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Problems: Set C
1
Problems: Set C
P1-1C Presented below are five independent situations.
(a) Christy Petersen and Joel Dunn each owned separate plastic molding businesses. They
have decided to combine their businesses. They expect that within the coming year
they will need significant funds to expand their operations.
(b) Three licensed physical therapists have been working in rehabilitation hospitals for
several years. They have decided to form a business that will provide therapy in clients’
homes. Each has contributed an equal amount of cash and knowledge to the venture. Although there appears to be a great need for their services, they are concerned
about the legal liabilities that their business might confront.
(c) Erik, Geoff, and Janna recently graduated with education degrees. They have been
friends since childhood. They have decided to start a consulting business focused on
assisting “home-schooled” students over the Internet.
(d) Ben Fullerton has been providing routine automotive maintenance and repair services for several years. He performs his work in customers’ garages out of a cargo
van that contains tools, diagnostic equipment, and parts. Customers can continue
to work or relax at home while he services their vehicles. His business has been so
successful that several regular customers have suggested he expand its operations.
Ben is confident that he could find other mechanics to help provide the service but
knows the business would require a large investment of capital to outfit the vans.
He is also aware that working in customers’ homes could expose him to considerable liability. Ben has no savings or personal assets. He wants to maintain control
over the business.
(e) Chad Browne, a college student looking for summer employment, opened a flower
stand at a local farmers’ market.
Determine forms of business
organization.
(SO 1)
Instructions
In each case explain what form of organization the business is likely to take—sole proprietorship, partnership, or corporation. Give reasons for your choice.
P1-2C Financial decisions often place heavier emphasis on one type of financial
statement over the others. Consider each of the following hypothetical situations
independently.
(a) Nordstroms is considering extending credit to a new customer. The terms of the credit
would require the customer to pay within 30 days of receipt of goods.
(b) An investor is considering purchasing common stock of Home Depot Company. The
investor plans to hold the investment for at least 5 years.
(c) Wells Fargo is considering extending a loan to a small company. The company would
be required to make interest payments at the end of each year for 5 years, and to repay the loan at the end of the fifth year.
(d) The president of American Greetings is trying to determine whether the company
is generating enough cash to increase the amount of dividends paid to investors
in this and future years, and still have enough cash to buy equipment as it is
needed.
Identify users and uses of
financial statements.
(SO 2, 4, 5)
Instructions
In each situation, state whether the decision maker would be most likely to place primary
emphasis on information provided by the income statement, balance sheet, or statement
of cash flows. In each case provide a brief justification for your choice. Choose only one
financial statement in each case.
P1-3C On August 1 Copicat Inc. was started with an initial investment in
the company of $10,000 cash. Here are the assets and liabilities of the company at
August 31, and the revenues and expenses for the month of August, its first month of
operations:
Cash
Accounts receivable
Revenue
Supplies
Advertising expense
Equipment
$ 3,800
1,000
11,000
1,800
500
12,000
Notes payable
Accounts payable
Supplies expense
Rent expense
Utilities expense
Wage expense
$6,000
900
3,000
1,600
200
3,400
Prepare an income
statement, retained earnings
statement, and balance sheet,
and discuss results.
(SO 4, 5)
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Introduction to Financial Statements
Marginal check figures
(in blue) provide a key
number to let you know
you’re on the right track.
(a) Net income
$2,300
Ret. earnings $1,700
Tot. assets
$18,600
Determine items included in
a statement of cash flows,
prepare the statement, and
comment.
(SO 4, 5)
(a) Net increase $23,000
Comment on proper
accounting treatment and
prepare a corrected balance
sheet.
(SO 4, 5)
In August, the company issued no additional stock, but paid dividends of $600.
Instructions
(a) Prepare an income statement and a retained earnings statement for the month of
August and a balance sheet at August 31, 2007.
(b) Briefly discuss whether the company’s first month of operations was a success.
(c) Discuss the company’s decision to distribute a dividend.
P1-4C Presented below is selected financial information for Showalter Corporation for
December 31, 2007.
Inventory
Cash paid to suppliers
Building
Common stock
Cash dividends paid
$ 19,000
76,000
200,000
40,000
4,000
Cash paid to purchase equipment
Equipment
Revenues
Cash received from customers
Cash received from issuing
common stock
$ 8,000
40,000
87,000
93,000
18,000
Instructions
(a) Determine which items should be included in a statement of cash flows and then prepare the statement for Showalter Corporation.
(b) Comment on the adequacy of net cash provided by operating activities to fund the
company’s investing activities and dividend payments.
P1-5C Julius Corporation was formed on January 1, 2007. At December 31, 2007, Dan
Jasper, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows.
JULIUS CORPORATION
Balance Sheet
December 31, 2007
Assets
Cash
Accounts receivable
Motorcycle
Truck
Liabilities and Stockholders’ Equity
$20,000
39,000
17,000
20,000
Accounts payable
Notes payable
Motorcycle loan
Stockholders’ equity
$40,000
15,000
14,000
27,000
Dan willingly admits that he is not an accountant by training. He is concerned that his
balance sheet might not be correct. He has provided you with the following additional
information.
1. The motorcycle actually belongs to Jasper, not to Julius Corporation. However, because
he thinks he might use it to visit customers occasionally, he decided to list it as an asset of the company. To be consistent he also listed as a liability of the corporation his
personal loan that he took out at the bank to buy the motorcycle.
2. The truck was purchased for only $18,000, even though Dan knows its “sticker price”
was $20,000. He thought it would be best to record it at $20,000.
3. Included in the accounts receivable balance is $8,000 that Dan expects to collect from
a customer for a sale that he anticipates will occur in January. Dan included this in
the receivables of Julius Corporation because he has already discussed the potential
sale with the customer.
Tot. assets $69,000
Instructions
(a) Comment on the proper accounting treatment of the three items above.
(b) Provide a corrected balance sheet for Julius Corporation. (Hint: To get the balance
sheet to balance, adjust stockholders’ equity.)
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Problems: Set C
3
Problems: Set C
P2-1C The following items are taken from the 2004 balance sheet of Starbucks Corporation. (All dollars are in thousands.)
Intangible assets
Common stock
Property and equipment, net
Accounts payable
Other assets
Long-term investments
Accounts receivable
Prepaid expenses and other current assets
Short-term investments
Retained earnings
Cash and cash equivalents
Long-term debt
Accrued expenses and other current liabilities
Unearned revenue—current
Other long-term liabilities
Inventories
$
95,750
996,078
1,551,416
199,346
85,561
306,926
140,226
134,997
353,881
1,478,140
299,128
3,618
425,536
121,377
166,453
422,663
Instructions
Prepare a classified balance sheet for Starbucks Corporation as of October 3, 2004.
P2-2C
These items are taken from the financial statements of Graham Corporation for 2007.
Retained earnings (beginning of year)
Utilities expense
Equipment
Accounts payable
Cash
Salaries payable
Common stock
Dividends
Service revenue
Prepaid insurance
Repair expense
Depreciation expense
Accounts receivable
Insurance expense
Salaries expense
Accumulated depreciation
$26,000
3,000
38,000
2,400
20,700
1,700
15,000
7,000
77,000
1,950
1,800
5,300
8,850
3,900
44,000
12,400
Prepare a classified balance
sheet.
(SO 1)
Tot. current assets $1,350,895
Tot. assets
$3,390,548
Prepare financial statements.
(SO 1, 3)
Instructions
Prepare an income statement, a retained earnings statement, and a classified balance
sheet as of December 31, 2007.
Net income $19,000
Tot. assets
$57,100
P2-3C You are provided with the following information for Barnette Enterprises, effective as of its September 30, 2007, year-end.
Prepare financial statements.
(SO 1, 3)
Accounts payable
Accounts receivable
Building, net of accumulated depreciation
Cash
Common stock
Cost of goods sold
Current portion of long-term debt
Depreciation expense
Dividends paid during the year
$ 6,300
2,500
37,000
2,600
10,000
22,000
5,000
2,900
1,800
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A Further Look at Financial Statements
Equipment, net of accumulated depreciation
Income tax expense
Income taxes payable
Interest expense
Inventories
Land
Long-term debt
Prepaid expenses
Retained earnings, beginning
Revenues
Selling expenses
Short-term investments
Wages expense
Wages payable
Net income
Tot. current assets
Tot. assets
$7,650
$14,250
$81,250
Compute ratios; comment on
relative profitability, liquidity,
and solvency.
(SO 2, 4, 5)
14,000
2,550
700
3,400
4,800
16,000
31,000
1,350
21,300
56,800
2,700
3,000
15,600
1,100
Instructions
(a) Prepare an income statement and a retained earnings statement for Barnette
Enterprises for the year ended September 30, 2007.
(b) Prepare a classified balance sheet for Barnette Enterprises as of September 30, 2007.
P2-4C Comparative financial statement data for Batman Corporation and Spiderman Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2007.
Batman Corporation
Spiderman Corporation
2007
2007
Net sales
Cost of goods sold
Operating expenses
Interest expense
Income tax expense
$269,000
130,000
80,000
12,000
18,000
$504,000
248,000
132,000
6,000
44,000
Current assets
Plant assets (net)
Current liabilities
Long-term liabilities
146,000
105,000
44,000
87,000
182,000
86,000
106,000
41,000
Additional information:
Cash from operating activities
Capital expenditures
Dividends paid
Average number of shares
outstanding
$36,000
$15,000
$8,000
$43,000
$28,000
$10,000
30,000
40,000
Instructions
(a) Comment on the relative profitability of the companies by computing the net income
and earnings per share for each company for 2007.
(b) Comment on the relative liquidity of the companies by computing working capital
and the current ratios for each company for 2007.
(c) Comment on the relative solvency of the companies by computing the debt to total
assets ratio and the free cash flow for each company for 2007.
Compute liquidity, solvency,
and profitability ratios.
(SO 2, 4, 5)
P2-5C
Here and on the next page are financial statements of Howard Company.
HOWARD COMPANY
Income Statement
For the Year Ended December 31
2007
Net sales
Cost of goods sold
Selling and administrative expenses
Interest expense
Income tax expense
$558,200
254,500
178,000
24,000
34,700
Net income
$ 67,000
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Problems: Set C
HOWARD COMPANY
Balance Sheet
December 31
Assets
2007
Current assets
Cash
Short-term investments
Accounts receivable (net)
Inventory
$ 15,000
33,500
66,400
21,200
Total current assets
Plant assets (net)
136,100
294,600
Total assets
$430,700
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Income taxes payable
$ 26,800
18,300
Total current liabilities
Bonds payable
45,100
220,000
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
265,100
80,000
85,600
Total stockholders’ equity
165,600
Total liabilities and stockholders’ equity
$430,700
Additional information: The cash provided by operating activities for 2007 was $105,000.
The cash used for capital expenditures was $64,000. The cash used for dividends was
$18,000. The average number of shares outstanding during the year was 20,000.
Instructions
Compute the following values and ratios for 2007.
(a) Working capital.
(b) Current ratio.
(c) Free cash flow.
(d) Debt to total assets ratio.
(e) Earnings per share.
P2-6C Condensed balance sheet and income statement data for Janzan Corporation are
presented here.
JANZAN CORPORATION
Balance Sheets
December 31
Assets
2007
2006
Cash
Receivables (net)
Other current assets
Long-term investments
Plant and equipment (net)
$ 10,500
18,000
5,700
21,800
46,000
$ 9,000
14,000
4,000
20,000
38,000
Total assets
$102,000
$85,000
Liabilities and Stockholders’ Equity
2007
2006
Current liabilities
Long-term debt
Common stock
Retained earnings
$ 25,000
36,000
22,000
19,000
$23,000
36,000
20,000
6,000
Total liabilities and stockholders’ equity
$102,000
$85,000
Compute and interpret
liquidity, solvency, and
profitability ratios.
(SO 2, 4, 5)
5
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A Further Look at Financial Statements
JANZAN CORPORATION
Income Statements
For the Years Ended December 31
2007
2006
Sales
Cost of goods sold
Operating expenses (including income taxes)
$175,000
100,000
57,000
$160,000
92,000
53,000
Net income
$ 18,000
$ 15,000
$20,000
$11,000
$5,000
22,000
$13,000
$8,000
$3,000
20,000
Additional information:
Cash from operating activities
Cash used for capital expenditures
Dividends paid
Average number of shares outstanding
Instructions
Compute these values and ratios for 2006 and 2007.
(a) Earnings per share.
(b) Working capital.
(c) Current ratio.
(d) Debt to total assets ratio.
(e) Free cash flow.
(f) Based on the ratios calculated, discuss briefly the improvement or lack thereof in
financial position and operating results from 2006 to 2007 of Janzan Corporation.
Compute ratios and compare
liquidity, solvency, and
profitability for two
companies.
(SO 2, 4, 5)
P2-7C Selected financial data of two competitors, Home Depot and Lowes, are presented here. (All dollars are in millions.)
Home Depot
(1/30/05)
Lowes
(1/28/05)
Income Statement Data for Year
Net sales
Cost of goods sold
Selling and administrative expenses
Interest expense
Other income (loss)
Income taxes
$73,094
48,664
16,504
70
56
2,911
$36,464
24,165
7,562
192
(1,001)
1,368
Net income
$ 5,001
$ 2,176
Home Depot
Lowes
Balance Sheet Data (End of Year)
Current assets
Noncurrent assets
$14,190
24,717
$ 6,974
14,235
Total assets
$38,907
$21,209
Current liabilities
Long-term debt
Total stockholders’ equity
$10,529
4,220
24,158
$ 5,719
3,955
11,535
Total liabilities and stockholders’ equity
$38,907
$21,209
$6,904
$3,948
$719
2,207
$3,033
$2,927
$116
777
Cash from operating activities
Cash paid for capital expenditures
Dividends paid
Average shares outstanding
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Problems: Set C
Instructions
For each company, compute these values and ratios.
(a) Working capital.
(b) Current ratio.
(c) Debt to total assets ratio.
(d) Free cash flow.
(e) Earnings per share.
(f) Compare the liquidity, solvency, and profitability of the two companies.
P2-8C Meredith Norby recently completed an undergraduate degree in accounting.
She has been approached by her older brother and five of his friends to assist them in
creating an investment club. None have taken any business courses, but all have been
working for at least five years and feel they are ready to make their money work for
them. Some of the prospective members want to use the fund as part of their retirement assets. Others hope to use their portion of the annual earnings to supplement
their current income.
The group has discussed various types of companies to invest in. Some members prefer to choose well-established companies that are traded on national stock exchanges.
Others want to “get in on the ground floor” by investing in new businesses that may have
only a few stockholders. One member has suggested buying into a company started by
his best friend from high school who claims that his business has tripled its earnings during its first two years of operations.
It has become clear to Meredith that this group of prospective investors has little or
no understanding of financial reporting or generally accepted accounting principles
(GAAP).
Instructions
(a) Explain what is meant by financial reporting and GAAP.
(b) Considering the variety of members’ goals and suggestions, indicate the type of financial information that should be most useful in addressing investment choices.
Comment on the objectives
and qualitative characteristics of financial reporting.
(SO 6, 7)
7
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The Accounting Information System
Problems: Set C
Analyze transactions and
compute net income.
(SO 1)
GL S
P3-1C On April 1 Test Prep Inc. was established. These transactions were completed
during the month.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
(a) Cash
Ret. earnings
$6,600
$600
Analyze transactions and
prepare financial statements.
(SO 1)
Stockholders invested $12,000 cash in the company in exchange for common stock.
Paid $1,400 cash for April office rent.
Purchased office equipment for $4,300 cash.
Purchased $500 of advertising in School News, on account.
Paid $700 cash for office supplies.
Earned $6,000 for services provided: Cash of $1,000 is received from customers, and
the balance of $5,000 is billed to customers on account.
Paid $100 cash dividends.
Paid School News amount due in transaction (4).
Paid employees’ salaries $3,400.
Received $4,000 in cash from customers who have previously been billed in transaction (6).
Instructions
(a) Prepare a tabular analysis of the transactions using these column headings: Cash,
Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, and
Retained Earnings. Include margin explanations for any changes in Retained Earnings.
(b) From an analysis of the column Retained Earnings, compute the net income or net
loss for April.
P3-2C Judy Takahashi started her own consulting firm, Takahashi Consulting Inc., on
November 1, 2007. The following transactions occurred during the month of November.
Nov. 1
GL S
2
3
5
9
12
15
17
20
23
26
29
30
(a) Cash
$20,830
Ret. earnings
$1,380
Stockholders invested $15,000 cash in the business in exchange for
common stock.
Paid $1,000 for office rent for the month.
Purchased $750 of supplies on account.
Paid $400 to advertise in the Small Business Times.
Received $800 cash for services provided.
Paid $100 cash dividend.
Performed $4,400 of services on account.
Paid $2,100 for employee salaries.
Paid for the supplies purchased on account on November 3.
Received a cash payment of $1,800 for services provided on account on
November 15.
Borrowed $8,000 from the bank on a note payable.
Purchased office equipment for $3,500 paying $200 in cash and the
balance on account.
Paid $220 for utilities.
Instructions
(a) Show the effects of the previous transactions on the accounting equation using the
following format. Assume the note payable is to be repaid within the year.
Stockholders’
Liabilities
Equity
Accounts
Office
Notes
Accounts
Common
Retained
Date Cash Supplies Receivable
Equipment
Payable
Payable
Stock
Earnings
Assets
(b) Net income
$1,480
Include margin explanations for any changes in Retained Earnings.
(b) Prepare an income statement for the month of November.
(c) Prepare a classified balance sheet at November 30, 2007.
P3-3C Din Liu created a corporation providing legal services, Din Liu Inc., on March 1,
2007. On March 31 the balance sheet showed: Cash $6,500; Accounts Receivable $2,000;
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Problems: Set C
Supplies $800; Office Equipment $7,000; Accounts Payable $4,700; Common Stock $8,000;
and Retained Earnings $3,600. During April the following transactions occurred.
1. Collected $1,300 of accounts receivable due from customers.
2. Paid $3,200 cash for accounts payable due.
3. Earned revenue of $7,100 of which $4,000 is collected in cash and the balance is due
in May.
4. Purchased additional office equipment for $1,000, paying $200 in cash and the balance on account.
5. Paid salaries $2,700, rent for April $800, and advertising expenses $280.
6. Declared and paid a cash dividend of $400.
7. Received $3,500 from Metro Bank; the money was borrowed on a 4-month note payable.
8. Incurred utility expenses for the month on account $320.
Instructions
(a) Prepare a tabular analysis of the April transactions beginning with March 31 balances.
The column heading should be: Cash Accounts Receivable Supplies Office
Equipment Notes Payable Accounts Payable Common Stock Retained Earnings. Include margin explanations for any changes in Retained Earnings.
(b) Prepare an income statement for April, a retained earnings statement for April, and
a classified balance sheet at April 30.
P3-4C Skating By, Inc. was opened on May 1 by James Bea. These selected events and
transactions occurred during May.
May 1
3
5
6
10
18
19
25
30
30
31
Stockholders invested $80,000 cash in the business in exchange for common stock of the corporation.
Purchased BoardWorld for $60,000 cash. The price consists of land
$20,000, building $30,000, and equipment $10,000. (Record this in a single entry.)
Advertised the opening of the skate board park, paying advertising
expenses of $500 cash.
Paid cash $6,000 for a 1-year insurance policy.
Purchased equipment for $4,600 from T. Hawks Company, payable in
30 days.
Received $1,500 in cash from customers for fees earned.
Sold 150 coupon books for $40 each in cash. Each book contains five
coupons that enable the holder to use the park. (Hint: The revenue is not
earned until the customers use the coupons.)
Declared and paid a $300 cash dividend.
Paid salaries of $1,280.
Paid T. Hawks in full for equipment purchased on May 10.
Received $1,100 of fees in cash from customers for fees earned.
9
Analyze transactions and
prepare an income statement,
retained earnings statement,
and balance sheet.
(SO 1)
GL S
(a) Cash
$7,720
Ret. earnings $6,200
(b) Net income
$3,000
Journalize a series of
transactions.
(SO 3, 5)
GL S
The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment,
Accounts Payable, Unearned Revenue, Common Stock, Retained Earnings, Dividends,
Revenue, Advertising Expense, and Salaries Expense.
Instructions
Journalize the May transactions, including explanations.
P3-5C Castle Architects incorporated as licensed architects on September 1, 2007. During
the first month of the operation of the business, these events and transactions occurred:
Sept. 1
1
2
3
10
11
20
30
30
Stockholders invested $22,000 cash in exchange for common stock of the
corporation.
Hired a secretary-receptionist at a salary of $410 per week, payable monthly.
Paid office rent for the month $1,500.
Purchased architectural supplies on account from Taliesin Company $1,150.
Completed blueprints on a carport and billed client $1,700 for services.
Received $800 cash advance from M. Stewart to design a new home.
Received $4,900 cash for services completed and delivered to R. Husch.
Paid secretary-receptionist for the month $1,640.
Paid $600 to Taliesin Company for accounts payable due.
Journalize transactions, post,
and prepare a trial balance.
(SO 3, 5, 6, 7, 8)
GL S
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The Accounting Information System
The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts
Payable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, and
Rent Expense.
(c) Cash
$23,960
Tot. trial
balance $29,950
Journalize transactions, post,
and prepare a trial balance.
(SO 3, 5, 6, 7, 8)
Instructions
(a) Journalize the transactions, including explanations.
(b) Post to the ledger T accounts.
(c) Prepare a trial balance on September 30, 2007.
P3-6C
This is the trial balance of Dominic Company on April 30.
DOMINIC COMPANY
Trial Balance
April 30, 2007
GL S
Debit
Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Unearned Revenue
Common Stock
Credit
$ 3,700
3,200
900
9,300
$ 3,400
1,700
12,000
$17,100
$17,100
The May transactions were as follows.
May 5
10
15
17
20
29
31
(d) Cash
$1,640
Tot. trial
balance $20,500
Prepare a correct trial
balance.
(SO 8)
Received $1,600 in cash from customers for accounts receivable due.
Billed customers for services performed $4,900.
Paid employee salaries $1,600.
Performed $400 of services for customers who paid in advance in April.
Paid $1,500 to creditors for accounts payable due.
Paid a $200 cash dividend.
Paid utilities $360.
Instructions
(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger
accounts as of May 1. Provision should be made for these additional accounts: Dividends, Service Revenue, Salaries Expense, and Utilities Expense.
(b) Journalize the transactions, including explanations.
(c) Post to the ledger accounts.
(d) Prepare a trial balance on May 31, 2007.
P3-7C
This trial balance of Arias Co. does not balance.
ARIAS CO.
Trial Balance
March 31, 2007
Debit
Cash
Accounts Receivable
Supplies
Equipment
Accounts Payable
Unearned Revenue
Common Stock
Dividends
Service Revenue
Salaries Expense
Office Expense
Credit
$ 3,240
$ 3,656
800
4,360
2,720
1,200
7,100
800
5,420
3,100
660
$13,360
$19,696
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Problems: Set C
11
Each of the listed accounts has a normal balance per the general ledger. An examination
of the ledger and journal reveals the following errors:
1. Cash received from a customer on account was debited for $340, and Accounts Receivable was credited for $34. The actual collection was for $340.
2. The purchase of copy machine paper on account for $160 was recorded as a debit to
Equipment for $160 and a credit to Accounts Payable for $160.
3. A client paid $900 for services to be performed during April and May. Cash was debited
for $900 and Service Revenue was credited for $900.
4. A debit posting to Office Expense of $130 was omitted.
5. A payment on account was credited to Cash for $240 and debited to Accounts Payable
for $240. The actual payment was $420.
6. Payment of a $400 cash dividend to Arias’s stockholders was debited to Common Stock
for $400 and credited to Cash for $400.
Instructions
Prepare the correct trial balance. (Hint: All accounts have normal balances.)
P3-8C Big Sky Drive-In Theater Inc. was recently formed. It began operations in April
2007. On April 1, the ledger of Big Sky showed: Cash $31,000; Land $52,000; Buildings
(concession stand, projection room, ticket booth, and screen) $64,000; Equipment
$35,000; Accounts Payable $22,000; and Common Stock $160,000. During the month of
April the following events and transactions occurred.
Apr.
1
2
8
10
13
14
15
18
30
30
30
Tot. trial balance
$16,660
Journalize transactions, post,
and prepare a trial balance.
(SO 3, 5, 6, 7, 8)
GL S
Rented movies to be shown for the first two weeks of April. The film
rental was $15,000; $3,000 was paid in cash and $12,000 will be paid on
April 13.
Ordered movies to be shown the last two weeks of April at a cost of
$7,000 per week.
Received $11,400 cash from admissions.
Hired R. Daggett to operate the concession stand. Daggett agrees to pay
Big Sky 20% of gross receipts, payable monthly.
Paid balance due on movie rentals and $7,400 on April 1 accounts
payable.
Received the movies ordered April 2 and paid rental fee of $14,000.
Paid advertising expenses $600.
Received $9,800 cash from customers for admissions.
Paid salaries of $5,200.
Received statement from R. Daggett showing gross receipts from concessions of $10,400 and the balance due to Big Sky of $2,080 for April.
Daggett paid half the balance due and will remit the remainder on May 8.
Received $23,000 cash from customers for admissions.
In addition to the accounts identified above, the chart of accounts includes: Accounts
Receivable, Admission Revenue, Concession Revenue, Advertising Expense, Film Rental
Expense, and Salaries Expense.
Instructions
(a) Using T accounts, enter the beginning balances to the ledger.
(b) Journalize the April transactions, including explanations.
(c) Post the April journal entries to the ledger.
(d) Prepare a trial balance on April 30, 2007.
P3-9C The bookkeeper for Tim Taylor’s repair shop made the following errors in journalizing and posting.
1. A credit to Accounts Payable of $900 was posted twice.
2. A credit posting of $800 to Unearned Revenue was inadvertently credited to Accounts
Receivable.
3. A purchase of equipment on account of $960 was debited to Equipment for $960 and
credited to Accounts Payable for $690.
4. A debit posting of $250 to Wages Expense was omitted.
5. A debit posting to Wages Payable for $250 was inadvertently posted as a credit to
Wages Payable.
(d) Cash
$34,040
Tot. trial
balance $220,880
Analyze errors and their
effects on the trial balance.
(SO 8)
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6. A debit posting for $800 of Dividends was inadvertently posted to Wage Expense
instead.
7. A debit posting to Cash and a credit posting to Service Revenue for $600 were inadvertently posted twice.
8. A debit to Accounts Receivable of $400 was debited to Accounts Payable.
Instructions
For each error, indicate (a) whether the trial balance will balance; (b) the amount of the
difference if the trial balance will not balance; and (c) the trial balance column that will
have the larger total. Consider each error separately. Use the following form, in which
error 1 is given as an example.
Error
(a)
In Balance
(b)
Difference
(c)
Larger Column
1.
No
$900
Credit
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13
Problems: Set C
Problems: Set C
P4-1C The following selected data are taken from the comparative financial statements
of Lake View Bocce Club. The Club prepares its financial statements using the accrual
basis of accounting.
October 31
Accounts receivable for member dues
Unearned rent revenue
Dues revenue
2007
2006
$ 15,000
30,000
162,000
$ 19,000
38,000
140,000
Record transactions on
accrual basis; convert
revenue to cash receipts.
(SO 2, 4)
Dues are billed to members based upon their use of the Club’s facilities. Unearned revenues
arise from deposits required to reserve club facilities for weddings and parties.
Instructions
(Hint: You will find it helpful to use T accounts to analyze the following data. You
must analyze these data sequentially, as missing information must first be deduced
before moving on. Post your journal entries as you progress, rather than waiting until the end.)
(a) Prepare journal entries for each of the following events that took place during 2007.
1. Dues receivable from members from 2006 were all collected during 2007.
2. Unearned rent revenue at the end of 2006 was all earned during 2007.
3. Additional rent revenue of $89,000 cash was received during 2007; a portion of
these were for events held during the year. The entire balance remaining relates
to upcoming events in 2007 and 2008.
4. Dues for the 2006–2007 fiscal year were billed to members.
5. Dues receivable for 2007 (i.e., those billed in item (4) above) were partially collected.
(b) Determine the amount of cash received by the Club from the above transactions during the year ended October 31, 2007.
P4-2C Troy Verley started his own consulting firm, Do It Now Consulting, on April 1,
2007. The trial balance at April 30 is as follows.
DO IT NOW CONSULTING
Trial Balance
April 30, 2007
Debit
Cash
Accounts Receivable
Prepaid Rent
Supplies
Office Equipment
Accounts Payable
Unearned Service Revenue
Common Stock
Service Revenue
Salaries Expense
Insurance Expense
Credit
$ 5,100
3,100
25,000
9,000
3,800
400
$42,200
In addition to those accounts listed on the trial balance, the chart of accounts for Do It Now
also contains the following accounts: Accumulated Depreciation—Office Equipment,
Phone Payable, Salaries Payable, Depreciation Expense, Rent Expense, Phone Expense,
and Supplies Expense.
Other data:
1. Supplies on hand at April 30 total $320.
2. A phone bill for $120 has not been recorded and will not be paid until next month.
3. The prepaid rent covers April, May, and June.
$255,000
Prepare adjusting entries,
post to ledger accounts,
and prepare adjusted trial
balance.
(SO 4, 5, 6)
GL S
$ 9,300
5,000
2,700
1,000
20,000
$42,200
(b) Cash received
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4. $2,200 of unearned service revenue has been earned at the end of the month.
5. Salaries of $1,460 are accrued at April 30.
6. The office equipment has a 5-year life with salvage value of $2,000 and is being
depreciated at $300 per month for 60 months.
7. Invoices representing $2,800 of services performed during the month have not been
recorded as of April 30.
(b) Service rev.
$14,000
(c) Tot. trial balance $46,880
Prepare adjusting entries,
adjusted trial balance, and
financial statements.
(SO 4, 5, 6, 7)
Instructions
(a) Prepare the adjusting entries for the month of April.
(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance as beginning account balances. Use T accounts.
(c) Prepare an adjusted trial balance at April 30, 2007.
P4-3C The Welcome Inn opened for business on March 1, 2007. Here is its trial balance before adjustment on March 31.
GL S
WELCOME INN
Trial Balance
March 31, 2007
Debit
Cash
Prepaid Insurance
Supplies
Land
Lodge
Furniture
Accounts Payable
Unearned Rent Revenue
Mortgage Payable
Common Stock
Rent Revenue
Salaries Expense
Utilities Expense
Advertising Expense
$
Credit
2,700
2,400
3,300
25,000
85,000
22,400
$
9,200
2,800
50,000
72,000
11,000
3,000
800
400
$145,000
$145,000
Other data:
1. Insurance expires at the rate of $400 per month.
2. An inventory of supplies shows $1,900 of unused supplies on March 31.
3. Annual depreciation is $4,440 on the lodge and $3,600 on furniture.
4. The mortgage interest rate is 9%. (The mortgage was taken out on March 1.)
5. Unearned rent of $1,300 has been earned.
6. Salaries of $960 are accrued and unpaid at March 31.
(c) Rent revenue
Tot. trial
balance
(d) Net income
$12,300
$147,005
$4,295
Prepare adjusting entries and
financial statements; identify
accounts to be closed.
(SO 4, 5, 6, 7)
GL S
Instructions
(a) Journalize the adjusting entries on March 31.
(b) Prepare a ledger using T accounts. Enter the trial balance amounts and post the
adjusting entries.
(c) Prepare an adjusted trial balance on March 31.
(d) Prepare an income statement and a retained earnings statement for the month of
March and a classified balance sheet at March 31.
(e) Identify which accounts should be closed on March 31.
P4-4C Green Acres Golf Inc. was organized on April 1, 2007. Quarterly financial statements are prepared. The trial balance and adjusted trial balance on June 30 are shown
on the next page.
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Problems: Set C
GREEN ACRES GOLF INC.
Trial Balance
June 30, 2007
Unadjusted
Dr.
Cash
Accounts Receivable
Prepaid Insurance
Supplies
Equipment
Accumulated Depreciation—Equipment
Notes Payable
Accounts Payable
Salaries Payable
Interest Payable
Unearned Rent Revenue
Common Stock
Retained Earnings
Dividends
Dues Revenue
Rent Revenue
Salaries Expense
Insurance Expense
Depreciation Expense
Supplies Expense
Utilities Expense
Interest Expense
Cr.
$ 7,890
1,500
2,400
2,100
18,000
Adjusted
Dr.
Cr.
$ 7,890
1,900
1,800
1,410
18,000
$
750
7,500
2,200
900
100
800
18,000
0
$ 7,500
2,200
1,300
18,000
0
450
450
14,600
700
10,100
1,200
15,000
1,200
11,000
1,800
750
690
660
100
660
$44,300
$44,300
$46,450
$46,450
Instructions
(a) Journalize the adjusting entries that were made.
(b) Prepare an income statement and a retained earnings statement for the 3 months
ending June 30 and a classified balance sheet at June 30.
(c) Identify which accounts should be closed on June 30.
(d) If the note bears interest at 8%, how many months has it been outstanding?
(b) Net income $1,200
Tot. assets
$30,250
P4-5C A review of the ledger of Phelps Company at December 31, 2007, produces these
data pertaining to the preparation of annual adjusting entries.
Prepare adjusting entries.
(SO 4, 5)
1. Prepaid Insurance $16,400. The company has separate insurance policies on its
buildings and its motor vehicles. Policy B4564 on the building was purchased on
January 1, 2006, for $11,400. The policy has a term of 3 years. Policy A2958 on
the vehicles was purchased on July 1, 2007, for $8,800. This policy has a term of
2 years.
2. Unearned Subscription Revenue $29,040. The company began selling magazine subscriptions on September 1, 2007 on an annual basis. The selling price of a subscription is $24. A review of subscription contracts reveals the following.
Subscription
Start Date
Number of
Subscriptions
September 1
October 1
November 1
December 1
240
260
330
380
1,210
3. Notes Payable, $16,000: This balance consists of a note for 8 months at an annual
interest rate of 9%, dated August 1.
4. Salaries Payable $0: There are six salaried employees. Salaries are paid every
Friday for the current week. Four employees receive a salary of $480 each per
week, and two employees earn $600 each per week. December 31 is a Thursday.
15
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Employees do not work weekends. All employees worked the last 4 days of
December.
Instructions
Prepare the adjusting entries at December 31, 2007.
Prepare adjusting entries
and a corrected income
statement.
(SO 4, 5)
P4-6C A-Plus Test Prep was organized on May 1, 2006, by Denise Fenley. Denise is a
good manager but a poor accountant. From the trial balance prepared by a part-time
bookkeeper, Denise prepared the following income statement for her fourth quarter, which
ended April 30, 2007.
A-PLUS TEST PREP
Income Statement
For the Quarter ended April 30, 2007
Revenues
Tuition revenues
Operating expenses
Advertising
Wages
Utilities
Depreciation
Repairs
$240,000
$ 6,400
92,000
1,300
2,400
1,700
Total operating expenses
103,800
Net income
$136,200
Denise suspected that something was wrong with the statement because net income
had never exceeded $40,000 in any one quarter. Knowing that you are an experienced accountant, she asks you to review the income statement and other data.
You first look at the trial balance. In addition to the account balances reported above
in the income statement, the ledger contains the following additional selected balances
at April 30, 2007.
Books and Supplies
Prepaid Insurance
Note Payable
$ 9,800
12,000
15,000
You then make inquiries and discover the following.
1. Tuition revenues include advanced tuition payments received for summer classes, in
the amount of $70,000.
2. There were $2,600 of books and supplies on hand at April 30.
3. Prepaid insurance resulted from the payment of a one-year policy on February 1,
2007.
4. The mail in May 2007 brought the following bills: advertising for the week of April
24, $80; repairs made April 18, $2,560; and utilities for the month of April, $530.
5. There are six employees who receive wages that total $1,380 per day. At April 30,
three days’ wages have been incurred but not paid.
6. The note payable is a 8% note dated February 1, 2007, and due on May 31, 2007.
7. Income tax of $15,200 for the quarter is due in May but has not yet been recorded.
(b) Net income
$33,190
Instructions
(a) Prepare any adjusting journal entries required as at April 30, 2007.
(b) Prepare a correct income statement for the quarter ended April 30, 2007.
(c) Explain to Denise the generally accepted accounting principles that she did not recognize in preparing her income statement and their effect on her results.
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Problems: Set C
P4-7C On August 1, 2007, the following were the account balances of Bob and Norm
Repair Services.
Debits
Cash
Accounts Receivable
Supplies
Store Equipment
$ 6,040
2,910
1,030
10,000
Credits
Accumulated Depreciation
Accounts Payable
Unearned Service Revenue
Salaries Payable
Common Stock
Retained Earnings
$19,980
$
600
2,300
1,260
1,420
10,000
4,400
17
Journalize transactions and
follow through accounting
cycle to preparation of
financial statements.
(SO 4, 5, 6)
GL S
$19,980
During August the following summary transactions were completed.
Aug. 5
10
12
15
17
20
22
25
27
29
Received $1,200 cash from customers in payment of account.
Paid $3,120 for salaries due employees, of which $1,700 is for August and
$1,420 is for July salaries payable.
Received $2,800 cash for services performed in August.
Purchased store equipment on account $2,000.
Purchased supplies on account $860.
Paid creditors $2,500 of accounts payable due.
Paid August rent $380.
Paid salaries $2,900.
Performed services on account and billed customers for services provided
$3,130.
Received $780 from customers for services to be provided in the future.
Adjustment data:
1. Supplies on hand are valued at $960.
2. Accrued salaries payable are $1,540.
3. Depreciation for the month is $320.
4. Unearned service revenue of $800 is earned.
Instructions
(a) Enter the August 1 balances in the ledger accounts. (Use T accounts.)
(b) Journalize the August transactions.
(c) Post to the ledger accounts. Use Service Revenue, Depreciation Expense, Supplies
Expense, Salaries Expense, and Rent Expense.
(d) Prepare a trial balance at August 31.
(e) Journalize and post adjusting entries.
(f) Prepare an adjusted trial balance.
(g) Prepare an income statement and a retained earnings statement for August and a
classified balance sheet at August 31.
P4-8C Laura Young opened Magic Carpet Cleaners Inc. on January 1, 2007. During
January the following transactions were completed.
Jan. 1
1
3
5
12
18
20
21
25
31
31
Issued 12,000 shares of common stock for $18,000 cash.
Purchased used truck for $12,000, paying $4,000 cash and the balance on
account.
Purchased cleaning supplies for $940 on account.
Paid $7,200 cash on 1-year insurance policy effective January 1.
Billed customers $4,100 for cleaning services.
Paid $600 cash on amount owed on truck and $300 on amount owed on
cleaning supplies.
Paid $2,600 cash for employee salaries.
Collected $2,300 cash from customers billed on January 12.
Billed customers $2,850 for cleaning services.
Paid $450 for gas and oil used in the truck during month.
Declared and paid $600 cash dividend.
The chart of accounts for Magic Carpet Cleaners contains the following accounts: Cash,
Accounts Receivable, Cleaning Supplies, Prepaid Insurance, Equipment, Accumulated
(f) Cash
$1,920
Tot. trial balance $27,490
(g) Net loss
$1,040
Complete all steps in
accounting cycle.
(SO 4, 5, 6, 7, 8)
GL S
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Accrual Accounting Concepts
Depreciation—Equipment, Accounts Payable, Salaries Payable, Common Stock, Retained
Earnings, Dividends, Income Summary, Service Revenue, Gas & Oil Expense, Cleaning
Supplies Expense, Depreciation Expense, Insurance Expense, Salaries Expense.
(f) Cash
(g) Tot. assets
$4,550
$30,030
Instructions
(a) