Income Statements » What’s Behind Income Statements » Exercises
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S O L U T I O N S
is.wbn.is.je.030 Recording journal entries, posting to T-Accounts, and creating
income statements (Bryan’s Health & Fitness)
Use the materials provided for this exercise to record the entries, post to T-Accounts and
create income statements.
Events
Bryan’s Health and Fitness provides a wide range of health and fitness products and services. Annual membership provides access to BHF’s state-of-the-art fitness center. BHF
also sells merchandise such as exercise clothes and health food supplements.
Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
Events E1-E16 below summarize similar events that occurred during fiscal 2012, which
ended December 31, 2012. For example, a single entry below summarizes merchandise
sales that were recorded throughout the year. All amounts are in dollars.
Events E1-E5 are carried forward from a balance-sheet exercise and repeated here for your
convenience.
E1 Issued common stock to shareholders in exchange for $5,000 cash.
E2 Purchased computers for $18,600 cash.
E3 Purchased merchandise on account for $11,000. BHF was invoiced upon delivery.
E4 Collected $8,900 due from customers for previous sales.
E5 Paid $13,200 due to suppliers and other vendors for resources previously provided
and invoiced. BHF’s policy is to record all invoices to accounts payable when
invoices are received.
E6 Collected $65,500 of annual membership fees from customers for use of the fitness
center during the next twelve months. BHF’s policy is to recognize membership
revenues evenly over the subsequent twelve months, starting at the end of the
month fees are collected. Entry E15 below summarizes the monthly revenue recognition entries (by treating them as a single annual entry).
E7 Paid $14,400 for insurance and other resources that will provide future benefits.
The cost of these resources will be expensed when the benefits are realized.
E8a Sold merchandise to customers for $22,800. $13,600 was collected at the time of
the sale and the remainder was fully expected to be collected on or before specified
future dates. BHF’s policy is to recognize revenue at the time merchandise is sold,
providing collection is reasonably assured.
E8b The merchandise sold in E8a cost $10,500.
Continued on next page...
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NAVIGATING ACCOUNTING®
E9 Paid $10,200 cash to tax authorities for previously expensed taxes.
E10 Paid $21,400 cash to employees and other resource providers for services previously rendered and expensed but not invoiced. BHF’s policy is to transfer
previously accrued expenses from accrued liabilities to accounts payable when
it receives invoices. Accrued expenses that are never invoiced (such as wages)
remain in accrued liabilities until they are paid.
E11 Received $1,400 of invoices for previously accrued expenses. BHF’s policy is to
transfer previously accrued expenses from accrued liabilities to accounts payable when it receives invoices.
E12 Recognized $2,400 of selling, general, and administrative expense during
the year. $1,600 was recognized when the company received invoices from
resource providers. The remaining expense was recognized when the company
paid resource providers.
E13 Recognized $36,000 of selling, general, and administrative expense as and
adjusting entry. $12,000 had been prepaid at earlier dates. The remainder
was accrued and there was no uncertainty about the timing and amount that
would be paid in the future. (This entry and the remaining entries summarize
adjusting entries recorded at the end of each month.)
E14 Recognized $10,000 of depreciation expense as an adjusting entry.
E15 Recognized $64,000 of previously deferred membership revenue as and adjusting entry. BHF’s revenue recognition policy for membership fees is explained
in E6.
E16 Accrued $11,100 of tax expense as and adjusting entry.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
3
EXERCISE
Required
(a) Record the journal entries for events E1-E16 using the chart of accounts and journal-entry template provided with the exercise materials.
+
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to see the details.
Bryan's Health and Fitness 2012 journal entries
E1: Issue common stock
E2: Purchase PP&E
Debit
Cash
Credit
$5,000
Contributed capital
$5,000
E3: Purchase merchandise on account
$11,000
$11,000
$13,200
$14,400
$14,400
$65,500
$10,500
Credit
$13,600
$9,200
$22,800
Debit
Accrued taxes
Cash
Credit
$10,200
$10,200
E11: Receive invoices previously expensed
Credit
$21,400
$21,400
E12: Recognize SG&A expense (period)
Debit
Debit
Cash
Accounts receivable
Merchandise revenues
E9: Pay previously accrued taxes
$10,500
Debit
Debit
Other accrued liabilities
Accounts payable
Credit
$1,400
$1,400
E13: Recognize SG&A expense (adjusting)
Credit
$2,400
$800
$1,600
E14: Recognize depreciation expense
Debit
Sales, general & administrative
Prepaid expenses
Other accrued liabilities
Credit
$36,000
$12,000
$24,000
E15: Recognize previously deferred revenue
Debit
Credit
$10,000
$10,000
E16: Accrue tax expense
Debit
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Deferred revenues
Credit
E10: Pay previous expenses not invoiced
Tax expense
Accrued taxes
Credit
E8a: Recognize merchandise revenue
Debit
Depreciation expense
Accumulated depreciation
$8,900
$65,500
Credit
E8b: Recognize cost of sold merchandise
Sales, general & administrative
Cash
Accounts payable
Credit
$8,900
Debit
Cash
$13,200
Debit
Other accrued liabilities
Cash
Debit
Cash
Accounts receivable
Credit
E7: Prepay expenses with cash
Cost of merchandise sold
Inventory
$18,600
E6: Sell memberships for cash
Debit
Prepaid expenses
Cash
Cash
Credit
E5: Pay invoices due
Accounts payable
Cash
Credit
$18,600
E4: Collect amounts due from customers
Debit
Inventory
Accounts payable
Debit
Property, plant & equipment at cost
Credit
$11,100
$11,100
Debit
Deferred revenues
Membership revenues
Credit
$64,000
$64,000
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NAVIGATING ACCOUNTING®
(b) Record the effects of journal entries for events E1–E16 to the T-Accounts template provided with the exercise
materials.
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to see the details.
Bryan's Health and Fitness 2012 T-accounts
C
BB
E1
$12,300
$5,000
E4
$8,900
E6
$65,500
E8a
$13,600
AR
BB
E2
$18,600
E5
$13,200
E7
$14,400
E9
E10
$10,200
$21,400
E12
$800
E4
E8a
E5
E3
$11,000
E3
BB
E7
BB
LIABILITIES
PreEx
OacLb
BB
$2,200
E9
$10,200
E10
E11
$1,400
$1,600
CC
BB
E1
BB
$64,450
$5,000
BB
E15
DepEx
BB
$0
E14
$10,000
TaxEx
BB
$0
E16
$11,100
$18,600
BB
$10,000
E13
$12,000
E14
$10,000
BB
$8,500
E6
$65,500
BB
$0
E8a
$22,800
DefRv
$24,000
E15
MmRv
$27,250
E2
AcDep
$14,400
$1,600
$11,100
RE
$90,000
$21,400
$1,400
E13
E16
BB
$10,500
$13,200
E11
E12
PP&E
$9,500
$11,000
E8b
AcTx
$2,750
$8,900
ASSETS
$3,600
$9,200
AP
BB
Inven
BB
$1,350
OWNERS' EQUITY
$0
$64,000
MrRv
Cms
BB
$0
E8b
$10,500
SG&A
BB
$0
E12
E13
$2,400
$36,000
$64,000
IncSm
BB
$0
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5
EXERCISE
(c) Create a comprehensive income statement for Bryan’s Health and Fitness using the T-accounts you completed above. Use the blank template provided with the exercise materials.
Bryan's Health and Fitness 2012
Income Statement
In Dollars, for year ended December 31, 2012
Income from operations
Membership revenues
$64,000
Merchandise revenues
$22,800
Cost of merchandise sold
($10,500)
Merchandise gross margin
$12,300
Sales, general & administrative
($38,400)
Depreciation expense
($10,000)
Income from operations
Non-operating income
Income before taxes
Tax expense
Net income
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
$27,900
$0
$27,900
($11,100)
$16,800