Practice Problem Answers Account 211
Quick Study 1-1
(a) and (b)
GAAP:
Generally Accepted Accounting Principles
Importance: GAAP are the rules that specify acceptable accounting
practices.
SEC:
Securities and Exchange Commission
Importance: The SEC is charged by Congress to set reporting rules for
organizations that sell ownership shares to the public. The
SEC delegates part of this responsibility to the FASB.
FASB:
Financial Accounting Standards Board
Importance: FASB is an independent group of full-time members who are
responsible for setting accounting rules.
IASB:
International Accounting Standards Board.
Importance: Its purpose is to issue standards that identify preferred
practices in the desire of harmonizing accounting practices
across different countries. The vast majority of countries and
financial exchanges support its activities and objectives.
IFRS:
International Financial Reporting Standards.
Importance: A global set of accounting standards issued by the IASB. Many
countries require or permit companies to comply with IFRS in
preparing their financial statements. The FASB is undergoing
a process with the IASB to converge GAAP and IFRS and to
create a single set of accounting standards for global use.
Quick Study 1-3
Internal controls serve several purposes:
 They involve monitoring an organization’s activities to promote efficiency
and to prevent wrongful use of its resources.
 They help ensure the validity and credibility of accounting reports.
 They are often crucial to effective operations and reliable reporting.
More generally, the absence of internal controls can adversely affect the
effectiveness of domestic and global financial markets.
Examples of internal controls include cash registers with internal tapes or
drives, scanners at doorways to identify tagged products, overhead video
cameras, security guards, and many others.
Quick Study 1-7
Assets
=
Liabilities
+
Equity
$700,000
(a) $280,000
$420,000
$500,000
(b) $250,000
(b) $250,000
Exercise 1-14 (15 minutes)
REAL ANSWERS
Income Statement
For Month Ended October 31
Revenues
Consulting fees earned ......................
Expenses
Salaries expense .................................
Rent expense.......................................
Telephone expense.............................
Miscellaneous expenses ....................
Total expenses ....................................
Net income ..................................................
Quick Study 1-8
$14,000
$7,000
3,550
760
580
11,890
$ 2,110
Assets
=
Liabilities
+
Equity
$75,000
(a) $35,000
$40,000
(b) $95,000
$25,000
$70,000
$85,000
$20,000
(c) $65,000
Exercise 1-11 (30 minutes)
Assets
Cash
a.
+$60,000
b.
–
Bal.
c.
d.
61,000 +
–
Bal.
g.
–
+
5,000 57,000 +
– 10,000
Bal.
j.
Bal.
3,000
52,000 +
Bal.
i.
6,000
55,000 +
Bal.
h.
+
15,000 =
+
10,000
+
25,000 =
______
61,000 +
_______ +
47,000 +
–
1,000
$46,000 +
=
+
$8,000
+ $75,000
8,000 +
______ +
8,000 +
______
6,000
31,000 =
5,000
______
3,000 +
31,000 =
______
10,000 +
_______
10,000 +
_______
10,000 +
_______
31,000 =
8,000 +
______
3,000 +
+$10,000
25,000 =
______
______
+
25,000 =
______
10,000 +
_______
10,000 +
_______
10,000 +
– 10,000
31,000 =
______
Equity
Accounts
Common
Dividends + Revenues – Expenses
Payable +
Stock –
______
2,500
Bal.
f.
1,500
58,500 +
+
Equipment
+ $15,000 =
_______
Bal.
e.
Accounts
+ Receivable +
58,500 +
Bal.
= Liabilities +
0 +
_______
$3,000 + $31,000 = $
______
– $1,500
75,000
–
______
1,500
_____
–
75,000
______
+
75,000
+
2,500 –
1,500
______
+
8,000
_____
75,000
+
10,500 –
1,500
_____
_____
10,500 –
1,500
_____ –
3,000
10,500 –
4,500
_____
_____
10,500 –
4,500
_____
_____
10,500 –
4,500
_____
_____
______
75,000
+
______
75,000
+
______
75,000
+
______
75,000
______ – $1,000
+
$2,500
1,500
_____
0 + $75,000 – $1,000 + $10,500 – $4,500
Problem 1-3A (15 minutes)
Elko Energy Company
Income Statement
For Year Ended December 31, 2013
Revenues ............................................................................
