation expense on the building d. To record accrued salaries e. To record accrued revenues
Williams Industrial, Inc. Statement of Retained Earnings Year Ended December 31, 2014
Retained earnings, January 1, 2014 $ 19,600 Less: Net loss (2,700) Subtotal 16,900 Less: Dividends ($800 × 12 months) (9,600) Retained earnings, December 31, 2014 $ 7,300 Req. 2 Retained earnings had a net decrease of $12,300 for the year (End $7,300 – Beg $19,600). This
resulted from the current net loss ($2,700) and dividends paid ($9,600).
12 No effect 18 Increase revenues $1,600 23 No effect 26 No effect 30 Increase expenses $1,615 31 Increase expenses $1,200 31 Increase revenues $875
Req 2
Revenues ($4,150 + $1,600 + $875) $6,625
Expenses ($1,160 + $1,615 + $1,200) $3,975
Net Income ($6,625 - $3,975) $2,650
Req 3
The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.
STOCKHOLDERS’ EQUITY Common stock 26,000 Retained earnings 15,960 Total Stockholders’ equity 41,960 Total liabilities and Total assets $58,100 stockholder’s equity $58,100
a. Inventory 4,200 Accounts Payable 4,200 Purchase inventory on account b. Inventory 140 Cash 140 Paid freight charges to have inventory delivered c. Accounts Payable 4,200 Cash ($4,200 × .97) 4,074 Inventory ($4,200 × .03) 126 Record payment of inventory purchases within the discount period.
Mar 17 Accounts Receivable 640.00 Sales Revenue 640.00 Cost of Goods Sold 360.00 Inventory 360.00 Record sale of inventory on account. 21 Sales Returns and Allowances 185.00 Accounts Receivable 185.00 Inventory 110.00 Cost of Goods Sold 110.00 Record receipt of returned goods. 26 Cash [($640– 185) × .98] 445.90 Sales Discount [($640 – 185) × .02] 9.10 Accounts Receivable ($640 - $185) 455.00 Record payment received within the discount period.
(5-10 min.) S 4-9 Req 1 Net Sales Revenue: Sales Revenue……………………………..…. $ 920.00 Less: Sales Returns and Allowances ………. (290.00) Sales Discounts [($920 − $290) ×.01]... (6.30) Net Sales Revenue……………………………. $ 623.70 Req 2 Net Sales Revenue: $ 623.70 Less: Cost of Goods Sold…(550-175)……………… (375.00) Gross profit……………………………………………. $ 248.70
(5-10 min.) S 4-10 Req 1 a. Cash 6,400 Accounts Receivable 5,700 Inventory 27,000 Supplies 1,950 Prepaid Rent 2,400 Total Current Assets $ 43,450 b. Accounts Payable $ 14,800 Salaries Payable 2,150 Unearned Revenue 7,300 Total Current Liabilities $ 24,250 c. Equipment $ 43,000 Less: Accumulated Depreciation, Equipment (4,200) $38,800 Building $ 121,000 Less: Accumulated Depreciation, Building (53,000) 68,000 Book Value of Plant Assets $ 106,800 d. Total Long-Term Liabilities (Note Payable, Long Term) $46,000
Year Ended January 31, 2014 Net sales revenue $41,500Cost of goods sold 21,000Gross profit 20,500Operating expense 6,475Operating income 14,025Other Expense: Interest expense 375Net income $13,650
Current assets: Cash $ 2,750 Accounts Receivable 3,100 Inventory 4,700 Prepaid Rent 1,200 Total current assets 11,750 Long-term assets: Equipment, net 25,700 Total assets $37,450
Liabilities
Current liabilities: Accounts Payable $ 4,800 Salaries Payable 1,150 Accrued Liabilities 2,475 Total current liabilities 8,425 Long-term liabilities: Long-Term Notes Payable 23,000 Total liabilities 31,425
Stockholders’ equity Total stockholders’ equity 6,025 Total liabilities and stockholders’ equity $37,450
Cost of Goods Sold 2,400 Inventory 2,400 Adjust inventory to physical count Req 2 The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.
Nov 3 Accounts Receivable 1,800.00 Sales Revenue 1,800.00 Cost of Goods Sold ($1,800.00 x .55) 990.00 Inventory 990.00 Record sale of inventory on account. 3 Accounts Receivable 75.00 Cash 75.00 Record prepayment of shipping charges. 7 Sales Returns and Allowances 150.00 Accounts Receivable 150.00 Inventory (150.00 x .55) 82.50 Cost of Goods Sold 82.50 Record return of goods from customer. 16 Cash ($1,800 + $75 - $150 - $33) 1,692.00 Sales Discounts [($1,800– $150) × .02] 33.00 Accounts Receivable ($1,800 + $75 - $150) 1,725.00 Record receipt of payment from customer.
Year Ended August 31, 2014 Revenues: Net Sales Revenue $ 244,600 Expenses: Cost of Goods Sold $128,700 Selling Expenses 32,400 General Expenses 13,800 Interest expense 1,700 Total Expenses 176,600Net Income $ 68,000
Computations: Net Sales Revenue: $249,000 - $2,500 - $1,900 = $244,600 Req 2 The single-step income statement is not recommended for Borden’s’s Furniture because they are a merchandiser. A merchandiser should use a multi-step income statement to provide more detailed information to the financial statement users.
Year Ended August 31, 2014 Sales Revenue $249,000 Less: Sales Returns and Allowances $2,500 Sales Discounts 1,900 4,400 Net Sales Revenue 244,600Cost of Goods Sold 128,700Gross Profit 115,900Operating Expenses: Selling Expenses 32,400 General Expenses 13,800 46,200Operating Income 69,700Other Expense: Interest expense 1,700Net income $68,000
Req 2
Gross Profit Percentage
= Gross Profit
=$115,900
= .474or 47.4% Net Sales Revenue $244,600
Req 3 Borden’s Furniture, Inc.’s gross profit rate of 47.4% in 2014 has improved from the gross profit rate of 41.3% in 2013. Borden’s Furniture, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses, interest expense and generating net income than it did in 2013.
Aug 4 Accounts Receivable - Tanaka’s Antique Furniture 7,100 Sales Revenue 7,100 Cost of Goods Sold 3,900 Inventory 3,900 Record sale of inventory on account. 10 Sales Returns and Allowances 1,300 Accounts Receivable - Tanaka’s Antique
Furniture 1,300
Inventory 700 Cost of Goods Sold 700 Record receipt of returned goods. 18 Cash ($1,800 .98) 1,764 Sales Discount ($1,800 x .02) 36 Accounts Receivable - Tanaka’s Antique
Nov 4 Inventory ($5,100 + $75) 5,175 Accounts Payable – Salem Tire 5,175 Record purchase of inventory on account 7 Supplies 600 Accounts Payable – Office Maxx 600 Record purchase of supplies on account 9 Accounts Receivable – T. Thompson 1,250 Sales Revenue 1,250 Cost of Goods Sold 750 Inventory 750 Record sale on account 11 Delivery Expense 50 Cash 50 Record payment of freight charges 13 Accounts Payable – Salem Tire 700 Inventory 700
Record return of merchandise to supplier
15 Cash 1,300 Sales Revenue 1,300 Cost of Goods Sold 780 Inventory 780 Record cash sales.
16 Accounts Payable – Office Maxx 600 Cash ($600 x .97) 582 Supplies (600 x .03) 18 Record payment for supplies 18 Accounts Payable – Salem Tire ($5,100+ $75 − $700) 4,475 Cash ($4,475 – $88) 4,387 Inventory [($5,100- $700) × .02] 88 Record payment on account within discount period.
Month Ended November 30, 2014 Sales Revenue $214,700 Less: Sales Returns and Allowances $3,800 Sales Discounts 4,300 8,100 Net Sales Revenue 206,600Cost of Goods Sold 102,600Gross Profit 104,000Operating Expenses: Selling Expenses 25,400 General Expenses 20,900 46,300Operating Income 57,700Other Expense: Interest expense 1,350Net income $56,350
Req 2
Gross Profit Percentage
= Gross Profit
=$104,000
= .503 or 50.3% Net Sales Revenue $206,600
Req 3 Fresh Foods Inc.’s 50.3% gross margin percentage means that each dollar of net sales generates 50.3 cents of gross profit that is used to cover operating expenses, interest expense, and generate net income.
Ramirez Industries, Inc.’s earnings per share in 2014 has improved from the earnings per share of $3.27 in 2013. Ramirez Industries, Inc. earned more for each share of stock in 2014 than it did in 2013.
Req 3
Gross Profit Percentage
= Gross Profit
=$142,800*
= .454 or 45.4% Net Sales Revenue $314,400*
* Numbers are taken from the solution to P4-48B above Req 4 Ramirez Industries, Inc.’s gross profit rate of 45.4% in 2014 has improved from the gross profit rate of 42.6% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses , interest expense, and generating net income than it did in 2013. Req 5
Net Income Percentage
= Net Income
= $17,600*
= .056or 5.6% Net Sales Revenue $314,400*
* Numbers are taken from the solution to P4-48B above
Req 6
Ramirez Industries, Inc.’s net income rate of 5.6% in 2014 has improved from the net income rate of 4.9% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales as net income than it did in 2013.
1. When inventory costs are rising, FIFO will produce the lowest cost of goods sold because the older, lower cost items are assumed to be sold before the newer, higher priced items.
2. When inventory costs are rising, LIFO will produce the highest cost of goods sold because the newer, higher cost items are assumed to be sold before the older, lower priced items.
3. If prices had been declining, FIFO will produce the highest cost of goods sold because the older, higher cost items are assumed to be sold before the newer, lower priced items.
(5-10 min.) S 5-8
__b.__ 1. A company must perform strictly proper accounting only for items that are
significant to the business’s financial statements.
___d._ 2. Reporting the least favorable figures in the financial statements.
___a._ 3. A business’s financial statements must report enough information for users to
make knowledgeable decisions about the company.
___c._ 4. A business should use the same accounting methods and procedures from period to period.
If ending inventory is overstated, $2,800 too much is deducted from Cost of goods available for sale to arrive at Cost of goods sold. Therefore, Cost of goods sold is understated by $2,800. The correct amount for Cost of goods sold would be $139,200($136,400+$2,800).
If Cost of goods sold is understated, too little was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is overstated by $2,800. The correct amount for Gross profit would be $114,500 ($117,300-$2,800))
(5-10 min.) S 5-13
Because the uncorrected ending inventory error in 2014 becomes a beginning inventory error in 2015, the beginning inventory in 2015 is overstated by $3,200.
If beginning inventory is overstated, $3,200 too much is added to purchases to arrive at Cost of goods available for sale. So, Cost of goods available for sale, and therefore Cost of goods sold, is overstated by $3,200 in 2015.
If Cost of goods sold is overstated, too much was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is understated by $3,200 in 2015.
(10-15 min.) S 5-14
Beginning inventory $ 51,600 + Purchases 326,800
= Cost of goods available for sale 378,400 Estimated cost of goods sold: Sales revenue 505,300 - Estimated gross profit of 38 % ($505,300 x 38%) 192,014
= Estimated cost of goods sold 313,286 Estimated ending inventory $ 65,114
FIFO results in the largest gross profit. When prices are rising, FIFO results in the lowest cost of goods sold and therefore the highest gross profit.
(10-15 min.) E 5-34B
Req 1
Using LCM, Ridgeview Resources will report the ending inventory at $29,700.
Req 2
No adjusting entry is required because the inventory cost of $29,700 is lower than the market value of $30,600.
The actual amount of inventory on hand may differ from the amount based on the perpetual inventory records due to errors in recording inventory related transactions or due to inventory shrinkage. Inventory shrinkage is most often the result of theft, damage, or spoilage of inventory items.
(10-15 min.) E 5-36B
Req 1
Sales Revenue $343,000
Cost of Goods Sold ($246,000 + $3,600) * 249,600
Gross Profit $93,400
*If ending inventory is overstated, $3,600 too much is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is understated by $3,600.
Req 2
Sales Revenue $343,000
Cost of Goods Sold ($246,000 - $1,800) * 244,200
Gross Profit $98,800
*If ending inventory is understated, $1,800 too little is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is overstated by $1,800.
The inventory method that most likely mimics the physical flow of Top Line Equipment’s inventory is FIFO because FIFO assigns the cost of the oldest items to cost of goods sold first.
Req 2
Perpetual Inventory Record: FIFO
Perpetual Inventory Record - LIFO
Date
Purchases Cost of Goods Sold Inventory on Hand
Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost
Because inventory prices are rising, the LIFO inventory method will result in Lakeside Industries paying the lowest income taxes. The LIFO method assigns the most recent cost (in this case the highest) to cost of goods sold which results in lower net income and, therefore, lower income taxes.
Purchases Cost of Goods Sold Inventory on Hand Quantity Unit
Cost Total Cost Quantity Unit
Cost Total Cost Quantity Unit Cost Total
Cost
Aug 1
Aug 4
Aug 12
Aug 22
Aug 31
70
56
$92.00
$95.00
$6,440.00
$5,320.00
81
44
$91.33
$93.90
$7,398.00
$4,132.00
35
105
24
80
36
$90.00
$91.33*
$91.33
$93.90**
$93.90
$3,150.00
$9,590.00
$2,192.00
$7,512.00
$3,380.00
Aug 31 126 $11,760.00 125 $11,530.00 36 $3,380.00
* ($3,150.00 + $6,440.00) /105 = $91.33 (rounded)
** ($2,192.00 + $5,320.00)/80 = $93.90
(10-15 min.) P 5-51B
Req 1
Conservatism is the reason to account for inventory at the lower-of-cost-or-market value. Conservatism directs accountants to decrease the accounting value of an asset if it appears unrealistically high.
Req 2
SoCal Sporting Goods should value its ending inventory at December 31, 2014 at the current replacement cost of $73,850 because it is less than SoCal Sporting Goods’ actual cost of $75,230.
Req 3
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,380 Inventory ($75,230 - $73,850) 1,380 Write inventory down to market value.
For the Years Ended December 31, 2012, 2013, & 2014
( in thousands) 2014 2013 2012 Sales Revenue $ 198 $ 177 $ 179Cost of Goods Sold: Beginning Inventory $ 16 $ 24 $ 6 Net Purchases 145 112 132 Cost of Goods Available 161 136 138 Ending Inventory 15 16 24 Cost of Goods Sold 146 120 114Gross Profit 52 57 65Operating Expenses 42 41 43Net Income $ 10 $ 16 $ 22
Req 3
There is no impact on the 2014 income statement if the 2012 inventory error is left uncorrected. The ending inventory in 2012 becomes the beginning inventory in 2013 so the net income in 2013 is misstated by the exact opposite amount that it was misstated by in 2012. However, the 2012 error will not carry forward into 2014.
= 7.29 times per year Average Inventory ($24,000 + $18,000) / 2
2013 Inventory Turnover
= Cost of Goods Sold
=$151,000
= 5.81 times per year Average Inventory ($28,000+ $24,000) / 2
Req 2
2014
Days-Sales-in-inventory
= (24,000 + 18,000)/2 = 50.1 days
(153,000/365)
2013
Days-Sales-in-inventory
= (28,000 + 24,000)/2
= 62.8 days
(151,000/365)
Req 3
Keystone Electronics, Inc.’s cost of goods sold remained relatively constant from 2013 to 2014. Therefore, the most likely cause for the change in the inventory turnover was the decrease in the average inventory from 2013 ($26,000) to 2014 ($21,000)
Chapter 6: The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics
Short Exercises
(5–10 min.) S 6-1
1 F
2 CR
3 B
4 F
5 E
(5–10 min.) S 6-2
1 P
2 P
3 R
4 O
5 P
(5–10 min.) S 6-3
Student answers will vary.
1. It can be argued that any one of the four objectives is the most important. However, many students feel that the safeguarding of assets is the most important. In fact, all of the objectives are equally important.
2. In order for the business to survive in the long run, each of the objectives must be accomplished. The failure to accomplish any of the objectives can leave the business susceptible to such things as erroneous financial reporting, theft, or fraud. Any one of these may harm the company to the extent that its survival is in jeopardy.
(5–10 min.) S 6-4
1 ADR
2 RA
3 PA
4 RA
5 SD
(10–15 min.) S 6-5
Student answers will vary.
Separation of duties helps prevent employees from being able to steal assets and then cover up the theft. This is why it is often referred to as the cornerstone of internal controls over the safeguarding of assets. If an employee has custody of cash (they make the daily deposits) and records the daily cash sales, they could steal money from the daily deposit and then alter the amount of the daily cash sales that were recorded in order to hide the theft.
a. Strength. When an employee is on vacation, errors or irregularities may be detected by the individual filling in for the employee who is on vacation.
b. Weakness. The accounting department should not be allowed to order merchandise and approve payment. An accountant could have goods sent to his / her home and then approve payment for the goods.
c. Strength. By not allowing the sales clerk access to both the cash and the accounting records, it is more difficult for the clerk to steal cash and hide the theft.
d. Weakness. The officer should examine the payment packet to ensure that the payment is for the correct amount.
(5–10 min.) S 6-10
a. Separation of duties (The same person is ordering merchandise and approving payment.)
b. Separation of duties (The same person is selling tickets and taking tickets.)
c. Adequate documents and records (No sales receipt is being prepared.)
d. Proper authorization (No authorization is required for sales returns.)
e. Adequate documents and records (No receiving report is being prepared.)
Bank Book Balance, October 31 $3,890 Balance, October 31 $2,605 Add: Add: Deposit in transit 240 Bank collection 630 4,130 Interest revenue 5 3,240 Less: Less: Outstanding checks (930) Service charge (40)Adjusted bank balance $3,200 Adjusted book balance $3,200
May 31 Cash 5 Interest revenue 5 Record interest earned on bank balance. 31 Miscellaneous expense 25 Cash 25 Record bank service charge. 31 Accounts receivable 132 Cash 132 Record NSF checks
f. 1. A contra-account, related to accounts receivable, which holds the estimated
amount of uncollectible receivables
i. 2. A method of accounting for uncollectible receivables in which the company
waits until a specific customer’s account receivable is uncollectible before recording Bad debt
expense
e. 3. A method of recording receivable losses on the basis of estimates instead of
waiting to see which customers the company will not collect from
a. 4. The party to a credit transaction who sells goods or a service and obtains a
receivable
h. 5. A way to estimate uncollectible accounts by analyzing individual accounts
receivable according to the length of time they have been receivable
b. 6. The party to a credit transaction who makes a purchase and has a payable
d. 7. Cost to the seller of credit sales; arises from the failure to collect from credit
customers
g. 8. A method of estimating uncollectible receivables that calculates Bad debt
expense based on net credit sales
(5-10 min.) S 7-7 Accounts receivable balance at October 31:
Accounts receivable Bal. 16,500 Collections 19,000Services on account
21,000 Write-offs 1,600
Bal. 16,900 Macintosh probably does not expect to collect all $16,900 of the accounts receivable because, realistically, she knows she will most likely not be able to collect from some clients.
a. Accounts receivable 322,000 Sales revenue 322,000 Record sales on account.
b. Cash 309,000 Accounts receivable 309,000 Record collections on account.
c. Allowance for uncollectible accounts 12,400 Accounts receivable 12,400 Write off uncollectible accounts.
d. Bad debt expense 10,700 Allowance for uncollectible accounts 10,700 Record estimate of uncollectible accounts for the year.
Allowance for uncollectible accounts Write-offs 12,400 Bal. 9,000 Bad debt expense
X
= 10,700 Bal. 7,300
Alternative solution: Ending balance = Beginning balance – write offs + Bad debt expense Where X = Bad debt expense, $87,300 = $9,000 - $12,400 + X $7,300 + $12,400 - $9,000 = X $10,700 = X
(5-10 min.) S 7-11 continued Computations: Required balance for Allowance for Uncollectible Accounts based on the aging schedule:
Age of Accounts
1-30 Days 31-60 Days 61-90 Days Over
90 Days Total
Receivables Amount receivable
$66,000 $24,000 $12,000 $3,600 $105,600
Estimate percentage uncollectible
X 1% X 2% X 6% X 53%
Required balance for Allowance for Uncollectible Accounts
$660 + $480 + $720
+ $1,908 = $ 3,768
Allowance for uncollectible accounts Bal. 2,000 Bad debt expense = 1,768 Bal. 3,768
(10-15 min.) S 7-12
Procedure b is the only procedure that includes an internal control weakness. The internal control weakness is the lack of separation of duties that allows the Credit Department to receive incoming cash receipts from customers and the authority to write-off an account receivable. With access to cash, a credit-department employee can pocket cash received from a customer and destroy the related remittance slip. The employee can then authorize the write-off of the customer’s account as uncollectible, and the company will stop pursuing collection from the customer. To strengthen the controls, the company can have customer checks go to a lock box controlled by a bank or to the company mailroom, not to the credit department.
Apr 30 Accounts payable 9 Cash 9 To correct error on check written to vendor. 30 Miscellaneous expense 57 Cash 57 Record bank service charge and cost of checks.
(20-25 min.) E 7-32B Req. 1
Addison Picture Frames
Bank Reconciliation
November 30
Bank Book
Balance, November 30 $1,030 Balance, November 30 $3,304
Add: Add:
Deposit in transit 2,700 EFT collection—rent 410
3,730 3,714
Less:
Correction of book error—
Less: Recorded $330 check as $33 297
Outstanding checks Service charge 23
No. 213 300 Charge for printed checks 14
No. 214 150 NSF checks 100
Adjusted bank balance $3,280 Adjusted book balance $3,280
Nov 30 Cash 410 Rental income 410 To record rental income 30 Salaries expense 297 Cash 297 To correct error on check written to pay salaries. 30 Miscellaneous expense 37 Cash 37 Record bank service charge and cost of checks. 30 Accounts receivable 100 Cash 100 Record NSF checks (5-10 min.) E 7-33B
Journal
DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.
May 3 Accounts receivable – B. Wilson 1,300 Service revenue 1,300 Record service revenue. Nov. 8 Bad debt expense 1,300 Accounts receivable – B. Wilson 1,300 Write off uncollectible accounts. Dec. 10 Accounts receivable – B. Wilson 1,150 Bad debt expense 1,150 Reinstate part of B. Wilson account Dec 10 Cash 1,150 Accounts receivable – B. Wilson 1,150 Record receipt of cash on account
a. Cash 60,000 Accounts receivable 98,000 Sales revenue 158,000 Record sales. b. Cash 77,000 Accounts receivable 77,000 Record collections on account. c. Allowance for uncollectible accounts 900 Accounts receivable 900 Write off uncollectible accounts. d. Bad debt expense ($98,000 .01) 980 Allowance for uncollectible accounts 980 Record estimate of uncollectible accounts for the
month.
Req. 2
Accounts receivable Allowance for uncollectible accounts Bal. 30,000 Collections 77,000 Write-offs 900 Bal. 4,000Credit Sales 98,000 Write-offs 900 Bad debt expense 980Bal. 50,100 Bal. 4,080 Net accounts receivable: $50,100 – $4,080 = $46,020. Teck Automotive expects to collect the net accounts receivable of $46,020.
2014 Oct. 31 Bad debt expense ($11,085 - $4,200) 6,885 Allowance for uncollectible accounts 6,885 Record estimate of uncollectible accounts for the year.
Allowance for uncollectible accounts Bal. 4,200 Bad debt expense 6,885 Bal. 11,085
Req. 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Oct. 31 Bad debt expense ($11,085 + $1,300) 12,385 Allowance for Uncollectible Accounts 12,385 Record estimate of uncollectible accounts for the year.
2014 Dec 31 Bad debt expense 6,000 Allowance for uncollectible accounts 6,000 Record estimate of uncollectible accounts for the year. Computations: ($800,000 .0075) = $6,000 Req 2
Journal
DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.
2014 Dec. 31 Bad debt expense 1,350 Allowance for uncollectible accounts 1,350 Record estimate of uncollectible accounts for the year. Computations: Balance needed in allowance account: $2,650 Adjusting entry amount: $2,650 balance needed - $1,300 current balance = $1,350 (15-20 min.) E 7-37B
a. Texas State Bank has a note receivable. b. Gina Baldwin has a note payable. c. Texas State has interest revenue. d. Gina Baldwin has interest expense.
2014 Jan 31 Accounts receivable—Jitterz Coffee 12,000 Sales revenue 12,000 Record sale on account. Jun 1 Note receivable—Jitterz Coffee 12,000 Accounts receivable—Jitterz Coffee 12,000 Record note received for account. Jul 31 Cash ($12,000 + $140) 12,140 Note receivable— Jitterz Coffee 12,000 Interest revenue ($12,000 .07 x 60/360) 140 Record collection of note receivable. (15-20 min.) E 7-40B Req 1 A B C D Cash $ 95,000 $ 67,000 $20,000 $103,000 Short-term investments 85,000 30,000 14,000 53,000 Net receivables 120,000 113,000 50,000 145,000 =Total quick assets $300,000 $210,000 $84,000 $301,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 Quick ratio 1.50 0.82 1.40 1.16
Req 2 Total current assets $325,000 $224,000 $96,000 $368,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 = Current ratio 1.63 0 .88 1.60 1.42 Req 3 Company B should be concerned because they only have $0.82 of quick assets and $0.88 of current assets to pay for every $1 owed in current liabilities.
Oct 31 Cash 850 Rent revenue 850 Record EFT rent collected by bank 31 Cash 225 Accounts receivable 225 Record EFT collection from customer. 31 Cash 8 Interest revenue 8 Record interest earned 31 Accounts receivable ($72 + $186) 258 Cash 258 Record NSF checks returned by the bank. 31 Miscellaneous expense 35 Cash 35 Record bank service charge.
REF. Dr. Cr. Apr 30 Accounts receivable 510,000 Sales revenue 510,000 Record sales on account. 30 Cash 525,000 Accounts receivable 525,000 Record collections on account. 30 Allowance for uncollectible accounts 5,000 Accounts receivable 5,000 Write off uncollectible accounts. 30 Bad debt expense (510,000 .04) 20,400 Allowance for uncollectible accounts 20,400 Record estimate of uncollectible expense for the
Bad debt expense $20,400 $5,000 Bad debt expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way.
Req. 4
Balance sheet:
Allowance Method
Direct Write- Off Method
Accounts receivable $190,000 $190,000 Less: Allowance for uncollectible accounts 21,700 — Accounts receivable, net $168,300 $190,000 Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.
2014 Jan. 17 Accounts receivable—Jon Nelson 800 Sales revenue 800 Record sale on account. June 29 Allowance for uncollectible accounts 800 Accounts receivable— Jon Nelson 800 Write off uncollectible account. Aug. 6 Accounts receivable— Jon Nelson 800 Allowance for uncollectible accounts 800 Reinstate account receivable. 6 Cash 650 Accounts receivable— Jon Nelson 650 Record partial collection on account. Sept. 4 Cash ($800 – $650) 150 Accounts receivable—Jon Nelson 150 Record balance collected on account. Dec. 31 Allowance for uncollectible accounts 552 Accounts receivable—Bill Renz 175 Accounts receivable—Nancy Carlson 240 Accounts receivable—Daria Putin 137 Write off uncollectible accounts. 31 Bad debt expense 2,332 Allowance for uncollectible accounts 2,332 Record estimate of uncollectible accounts for the year. Req. 3
MEMORANDUM DATE: TO: The Lakeland Restaurants FROM: Student Name RE: Changes in ratio values from 2013 to 2014 The quick ratio increased from 0.76 to 0.86 and the current ratio increased from 1.49 to 1.57. These increases were largely due to the significant increase in Cash. This conveys a favorable impression about the company as it indicates the company has more of an ability to pay its current liabilities as they come due. The accounts receivable turnover increased from 16.83 to 19.20 and the receivable collection period decreased from 21.68 to 19.01. Both changes were favorable and can be attributed to the decrease in Accounts receivable. This conveys a favorable impression about the company as it indicates that the business appears to have a better ability collecting cash from credit customers. Student responses may vary.
Sept. 1 Petty cash 250 Cash 250 30 Office supplies expense 112 Entertainment expense 75 Cash short and over 7 Cash 194 30 Petty cash 50 Cash 50
Exercises
(10-15 min.) E 7A-6B
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Dec 31 Office supplies expense 121 Delivery expense 55 Cash short and over 12 Cash 188 Replenish the petty cash fund. 31 Petty cash 80 Cash 80 Increase Petty Cash fund by $80 to $280
Aug 1 Petty cash 450 Cash 450 Open the petty cash fund. Req. 2
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Aug 31 Office supplies expense 92 Travel expense 29 Delivery expense 15 Entertainment expense 70 Cash short and over 35 Cash 241 Replenish the petty cash fund. A difference of $35 charged to the cash short and over account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use. Req. 3
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Sep 1 Cash ($450 − $400) 50 Petty cash 50 Decrease the petty cash fund from $450 to $400. The custodian takes $50 currency and coin from the fund and deposits it in the bank.
Depreciation Expense, Hot Dog Stand 18,000 Accumulated Depreciation, Hot Dog Stand 18,000 Record depreciation on hot dog stand.
Computations:
Straight-line for years 1-4: $120,000 / 10 years = $12,000 per year
$12,000 4 years = $48,000 for years 1-4
Revised Straight-line: ($120,000 - $48,000)/4 years = $18,000 per year
(10-15 min.) S 8-11
CAP a. Purchase price REV b. Ordinary recurring repairs CAP c. Lubrication before machine is placed in service REV d. Periodic lubrication CAP e. Major overhaul CAP f. Sales tax CAP g. Transportation and insurance CAP h. Installation CAP i. Training of personnel
Purchase price paid for the Thrifty Nickel $925,000Market value of the Thrifty Nickel’s assets $1,225,000 Less: Market value of the Thrifty Nickel’s liabilities (375,000)
Market value of the Thrifty Nickel’s net assets 850,000
Goodwill $75,000
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Assets 1,225,000 Goodwill 75,000 Liabilities 375,000 Cash 925,000 Record purchase of The Thrifty Nickel.
(5-10 min.) S 8-14
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Apr 1 Patent 750,000 Cash 750,000 Record purchase of patent. Dec 31 Amortization Expense 112,500 Patent 112,500 Record amortization expense
Cost - Accumulated depreciation = Equipment, net* Net income
1 $470,000 $94,000 $376,000 U $ 376,000U**
2 $470,000 $188,000 $282,000 U $ 94,000 O
3 $470,000 $282,000 $188,000 U $ 94,000 O
4 $470,000 $376,000 $94,000 U $ 94,000 O
5 $470,000 $470,000 Correct $ 94,000 O
U = Understated O = Overstated
Computations:
Straight-line: ($470,000)/ 5 years = $94,000 per year.
*Equipment, net represents the net amount that should have appeared on the balance sheet for each year. Since no asset amount was recorded for this purchase, this represents the amount of the understatement.
**$470,000 expense recorded - $94,000 depreciation expense that should have been recorded = $376,000 understatement of net income.
Computations: Straight-line: ($38,000 – $2,000)/ 4 years = $9,000 per year.
Units-of-production: ($38,000 – $2,000)/ 800 operations = $45 per operation
Year 1: 90 operations $45 = $4,050
Year 2: 250 operations $45 = $11,250
Year 3: 240 operations $45 = $10,800
Year 4: 220 operations $45 = $9,900
Double-declining-balance: (1/4 years) 2 = 50%
Year 1: 50% x $38,000 = $19,000
Year 2: 50% x ($38,000 – $19,000) = $9,500
Years 3 and 4: ($38,000 – $19,000 – $9,500) = $9,500 – $2,000 residual value = $7,500/ 2 years = $3,750.
Req. 2
The units-of-production method tracks the wear and tear on the equipment most closely.
Req. 3
For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation expense and thus the largest tax deductions in the early life of the asset. This conserves cash in the early years.
Sale price of assets $252,000 Book value: Plant, and Equipment: $645,000/2= $322,500 Less: Accumulated Depreciation: $175,000/2 = (87,500) 235,000 Gain on sale $17,000
(a) Mineral Assets 615,000 Cash 615,000 Purchased mineral assets. (b) Mineral Assets ($1,400 + $3600 + $45,000) 50,000 Cash 50,000 Paid fees and other costs related to mineral assets. (c) Depletion Expense [($665,000/500,000) 80,000] 106,400 Accumulated Depletion, Mineral Assets 106,400 Record depletion.
(10-15 min.) E 8-44B
Requirement 1
Balance Sheet (partial):
Property, Plant, and Equipment $12,000,000
Less: Accumulated Depreciation, Plant and Equipment 3,000,000
Net Property, Plant, and Equipment $9,000,000
Patents 210,000
Goodwill 1,400,000
Other Long-term Assets 318,000
Total Long-term Assets $10,928,000
Requirement 2
The book value of property, plant, and equipment on December 31, 2014 was $9,000,000.
85,000 Motor-Carrier Equipment (old) 132,000 Cash ($174,000 – $64,000) 110,000 Gain on Exchange of Equipment 17,000 Record trade of motor-carrier equipment. July 1 Depreciation Expense, Building 6,125 Accumulated Depreciation, Building 6,125 Record 6 months’ depreciation.
1 Cash 100,000 Note Receivable 590,000
Accumulated Depreciation, Building ($240,000 + $6,125)
246,125 Building 570,000 Gain on Sale of Building 366,125 Record sale of building. Oct. 31 Land 288,000 Building 612,000 Cash 900,000 Record purchase of land and a building. Dec. 31 Depreciation Expense, Motor-Carrier Equipment 19,000
Accumulated Depreciation, Motor-Carrier Equipment 19,000 Record depreciation on motor-carrier equipment. 31 Depreciation Expense, Buildings 2,300 Accumulated Depreciation, Buildings 2,300 Record depreciation on building.
Trade-in Value of Motor carrier equipment: = $64,000 Book value: Motor carrier equipment $132,000 Less: Accumulated depreciation (85,000) 47,000 Gain on exchange $17,000
Straight-line, building: ($570,000 – $80,000)/ 40 years x 6/12 months = $6,125
Sale price of building: $100,000 + $590,000 = $690,000 Book value: Building $570,000 Less: Accumulated depreciation (246,125) 323,875 Gain on sale $366,125
Asset
Market Value
Percentage of Total Market Value
Total Purchase
Price
Cost of Each Asset
Land. $ 331,200 $331,200 / $1,035,000 = 32% X $900,000 = $288,000 Building 703,800 $703,800 / $1,035,000 = 68% X $900,000 = $612,000 Total $1,035,000 100% = $900,000
a. Accumulated Depreciation, Equipment 30,000 Loss on Disposal 1,000 Equipment 31,000 Record the disposition of equipment. b. Cash 6,000 Accumulated Depreciation, Equipment 30,000 Equipment 31,000 Gain on sale of Equipment 5,000 Record sale of equipment. c. Equipment - new 35,000 Accumulated Depreciation, Equipment 30,000 Equipment - old 31,000 Cash ($35,000 - $5,500) 29,500 Gain on Exchange of Equipment * 4,500 Record exchange of equipment. d. Equipment - new 23,000 Accumulated Depreciation, Equipment 30,000 Loss on Exchange of Equipment ** 500 Equipment - old 31,000 Note payable ($23,000 - $500) 22,500 Record exchange of equipment.
* Gain on exchange = Trade in value less book value of old equipment = $5,500 - ($31,000 - $30,000) = $4,500
** Loss on exchange = Book value of old equipment - trade in value = ($31,000 - $30,000) - $500 = $500
Assets 2,700,000 Goodwill 400,000 Liabilities 1,300,000 Cash 1,800,000 Record purchase of Corner Diners
Computations: Goodwill: Purchase price paid for Don’s Diners $1,800,000Market value of Don’s Diners’ assets $2,700,000 Less: Market value of Don’s Diners’ liabilities (1,300,000) Market value of Don’s Diners’ net assets 1,400,000Goodwill $400,000
Req. 2
Cottage Cafe should measure the fair value of its goodwill each year. If the goodwill has
increased in fair value, there is nothing to record. But if the goodwill’s fair value has decreased,
then Cottage Cafe should record an impairment loss and write down the goodwill.
= 16.61%Average total assets ($901,000 + $917,000)/2
Fixed asset turnover ratio
= Sales
=$1,582,000
= 2.11 Average fixed assets ($736,000 + $764,000)/2
2014
Return on Assets
= Net income
=$142,000
= 15.40%Average total assets ($917,000 + $926,000)/2
Fixed asset turnover ratio
= Sales
=$1,468,000
= 1.92 Average fixed assets ($764,000 + $768,000)/2
Req 2
The return on assets has decreased from 16.61% to 15.40% indicating that Ibanez Industries is less profitable in 2014 relative to its total assets.
The fixed asset turnover ratio has decreased from 2.11 to 1.92 indicating that Ibanez Industries is generating sales less efficiently with its fixed assets in 2014.
At the end of the first year, Sundaze owes its customers $5,780 in estimated warranty payable
3. Sundaze will report warranty expense of $24,280 during its first year of operations.
No, the warranty expense for the year does not necessarily equal the year’s cash payments for warranties. The matching principle addresses this situation. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for the warranty claims.
(5-10 min.) S 9-4
1. These are contingent liabilities because at the time the financial statements were issued;
Phatboy Motorcycles was not liable for any of these product losses. These represent
potential rather than actual obligations.
2. The contingency can become a real liability if the user of a Phatboy product suffers a loss for
Clayton’s Auto Repair will report $3,760 of estimated warranty payable on its balance sheet at December 31, 2014 and $11,580 of warranty expense on its income statement for the year ended December 31, 2014.
* The December 31, 2014 long-term portion of the Mortgage Payable is represented by the balance at December 31, 2015. The principal portion of the 2015 payments ($3,536 + $3,731) would be reflected as current portion of long-term debt in current liabilities at December 31, 2014.
(20-25 min.) P 9-48B
Req 1 The 8% bonds, issued when the market interest rate is 7.25%, will be priced at a premium.
Because they pay interest at a rate higher than the market rate, investors will pay a price above
maturity value to acquire them.
Req 2
The 8% bonds, issued when the market interest rate is 9.5%, will be priced at a discount.
Because they pay interest at a rate lower than the market rate, investors will pay less than
28% (100% - 72%) of Quinn’s assets belong to the stockholders.
Req 3
Based on the debt ratio and the interest coverage ratio, most people would not be willing to lend Quinn money because the total debt is 72% of total assets and the EBIT is only 1.49 times the interest expense.
Building $475,000Equipment 125,000Common stock 100,000Paid-in capital in excess of par--Common 500,000
(5-10 min.) S 10-4
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
1. Cash ($1,200,000+ $425,000) 1,625,000
Common stock 1,200,000
Paid-in capital in excess of par--Common 425,000
Issued common stock.
2. Buckeye, Inc.’s main source of stockholders’ equity was profitable operations, as shown by the far greater amount of Retained earnings compared to paid-in capital.
($88,000 - $22,000) 66,000 2. There is no effect on Oceanview Realty’s total assets. There is no effect on Oceanview Realty’s total stockholders’ equity. (10-15 min.) S 10-10 1. Stock dividends
(5–10 min.) S 10-11 1. Stockholders’ equity Paid-in capital: Common stock, $4.00 par, 1,000,000 shares authorized, 240,000 shares issued and outstanding $960,000 Paid-in capital in excess of par, common 225,000 Total paid-in capital 1,185,000Retained earnings 298,000Total stockholders’ equity 1,483,000 Computations: Par value: $8 x ½ = $4.00 Shares authorized: 500,000 x 2 = 1,000,000 Shares issued and outstanding: 120,000 x 2 = 240,000 2. No account balances changed after the stock split. All account balances were unchanged. (10-15 min.) S 10-12 Req 1
Journal
ACCOUNTS POST REF. Dr. Cr.
a. Treasury stock, common (2,500 shares $5) 12,500
Cash 12,500
b. Cash (1,000 shares $11) 11,000
Treasury stock, common (1,000 shares $5) 5,000
Paid-in capital from treasury stock ($11,000 -$5,000)
Req 2. Treasury stock is a contra-stockholders’ equity account. Liquidation World, Inc. should subtract the $7,500 balance in Treasury stock from the rest of the stockholders’ equity accounts to arrive at total stockholders’ equity on the balance sheet. (5-10 min.) S 10-13
Stockholders’ equity
Paid-In capital:
Common stock, $7 par, 250 shares issued and
outstanding $1,750,000
Paid-in capital in excess of par--Common 172,000
Total paid-in capital $1,922,000
Retained earnings 140,000
Total stockholders’ equity $2,062,000
(10-15 min.) S 10-14 1.
Journal
DATE ACCOUNTS POST REF. Dr. Cr.
Retained earnings (or Dividends)
40,000
Dividends payable
40,000
Declared a cash dividend.
Dividends payable
40,000
Cash
40,000
Paid the cash dividend.
2. The issuance of Common stock brought in $110,000 ($20,000 + $90,000) of cash during
2014. 3. The cost of the treasury stock purchased during 2014 was $18,000. The cost of the
treasury stock sold during 2014 was $9,000. The treasury stock was sold in 2014 for $19,000 ($10,000 + $9,000).
Assume that the total dividend declared in 2014 is $18,600:
Total dividend $18,600
Less: 2014 preferred dividend (25,000 shares x .08 x $12 = $24,000, but dividends total $18,600 only)
(18,600)
Common dividend $0
Assume that the total dividend declared in 2015 is $42,800: Total dividend $42,800 Less: 2014 preferred dividend ($24,000 - $18,600) (5,400) 2015 preferred dividend (25,000 shares x .08 x $12) (24,000) Total preferred dividend (29,400)Common dividend $13,400
(10-15 min.) E 10-36B
Assume that the total dividend declared in 2015 is $175,000:
Total dividend $175,000
Less: 2014 preferred dividend (65,000 shares x $.75) (48,750)
2015 preferred dividend (65,000 shares x $.75) (48,750)
No entry is needed to record the stock split because the split affects no account balances.
Req 2 Stockholders’ equity Paid-in capital:
Common stock, $0.50 par, 3,200,000 shares authorized, 240,000 shares issued and outstanding $120,000
Paid-in capital in excess of par--Common 48,000 Total paid-in capital $168,000Retained earnings 214,000Total stockholders’ equity $382,000 Computations: Par value: $2 x 1/4= $0.50 Shares authorized: 800,000 x 4 =3,200,000 Shares issued and outstanding: 60,000 x 4 = 240,000 (20-25 min.) E 10-40B
a. Increase stockholders’ equity by $1,276,000 (58,000 shares $22).
b. Decrease stockholders’ equity by $6,600 (1,100 shares $6).
c. No effect.
d. Increase stockholders’ equity by $2,100 (300 shares $7).
Some students may argue that the increase is $900 [300 shares ($7.00 – $4.00)], but that is incorrect. To see this, examine the entry to record sale of the treasury stock:
Journal DATE
ACCOUNTS POST REF. Dr. Cr.
Cash (300 shares $7) 2,100 Treasury stock (300 shares $4) 1,200 Paid-in capital from treasury stock ($2,100 - $1,200) 900 See that the two credits to the stockholders’ equity accounts (Treasury stock $1,200 and Paid-in capital from treasury stock $900) total $2,100. e. No effect.
Balance, December 31, 2013 $840,000 $145,000 $670,000 $(63,800) $1,591,200Sale of treasury stock 3,000 14,500 17,500Issuance of Common stock 6,600 15,400 22,000Net income 203,000 203,000Cash dividends (40,000) (40,000)Balance, December 31, 2014 $846,600 $163,400 $833,000 $(49,300) $1,793,700 Computations: Sale of treasury stock:
Increase in additional paid-in capital: 500 shares x ($35 sale price - $29 cost) = $3,000 Decrease in treasury stock: 500 shares x $29 cost = $14,500
Issuance of Common stock: Increase in Common stock: 1,100 shares x $6 par = $6,600 Increase in additional paid-in capital: 1,100 shares x ($20 issue price - $6 par) = $15,400
6% is the annual dividend rate on the Preferred stock. It means that the annual dividend on the Preferred stock is $0.48 (6% x $8 par) per share.
Mackay, Inc. would expect to pay annual dividends on 1,500 shares of $720 ($8 par .06 1,500 shares)
Req. 2
Mackay, Inc. issued the Common stock during 2013 at a price of $3.75 per share. [($12,000 Common stock + $33,000 Paid-in capital in excess of par) /12,000 shares]
Req. 3
No, the first-year operations were not profitable, as shown by the ($4,000) deficit in Retained earnings.
Paid-in capital in excess of par--Common ($40,600 - $11,600)
29,000
Req 2
Stockholders’ Equity at December 31, 2014 Paid-in capital: Common stock, $2 par, 650,000 shares authorized, 125,800 shares
issued, 121,800 shares outstanding $251,600 Paid-in capital in excess of par--Common 339,000 Paid-in capital from treasury stock 7,000 Total paid-in capital 597,600Retained earnings 173,400 771,000Less: Treasury stock, 4,000 shares at cost (24,000)Total stockholders’ equity $747,000
newly issued Req 2 Price per share of stock issuance:
($16,000 + $56,000) = $14.40 per share
5,000 shares newly issued Req 3 Cost of treasury stock sold: $12,000 Selling price of treasury stock sold: $118,000 ($6,000 + $12,000) Increase in total stockholders’ equity: $18,000 Req 4 The stock dividend had no effect on total stockholders’ equity.
Year Ended April 30, 2014 Cash flows from operating activities: Net income $72,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $23,000 Increase in current assets (35,000) Decrease in current liabilities ( 4,000) (16,000) Net cash provided by operating activities 56,000 Cash flows from investing activities: Purchase of equipment (58,000) Proceeds from sale of land 63,000 Net cash provided by investing activities 5,000 Cash flows from financing activities: Proceeds from issuance of common stock 6,000 Purchase of treasury stock (7,000) Payment of notes payable (38,000) Payment of dividends (5,000) Net cash used for financing activities (44,000)Net increase in cash 17,000Cash balance April 30, 2013 11,000Cash balance April 30, 2014 28,000
Juarez Equipment, Inc. Statement of Cash Flows Year ended June 30, 2014
Cash flows from operating activities: Collections from customers $213,000 Payments to suppliers $ (92,000) Payments to employees (67,000) Net cash provided by operating activities 54,000 Cash flows from investing activities: Proceeds from sale of land 61,000 Purchase of equipment (38,000) Net cash provided by investing activities 23,000 Cash flows from financing activities: Proceeds from issuance of stock 21,000 Payment of dividends (16,000) Payment of notes payable (41,000) Net cash used for financing activities (36,000)Net increase in cash 41,000Cash balance, June 30, 2013 23,000Cash balance, June 30, 2014 $ 64,000
Year Ended November 30, 2014 Cash flows from operating activities: Net income $ 93,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $19,000 Decrease in accounts receivable 15,000 Increase in inventory (14,000) Increase in accounts payable 9,000 Decrease in accrued liabilities (13,000) 16,000 Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payment of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000
Noncash investing and financing transaction: Acquisition of fixed asset with note payable $15,000
Req 2
Free cash flow = Net cash flow from operations - Cash payment for investment in L/T assets = $109,000 - $87,000 = $22,000
Snyder Services’ operations provided net cash flows of $109,000. The majority of the cash flow comes from operations, as it should in a successful company. Snyder Services used net negative cash flows of $68,000 for investing activities. However, this indicates that the company is investing its cash into the long term assets of the business. Snyder Services’ financing activities provided net cash flows of $19,000. The company raised additional capital by issuing common stock, which more than covered the payment of long-term debt and the return of some of the proceeds from operations to the stockholders in the form of dividends. Snyder Services also has Free cash flow of $22,000 which indicates it has cash available to pay dividends, pay off debt, or pursue other investment oportunities.
Snyder Serices’ Cash conversion cycle has improved from 66.82 days to 61.28 days. This is a positive sign as it means that Snyder Services’ cash has been “tied up” for a shorter period of time in the current year.
The negative cash flow from operating activities is a sign of a company that is in distress because a successful business needs to generate most of its cash flows from day to day operating activities.
Year Ended November 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 290,000 Dividends received 11,000 Total cash receipts $ 301,000 Payments: To suppliers (110,000) To employees (63,000) For income tax (12,000) For interest (7,000) Total cash payments (192,000) Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payments of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000
Bal. end $31,000 Cash received from customers = Beg. Bal. $26,000 + Credit Sales $147,000 – Bal. end. $31,000 = $142,000 2. Step a.
Inventory Bal. beg. $31,000 94,000 Cost of goods sold Purchases ? Bal. end $34,000 Purchases of inventory + Beg. Bal. $31,000 – cost of goods sold $94,000 = Bal. end $34,000 Purchases of inventory = $97,000 (this is total purchases, some for cash and some on account). Step b.
(In millions) a. Collections from customers: Sales revenues $24,859 + Decrease in accounts receivable 179 = Collections from customers $25,038 b. Payments for inventory: Cost of goods sold $18,162 − Decrease in inventory (592) − Increase in accounts payable (183) = Payments for inventory $17,387
c. Payments for other operating expenses: Other operating expenses $ 4,883 + Decrease in accrued liabilities 91 = Payments for operating expenses $ 4,974
d. Acquisitions of property and equipment: Ending balance, Property and equipment, net $ 4,345 + Depreciation expense 288 − Beginning balance, Property and equipment, net (3,879) = Acquisitions of property and equipment $ 754
f. Proceeds from issuance of common stock: Ending balance, Common stock $ 675 − Beginning balance, Common stock (615) = Proceeds from issuance of common stock $ 60
g. Payment of cash dividends: Retained earnings, beginning balance $ 4,683 + Net income 994 − Retained earnings, ending balance (4,198) = Payment of cash dividends $ 1,479
Year Ended December 31, 2014 Cash flows from operating activities: Net income $ 57,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 21,900 Loss on sale of equipment 10,500 Increase in accounts receivable (4,900) Decrease in inventory 3,200 Increase in accounts payable 1,600 Decrease in income tax payable (2,000) 30,300 Net cash provided by operating activities 87,600 Cash flows from investing activities: Acquisition of building (124,000) Proceeds from sale of equipment 53,000 Net cash used for investing activities (71,000) Cash flows from financing activities: Proceeds from issuance of common stock 36,900 Proceeds from issuance of long-term notes payable 34,600 Payment of dividends (18,300) Purchase of treasury stock (14,200) Net cash provided by financing activities 39,000 Net increase in cash 55,600 Cash balance, December 31, 2013 27,000Cash balance, December 31, 2014 $ 82,600
Noncash Investing and Financing Activities:
Retirement of bonds payable by issuing common stock $66,000
Cash flows from operating activities: Net income $ 76,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 18,300 Decrease in accounts receivable 7,200 Increase in inventories (1,700) Increase in accounts payable 3,400 Decrease in accrued liabilities (2,100) Increase in income tax payable 3,800 28,900 Net cash provided by operating activities 105,300 Cash flows from investing activities: Acquisition of equipment (29,400) Acquisition of building (99,200) Net cash used for investing activities (128,600) Cash flows from financing activities: Proceeds from issuance of common stock 15,000 Proceeds from issuance of long-term notes payable 60,000 Payment of dividends (42,000) Net cash provided by financing activities 33,000 Net increase in cash 9,700 Cash balance, March 31, 2013 5,600Cash balance, March 31, 2014 $ 15,300
Req. 2 Marsing Company’s operations provided net cash flow of $105,300. This amount exceeds net income, as it should due to the add-back of depreciation. In addition, the majority of the cash flow comes from operations, as it should in a successful company. Marsingr Co. used net negative cash flows of $128,600 for investing activities. However, this indicates that the company is investing its cash into the long-term assets of the business. CMarsing Company’s financing activities provided net cash flows of $33,000. The company raised additional capital by issuing common stock and long-term notes payable, which more than covered the return of some of the company’s earnings to the stockholders.
Year Ended December 31, 2014 Cash flows from operating activities: Net income $67,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 4,600 Decrease in accounts receivable 1,800 Increase in inventory (2,300) Decrease in accounts payable (5,500) Increase in accrued liabilities 2,600 1,200 Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700 Req 2 Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.
Year Ended September 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 637,000 Interest received 7,600 Dividends received 4,800 Total cash receipts $ 649,400 Payments: To suppliers (381,900) To employees (87,400) For taxes (38,600) For interest (13,200) Total cash payments (521,100) Net cash provided by operating activities 128,300 Cash flows from investing activities: Acquisition of fixed assets (82,300) Proceeds from sale of fixed assets 17,800 Net cash used for investing activities (64,500) Cash flows from financing activities: Proceeds from issuance of common stock 55,000 Proceeds from issuance of notes payable 23,500 Payments of long-term notes payable (46,800) Payment of dividends (41,300) Net cash used for financing activities (9,600)Net increase in cash 54,200 Cash balance, September 30, 2013 26,700 Cash balance, September 30, 2014 $ 80,900
Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $214,800 Interest received 8,300 Total cash receipts $ 223,100 Payments: To suppliers: (86,000) To employees (27,700) For interest (11,400) For income taxes (29,000) Total cash payments (154,100) Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Collections from customers = Sales Revenue + decrease in Accounts Receivable = $213,000 + $1,800 = $214,800 Payment to suppliers = Payment for inventory plus payment for other operating expenses = (Cost of goods sold plus increase in inventory plus decrease in Accounts Payable) + (Other Operating Expenses – increase in Accrued Liabilities) = ($70,500 + $2,300 + $5,500) + ($10,300 - $2,600) = ($78,300) + ($7,700) = $86,000 Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700
Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.
(20-25 min.) P 11-42B
Nelson Industrial, Inc. Statement of Cash Flows
Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 461,300 Interest received 8,200 Total cash receipts $ 469,500 Payments: To suppliers (304,800) To employees (62,300) For interest (21,400) For income taxes (7,600) Total cash payments (396,100) Net cash provided by operating activities 73,400 Cash flows from investing activities: Acquisition of equipment (21,800) Net cash used for investing activities (21,800) Cash flows from financing activities: Proceeds from issuance of common stock 58,500 Payment of dividends (10,700) Payment of notes payable (72,000) Net cash used for financing activities (24,200)Net increase in cash 27,400 Cash balance, December 31, 2013 63,800Cash balance, December 31, 2014 $ 91,200
Assets Current assets: Cash $14,400 18.0% Accounts Receivable, net 5,600 7.0% Inventory 23,200 29.0% Prepaid expenses 2,400 3.0% Total current assets 45,600 57.0% Plant and Equipment, net 34,400 43.0% Total assets $80,000 100%
Although the percentage decrease in working capital is less from 2013 to 2014 than it was from 2012 to 2013, the trend is unfavorable given the decreases in both years.
Years Ended December 31, 2014 and 2013 2014 2013 Total revenues 100.0% 100.0% Expenses: Cost of goods sold 45.4% 45.0% Selling and general expenses 20.2% 21.8% Interest expense 8.1% 8.1% Income tax expense 5.0% 6.9% Total expenses 78.7% 81.8% Net income 21.3% 18.2%
= 42.50% $110,000 $120,000 d. Return on equity: $110,000
= 17.70%$120,000
= 20.29% ($640,000 + $603,000)/2 ($603,000 + $580,000)/2 Sharp Systems Incorporated stock’s attractiveness has decreased during the year as shown by the decrease in all of the ratios.
Johnson Auto Sales Common-Size Income Statement Compared to Industry Average
Year Ended December 31, 2014
Johnson Industry Average
Net sales 100.0% 100.0% Cost of goods sold 60.1% 63.2% Gross profit 39.9% 36.8% Operating expenses 31.5% 27.5% Operating income 8.4% 9.3% Other expenses 0 .6% 0.5% Net income 7.8% 8.8%
Johnson Auto Sales
Common-Size Balance Sheet Compared to Industry Average December 31, 2014
Johnson
Industry Average
Current assets 70.7% 71.2% Fixed assets, net 23.6% 24.3% Intangible assets, net 0.6% 0.7% Other assets 5.1% 3.8% Total assets 100.0% 100.0% Current liabilities 49.3% 48.4% Long-term liabilities 18.7% 16.1% Stockholders’ equity 32.0% 35.5% Total liabilities and stockholders’ equity 100.0% 100.0%
Req. 2 Johnson Auto Sale’s common-size income statement shows that its ratio of gross profit to net sales is better than the industry average. However, the company’s ratio of operating income to net sales and ratio of net income to net sales are worse than the industry averages. Overall, Johnson’s profit performance is worse than average for the industry. Req. 3 Johnson’s common-size balance sheet shows that its ratio of current assets to total assets is comparable to the industry average. Johnson’s ratio of stockholders’ equity to total assets is lower than the industry average. This indicates that Johnson’s Auto Sales finances more of its assets with debt than others in the industry which might make it harder to obtain additional financing if necessary.
= $4.20* of common stock: 11 10 g. Price/earnings $48.72*
= 8.26 $33.28*
= 7.92 ratio: $5.90* $4.20* *Not in thousands
Req 2
Decisions: a. The company’s performance improved during 2014 as shown by increases in the current ratio, inventory turnover, accounts
receivables turnover and in the interest coverage ratio. b. The common stock’s attractiveness increased during 2014, as shown by the increase in the return on equity, the earnings per share
of common stock, and the price/earnings ratio. Req 3 This problem gives you practice in computing and evaluating several of the ratios used in financial statement analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s ability to pay its debts, manage its assets, and earn a return for its investors has improved or deteriorated during this period. Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment.
(20-25 min.) P 12-42B Student answers will vary TO: Client FROM: Student Name SUBJECT: Investment Recommendation I recommend that you invest in Mutual Material, Inc. for the following reasons: 1. Mutual Materials, Inc.’ return on equity (ROE) is 4.5% higher than Anderson Supply, Co.’s. An investment in Mutual Materials,
Inc. stock should, therefore, produce a higher return than an investment in Anderson Supply, Co. stock.
2. Mutual Materials, Inc.’ ROE exceeds its return on assets by a wider margin than does Anderson Supply, Co.’s. This means that
Mutual Materials, Inc. is earning more with its borrowed funds than Anderson Supply, Co. is earning.
3. Mutual Materials, Inc. can cover its interest expense with operating income 9.3 times compared to 7.4 times for Anderson Supply,
Co..
4. Mutual Materials, Inc. collects receivables faster than Anderson Supply, Co. does. This suggests that cash flow is stronger at
Mutual Materials, Inc..
5. Mutual Materials, Inc.’s gross profit percentage is higher than Anderson Supply, Co.’s. This means they have more left over from
each dollar of sales after paying for cost of goods sold to put towards paying operating expenses and providing a profit to