$55,000
Expenses ..................................................
40,000
Net income ...............................................................................
$15,000
Quick Study 2-1 (10 minutes)
The likely source documents include:
a. Sales ticket
d. Telephone bill
e. Invoice from supplier
i.
Bank statement
Quick Study 2-3 (10 minutes)
a.
b.
c.
Debit
Debit
Credit
d.
e.
f.
Debit
Debit
Debit
g.
h.
i.
Credit
Debit
Credit
Debit
Credit
Credit
Debit
i.
j.
k.
l.
Credit
Debit
Debit
Credit
Quick Study 2-4 (10 minutes)
a.
b.
c.
d.
Debit
Debit
Credit
Credit
e.
f.
g.
h.
Quick Study 2-6 (15 minutes)
May 15 Cash .......................................................................... 70,000
Equipment ............................................................... 30,000
Common Stock................................................
100,000
Owner invests cash and equipment for stock.
21 Office Supplies ........................................................
Accounts Payable ...........................................
280
280
Purchased office supplies on credit.
25 Cash ..........................................................................
Landscaping Services Revenue ....................
7,800
7,800
Received cash for landscaping services.
30 Cash ..........................................................................
Unearned Landscaping Services Revenue ..
1,000
1,000
Received cash in advance for landscaping services.
Exercise 2-7 (25 minutes)
Aug. 1 Cash ..................................................................
6,500
Photography Equipment ................................. 33,500
Common Stock ..........................................
40,000
Owner investment in business for stock.
2 Prepaid Insurance ............................................
Cash ............................................................
Acquired 2 years of insurance coverage.
2,100
2,100
5 Office Supplies .................................................
Cash ............................................................
880
880
Purchased office supplies.
20 Cash ..................................................................
Photography Fees Earned ........................
3,331
3,331
Collected photography fees.
31 Utilities Expense ..............................................
Cash ............................................................
Paid for August utilities.
675
675
ddd
Problem 2-1A (90 minutes)
Part 1
a.
Cash.............................................................101 100,000
Office Equipment........................................163
5,000
Drafting Equipment ....................................164 60,000
Common Stock ...................................307
165,000
Owner invested cash and equipment for stock.
b.
Land .............................................................172
Cash .....................................................101
Notes Payable .....................................250
49,000
6,300
42,700
Purchased land with cash and notes payable.
c.
Building .......................................................170
Cash .....................................................101
55,000
55,000
Purchased building.
d.
Prepaid Insurance ......................................108
Cash .....................................................101
3,000
3,000
Purchased 18-month insurance policy.
e.
Cash.............................................................101
Engineering Fees Earned ..................402
6,200
6,200
Collected cash for completed work.
f.
Drafting Equipment ....................................164
Cash .....................................................101
Notes Payable .....................................250
20,000
9,500
10,500
Purchased equipment with cash and notes
payable.
g.
Accounts Receivable .................................106
Engineering Fees Earned ..................402
14,000
14,000
Completed services for client.
h.
Office Equipment........................................163
Accounts Payable ...............................201
Purchased equipment on credit.
1,150
1,150
Problem 2-1A (Part 1 Continued)
i.
Accounts Receivable .................................106
Engineering Fees Earned ..................402
22,000
22,000
Billed client for completed work.
j.
Equipment Rental Expense .......................602
Accounts Payable ...............................201
1,333
1,333
Incurred equipment rental expense.
k.
Cash.............................................................101
Accounts Receivable .........................106
7,000
7,000
Collected cash on account.
l.
Wages Expense ..........................................601
Cash .....................................................101
1,200
1,200
Paid assistant’s wages.
m.
Accounts Payable ......................................201
Cash .................................................. 101
1,150
1,150
Paid amount due on account.
n.
Repairs Expense ........................................604
Cash .................................................. 101
925
925
Paid for repair of equipment.
o.
Dividends ....................................................319
Cash .....................................................101
9,480
9,480
Paid cash dividends.
p.
Wages Expense ..........................................601
Cash .....................................................101
1,200
1,200
Paid assistant’s wages.
q.
Advertising Expense ..................................603
Cash .....................................................101
Paid for advertising expense.
2,500
2,500
Quick Study 3-3 (10 minutes)
a.
b.
c.
d.
e.
PE
AR
AE
PE
UR
Prepaid expenses
Accrued revenue
Accrued expenses
Prepaid expenses (Depreciation)
Unearned revenue
Quick Study 3-7 (15 minutes)
Accounts Debited and Credited
Debit
Unearned Revenue
Credit Revenue Earned
Financial Statement
Balance Sheet
Income Statement
b.
Debit
Credit
Wages Expense
Wages Payable
Income Statement
Balance Sheet
c.
Debit
Credit
Accounts Receivable
Revenue Earned
Balance Sheet
Income Statement
d.
Debit
Credit
Insurance Expense
Prepaid Insurance
Income Statement
Balance Sheet
e.
Debit
Credit
Depreciation Expense
Accumulated Depreciation
Income Statement
Balance Sheet
a.
Exercise 3-11 (20 minutes)
WILSON TRUCKING COMPANY
Income Statement
For Year Ended December 31, 2013
Trucking fees earned ................................................ $130,000
Expenses
Depreciation expense—Trucks ...........................$23,500
Salaries expense ..................................................61,000
Office supplies expense ......................................8,000
Repairs expense—Trucks ................................... 12,000
Total expenses .....................................................
104,500
Net income ................................................................. $ 25,500
WILSON TRUCKING COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2013
Retained earnings, December 31, 2012 ...................$145,000
Add: Net income ......................................................
25,500
170,500
Less: Dividends ........................................................ (20,000)
Retained earnings, December 31, 2013 ...................$150,500
Quick Study 4-3 (15 minutes)
Nov. 5
Merchandise Inventory ...........................................................................
Accounts Payable .....................................
To record credit purchase [(600 x $10].
6,000
6,000
Nov. 7
Accounts Payable .....................................................................................
250
Merchandise Inventory ............................
250
Returned defective units [(25 x $10].
Nov. 15
Accounts Payable ....................................................................................
5,750
Cash ...........................................................
Merchandise Inventory* ...........................
5,635
115
................................................................................... Paid for purchase less cash discount
...................................................................................................... *[(6,000 - $250) x 2%].
Quick Study 4-4 (10 minutes)
Apr. 1 Accounts Receivable ..................................... 3,000
Sales .......................................................
3,000
To record credit sale.
1 Cost of Goods Sold ........................................ 1,800
Merchandise Inventory .........................
1,800
To record cost of credit sale.
4 Sales Returns and Allowances ..................... 600
Accounts Receivable ............................
600
To record sales return.
4 Merchandise Inventory ..................................
Cost of Goods Sold ...............................
360
360
Restore cost of returned goods to inventory.
11 Cash ................................................................. 2,352
Sales Discounts* ............................................
48
Accounts Receivable .............................
................................................................................ Received payment less cash discount
..................................................................................................... *[($3,000 - $600) x 2%].
2,400
Exercise 4-2 (30 minutes)
Apr. 2 Merchandise Inventory ........................... ......... 4,600
Accounts Payable—Lyon ........................... ......... 4,600
Purchased merchandise on credit.
3 Merchandise Inventory ........................... ......... 300
Cash ........................................................... 300
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Lyon ....................... ......... 600
Merchandise Inventory ............................... ......... 600
Returned unacceptable merchandise.
17 Accounts Payable—Lyon ....................... ......... 4,000
Merchandise Inventory* .............................. ......... 80
Cash ........................................................... 3,920
*[($4,600 - $600) x 2%]
Paid balance (less 2%) within discount period.
18 Merchandise Inventory .......................... ......... 8,500
Accounts Payable—Frist ............................ ......... 8,500
Purchased merchandise on credit.
21 Accounts Payable—Frist ........................ ......... 1,100
Merchandise Inventory .............................. ......... 1,100
Received an allowance on purchase.
28 Accounts Payable—Frist ........................ ......... 7,400
Merchandise Inventory* .............................. ......... 148
Cash ........................................................... 7,252
*[($8,500 - $1,100) x 2%]
Paid balance (less 2%) within discount period.
Exercise 4-15 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only
Sales (gross) ...............................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
Net sales ......................................................................
$200,000
$ 4,000
16,000
20,000
180,000
Quick Study 5-2 (10 minutes)
LIFO—Perpetual
Date
1/1
1/9
1/25
Goods Purchased
Cost of Goods Sold
80 @ $3.20
320 @ $3.00
80 @ $3.20
100 @ $3.34
1/26
Alternate solution format
LIFO:
150 @ $3.00 =
Inventory Balance
320 @ $3.00
= $ 960.00
100 @ $3.34 =$ 334.00
80 @ $3.20 = 256.00
170 @ $3.00 = 510.00
$1,100.00
$ 450.00
}
= $1,216.00
320 @ $3.00
80 @ $3.20
100 @ $3.34
= $1,550.00
150 @ $3.00
= $ 450.00
Ending inventory cost
Exercise 5-8 (15 minutes)
a. Specific Identification method—Cost of goods sold
Cost of goods available for sale .....................................
Ending inventory under specific identification
3/14 purchase ( 45 @ $15) ......................................
7/30 purchase ( 75 @ $20) .......................................
10/26 purchase (100 @ $25) .......................................
Total ending inventory under specific identification..
Cost of goods sold under specific identification .......
$18,750
$ 675
1,500
2,500
4,675
$14,075
b. Specific Identification method—Gross margin
Sales revenue (880 units sold x $40 selling price) .......
Less: Specific identification cost of goods sold .........
Gross profit ......................................................................
$35,200
14,075
$21,125
Problem 5-1A (40 minutes)
1. Compute cost of goods available for sale and units available for sale
Beginning inventory ......................................................
100 units @ $50.00
March 5
400 units @ $55.00
March 18 ........................................... 120 units @ $60.00
March 25 ........................................... 200 units @ $62.00
Units available ................................. 820 units
$ 5,000
22,000
7,200
12,400
Cost of goods available for sale
$46,600
2. Units in ending inventory
Units available (from part 1) ........... 820 units
Less: Units sold (420 + 160) ........... 580 units
Ending Inventory (units) ................. 240 units
3a. FIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Mar. 1
100 @ $50.00
= $5,000
Mar. 5 400 @ $55.00 = $22,000
100 @ $50.00
400 @ $55.00
= $27,000
80 @ $55.00
= $ 4,400
80 @ $55.00
120 @ $60.00
= $11,600
80 @ $55.00
120 @ $60.00
200 @ $62.00
= $24,000
Mar. 9
100 @ $50.00 = $ 5,000
320 @ $55.00 = $17,600
Mar. 18 120 @ $60.00 = $ 7,200
Mar. 25 200 @ $62.00 = $ 12,400
Mar. 29
80 @ $55.00 = $ 4,400
40 @ $60.00
80 @ $60.00 = $ 4,800 200 @ $62.00
$31,800
= $14,800
Problem 5-1A (Continued)
3b. LIFO perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Mar. 1
100 @ $50.00
= $ 5,000
Mar. 5 400@ $55.00= $22,000
100 @ $50.00
400 @ $55.00
= $27,000
80 @ $50.00
= $ 4,000
80 @ $50.00
120 @ $60.00
= $11,200
80 @ $50.00
120 @ $60.00
200 @ $62.00
= $23,600
80 @ $50.00
120 @ $60.00
40 @ $62.00
= $13,680
Mar. 9
400 @ $55.00 = $22,000
20 @ $50.00 = $ 1,000
Mar. 18 120@ $60.00= $ 7,200
Mar. 25 200@ $62.00= $12,400
Mar. 29
160 @ $62.00 = $ 9,920
$32,920
3c. Weighted Average perpetual
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Mar. 1
100 @ $50.00
= $ 5,000
Mar. 5 400@ $55.00= $22,000
100 @ $50.00
400 @ $55.00
= $27,000
(avg. = $54.00)
Mar. 9
420 @ $54.00 = $22,680
80 @ $54.00
= $ 4,320
(avg. = $54.00)
80 @ $54.00
120 @ $60.00
Mar. 18 120@ $60.00= $ 7,200
= $11,520
(avg. = $57.60)
Mar. 25 200@ $62.00= $12,400
80 @ $54.00
120 @ $60.00
200 @ $62.00
= $23,920
(avg. = $59.80)
Mar. 29
160 @ $59.80 = $ 9,568
240 @ $59.80
(avg. = $59.80)
$32,248
= $14,352
Problem 5-1A (Concluded)
3d. Specific Identification
Date
Goods Purchased
Cost of Goods Sold
Inventory Balance
Mar. 1
100 @ $50.00
= $ 5,000
Mar. 5 400 @ $55.00 = $22,000
100 @ $50.00
400 @ $55.00
= $27,000
20 @ $50.00
60 @ $55.00
= $ 4,300
20 @ $50.00
60 @ $55.00
120 @ $60.00
= $11,500
20 @ $50.00
60 @ $55.00
120 @ $60.00
200 @ $62.00
= $23,900
20 @ $50.00
60 @ $55.00
80 @ $60.00
80 @ $62.00
= $14,060
Mar. 9
80 @ $50.00 = $ 4,000
340 @ $55.00 = $18,700
Mar. 18 120 @ $60.00 = $ 7,200
Mar. 25 200 @ $62.00 = $12,400
Mar. 29
40 @ $60.00 = $ 2,400
120 @ $62.00 = $ 7,440
$32,540
Specific identification—Alternative Computation
Cost of goods sold—80 units from beginning inventory, 340 units from March 5 purchase, 40 units
from March 18 purchase, and 120 units from March 25 purchase
Ending
Inventory
Specific Identification
Cost of
Goods Sold
(80x$50) + (340x$55) + (40x$60) + (120x$62) .......
$46,600 [Total Goods Available] - $32,540 [Cost of Goods Sold] ...
$32,540
$14,060
4.
Specific
Identification
FIFO
LIFO
Weighted
Average
Sales* ....................................
$50,900
$50,900
$50,900
$50,900
Less: Cost of goods sold ....
31,800
32,920
32,248
32,540
Gross profit .................................................
$ 19,100
$17,980
$ 18,652
$ 18,360
*Sales = (420 units x $85.00) + (160 units x $95.00) = $50,900
Exercise 6-10 (25 minutes)
DEL GATO CLINIC
Bank Reconciliation
June 30, 2013
Bank statement balance .......
Add
Deposit of June 30...............
Deduct
Outstanding checks ...........
Adjusted bank balance..........
$10,555
2,856
13,411
1,829
$11,582
Book
balance
........................................................
........................................................
Add
Error on Ck. No. 919.............
Deduct
Bank service charge............
Adjusted book balance .........
$11,589
9
11,598
16
$11,582
Problem 6-2A (30 minutes)
Part 1
Feb. 2 Petty Cash .......................................................
Cash ...........................................................
To establish the $400 petty cash fund.
Part 2
Nakashima Gallery
Petty Cash Payments Report (for February)
400
400
Delivery expense
Feb. 23 Delivery of customer's merchandise .........
$ 20.00
Mileage expense
Feb. 14 Reimbursement for mileage .......................
68.00
Postage expense
Feb. 12 Express delivery of contract ......................
Feb. 27 Purchased postage stamps ........................
$ 7.95
54.00
61.95
Merchandise inventory (transportation-in)*
Feb. 9 COD charges on purchases .......................
Feb. 25 COD charges on purchases .......................
32.50
13.10
45.60
Office supplies expense
Feb. 5 Purchased paper for copier ........................
Feb. 20 Purchased stationery ..................................
Total
14.15
67.77
81.92
$277.47
* Transportation-in costs are included in Merchandise Inventory under a perpetual system.
Part 3
Feb. 28 Delivery Expense............................................
Mileage Expense ............................................
Postage Expense............................................
Merchandise Inventory ..................................
Office Supplies Expense ...............................
Cash Over and Short......................................
Cash ...........................................................
20.00
68.00
61.95
45.60
81.92
2.11
279.58
To reimburse the petty cash fund.
Feb. 28 Petty Cash .......................................................
Cash ...........................................................
To increase the petty cash fund to $500.
Note: The two Feb. 28 entries can be combined into one.
100.00
100.00
Exercise 7-4 (20 minutes)
Dec. 31 Bad Debts Expense ..............................................
Allowance for Doubtful Accounts .................
4,875
4,875
To record estimated bad debts expense
(.005 x $975,000).
Feb. 1
Allowance for Doubtful Accounts.....................................................
580
Accounts Receivable—P. Park ......................
580
To write off an account.
June 5 Accounts Receivable—P. Park ............................
Allowance for Doubtful Accounts .................
580
580
To reinstate an account.
June 5 Cash .......................................................................
Accounts Receivable—P. Park ......................
580
580
To record cash received on account.
Quick Study 8-1 (10 minutes)
1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time, while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that inventory
is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
Exercise 8-3 (20 minutes)
Purchase price ........................................................
$375,280
Closing costs ..........................................................
Total cost of acquisition .........................................
20,100
$395,380
Allocation of total cost
Land .........................
Land improvements
Building ...................
Totals .......................
Appraised
Value
Percent
of Total
Applying %
to Cost
Apportioned
Cost
$157,040
58,890
176,670
$392,600
40%
15
45
100%
$395,380 x .40
$158,152
59,307
177,921
$395,380
$395,380 x .15
$395,380 x .45
Journal entry
Land ....................................................................
Land Improvements...........................................
Building ..............................................................
Cash .............................................................
158,152
59,307
177,921
395,380
To record costs of lump-sum purchase.
Exercise 8-4 (15 minutes)
Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year
Year
Annual Depreciation Year-End Book Value
2013 .......
$ 32,250
$121,750
2014 .......
32,250
89,500
2015 .......
32,250
57,250
2016 .......
32,250
25,000
Total .......
$129,000
Exercise 8-7 (10 minutes)
Units-of-production
Depreciation per unit = ($43,500 - $5,000) / 385,000 units = $0.10 per unit
For 32,500 units in second year: Depreciation = 32,500 x $0.10 = $3,250
Quick Study 9-2 (10 minutes)
Oct. 31
Cash ..............................................................
Unearned Ticket Revenue .....................
5,000,000
5,000,000
To record sales in advance of concerts.
Nov. 5
Unearned Ticket Revenue ...........................
Earned Ticket Revenue..........................
1,250,000
1,250,000
To record concert revenues earned.
Quick Study 9-3 (10 minutes)
Sept. 30 Cash ..............................................................
Sales ........................................................
Sales Taxes Payable ..............................
6,300
6,000
300
To record cash sales and 5% sales tax.
Sept. 30 Cost of Goods Sold......................................
Merchandise Inventory ..........................
3,900
3,900
To record cost of Sept. 30 sales.
Oct. 15 Sales Taxes Payable ....................................
Cash ........................................................
To record remittance of sales taxes to govt.
300
300
Exercise 9-4 (30 minutes)
1.
Maturity date = May 15 + 60 days = July 14, 2013
2a.
May 15
Cash .....................................................................
Notes Payable................................................
Borrowed cash by issuing an interest-bearing note.
110,000
110,000
Exercise 9-4 (Concluded)
2b.
July 14 Interest Expense* ................................................
Notes Payable......................................................
Cash ...............................................................
2,200
110,000
112,200
Repaid note plus interest.
* Principal .....................
$110,000
x Interest rate .............
12%
x Fraction of
60/360
year
.....................................
.....................................
$ 2,200
Total interest ..................
Exercise 9-6 (20 minutes)
Subject
to Tax
Rate
FICA--Social Security............................
$ 800
6.20%
FICA—Medicare ...................
800
1.45
11.60 Full amount is subject to tax.
FUTA.........................................
600
0.80
4.80 $200 is over the maximum.
SUTA.........................................
600
2.90
17.40 $200 is over the maximum.
b.
FICA--Social Security..........
$2,100
FICA—Medicare ...................
2,100
1.45
FUTA.........................................
0
0.80
0.00 Full amount is over maximum.
SUTA.........................................
0
2.90
0.00 Full amount is over maximum.
c.
FICA--Social Security..........
$6,300
FICA—Medicare ...................
8,000
Tax
Explanation
a.
$ 49.60 Full amount is subject to tax.
6.20% $130.20 Full amount is subject to tax.
6.20%
1.45
30.45 Full amount is subject to tax.
$390.60 $1,700 is over the maximum.
116.00 Full amount is subject to tax.
FUTA.........................................
0
0.80
0.00 Full amount is over maximum.
SUTA.........................................
0
2.90
0.00 Full amount is over maximum.
Exercise 10-1 (15 minutes)
1.
Semiannual cash interest payment = $3,400,000 x 9% x 1/2 = $153,000
2.
Journal entries
2013
(a)
Jan.
1
Cash ...........................................................
Bonds Payable ....................................
3,400,000
3,400,000
Sold bonds at par.
(b)
June 30
Bond Interest Expense .............................
Cash .....................................................
153,000
153,000
Paid semiannual interest on bonds.
(c)
Dec. 31
Bond Interest Expense .............................
Cash .....................................................
153,000
153,000
Paid semiannual interest on bonds.
3.
2013
(a)
Jan.
1
Cash*
Discount on Bonds Payable.....................
Bonds Payable ....................................
Sold bonds at 98. *($3,400,000 x 0.98)
(b)
3,332,000
68,000
3,400,000
Jan.
1
Cash*
Premium on Bonds Payable ..............
Bonds Payable ....................................
Sold bonds at 102. *($3,400,000 x 1.02)
3,468,000
68,000
3,400,000
Exercise 10-2 (30 minutes)
1. Discount = Par value - Issue price = $180,000 - $170,862 = $9,138
2.
Total bond interest expense over the life of the bonds
Amount repaid
Six payments of $7,200* ...............
Par value at maturity .....................
Total repaid ....................................
Less amount borrowed ....................
Total bond interest expense ...........
$ 43,200
180,000
223,200
(170,862)
$ 52,338
*180,000 x 0.08 x ½ = $7,200
or:
Six payments of $7,200 ....................
Plus discount ....................................
Total bond interest expense ...........
$ 43,200
9,138
$ 52,338
3. Straight-line amortization table ($9,138/6 = $1,523)
Semiannual
Period-End
Unamortized
Discount
Carrying
Value
(0)
1/01/2013 ...
$9,138
$170,862
(1)
6/30/2013 ...
7,615
172,385
(2) 12/31/2013 ...
6,092
173,908
(3)
6/30/2014 ...
4,569
175,431
(4) 12/31/2014 ...
3,046
176,954
(5)
6/30/2015 ...
1,523
178,477
(6) 12/31/2015 ...
0
180,000
Exercise 11-7 (25 minutes)
1.
Feb. 5 Retained Earnings*
Common Stock Dividend Distributable**....
Paid-In Capital in Excess of Par Value,
Common Stock***.......................................
480,000
120,000
360,000
Declared 20% common stock dividend
Shares to be issued: 60,000 shares x 20% = 12,000 shares
*12,000 shares x $40 per share = $480,000
**12,000 shares x $10 per share = $120,000
***$480,000 - $120,000 = $360,000
Feb. 28
Common Stock Dividend Distributable ............
Common Stock, $10 Par Value ....................
120,000
120,000
Distributed common stock dividend.
2.
Before
After
Total stockholders’ equity ....................................................
$1,575,000
$1,575,000
Issued and distributable shares ..........
 60,000
 72,000
Book value per share ...........................
$
Shares owned........................................
Total book value of shares ..................
26.250
x
$
$
800
21,000
21.875
x
$
960*
21,000
* 800 shares x 120% = 960 shares.
3.
February 5
Market value per share ........................................................
Shares owned........................................
Total market value of shares owned ...
$
40
x
800
$ 32,000
February 28
$
33.40
x
960
$ 32,064
Note: The total market value of the investor’s holdings is approximately the same
for February 5 and February 28. Assuming that the stock dividend is the only valuerelevant information/event between February 5th and February 28th, these per
share values highlight the lack of value distributed in a stock dividend.
Exercise 11-18 (40 minutes)
Part 1
Jan. 2
Treasury Stock, Common...................................
Cash ...............................................................
75,000
75,000
Purchased treasury stock (3,000 x $25).
Jan. 7
Retained Earnings
Common Dividend Payable ..........................
40,500
40,500
Declared $1.50
dividend per share on 27,000 outstanding shares.
Feb. 28
Common Dividend Payable ................................
Cash ...............................................................
40,500
40,500
Paid cash dividend.
July 9
Cash* ....................................................................
Treasury Stock, Common** ..........................
Paid-In Capital, Treasury Stock*** ...............
36,000
30,000
6,000
Reissued treasury stock.
*(1,200 x $30) **(1,200 x $25) ***(1,200 x $5)
Aug. 27
Cash* ....................................................................
Paid-In Capital, Treasury Stock .........................
Retained Earnings...............................................
Treasury Stock, Common** ..........................
30,000
6,000
1,500
37,500
Reissued treasury stock.
*(1,500 x $20) **(1,500 x $25)
Sept. 9
Retained Earnings
Common Dividend Payable ..........................
59,400
59,400
Declared $2 dividend on 29,700 outstanding shares.
Oct. 22
Common Dividend Payable ................................
Cash ...............................................................
59,400
59,400
Paid cash dividend.
Dec. 31
Income Summary ................................................
Retained Earnings.........................................
Closed Income Summary account.
52,000
52,000
Exercise 11-18 (Concluded)
Part 2
ALEXANDER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2014
Retained earnings, December 31, 2013 ........................ $ 340,000
Plus net income...............................................................
52,000
392,000
Less: Cash dividends declared ......................................
(99,900)
Treasury stock
reissuances*
.................................................................................
(1,500)*
Retained earnings, December 31, 2014 ........................ $ 290,600
*From August 27 transaction of reissuance of treasury shares.
Part 3
ALEXANDER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2014
Common stock$25 par value, 50,000 shares
authorized, 30,000 shares issued and outstanding;
300 shares in treasury ..................................................
$ 750,000
Paid-in capital in excess of par value, common stock .
50,000
Retained earnings (from part 2)..........................................
290,600
Less cost of treasury stock ...........................................
Total stockholders’ equity..............................................
(7,500)
$1,083,100
Exercise 12-5B (15 minutes)
Case X:
Case Y:
Case Z:
Sales revenue ..............................................
Accounts receivable, Dec. 31, 2013 ..........
Accounts receivable, Dec. 31, 2014 ..........
Less increase in accounts receivable ......
Cash received from customers .................
Rent expense...............................................
Rent payable, Dec. 31, 2013 .......................
Rent payable, Dec. 31, 2014 .......................
Plus decrease in rent payable ...................
Cash paid for rent .......................................
Cost of goods sold .....................................
Merchandise inventory, Dec. 31, 2014 ......
Merchandise inventory, Dec. 31, 2013 ......
Less decrease in merch. inventory ...........
Cost of goods purchased ..........................
Accounts payable, Dec. 31, 2014 ..............
Accounts payable, Dec. 31, 2013 ..............
Less increase in accounts payable...........
Cash paid for merchandise........................
$515,000
$ 27,200
(33,600)
(6,400)
$508,600
$139,800
$ 7,800
(6,200)
1,600
$141,400
$525,000
$130,400
(158,600)
(28,200)
496,800
82,000
(66,700)
(15,300)
$481,500
Exercise 13-3 (20 minutes)
Sales .............................
2015
189
2014
181
2013
168
2012
156
2011
100
Cost of goods sold ........
191
182
172
159
100
Accounts receivable .....
201
192
182
169
100
Analysis: The trend in sales is positive. While this is better than no growth, one
cannot definitively say whether the sales trend is favorable without additional
information about the economic conditions in which this trend occurred such
as inflation rates and competitors’ performances.
Given the trend in sales, the comparative trends in both cost of goods sold and
accounts receivable are somewhat unfavorable. In particular, for the most
recent year, both are increasing at slightly faster rates (indexes for cost of goods
sold is 191 and accounts receivable is 201) compared to sales (index is 189).
Exercise 13-5 (25 minutes)
Sales .............................................
2013
100.0%
2012
100.0%
Cost of goods sold .........................
75.7
46.5
Gross profit .....................................
24.3
53.5
Operating expenses .......................
17.3
35.0
Net income ......................................
7.0%
18.5%
Analysis: Overall, this company’s situation has worsened. This is evident from
the substantial decline in net income as a percent of sales for 2013 (7.0%) relative
to 2012 (18.5%). The main culprit is the increase in cost of goods sold as a
percent of sales from 46.5% in 2012 to 75.7% in 2013. On a somewhat positive
note, the company has not experienced any increase in operating expenses as
a percent of sales; indeed, declining from 35.0% in 2012 to 17.3% in 2013. Even
more positive is the company’s level of sales increase from $625,000 in 2012 to
$740,000 in 2013.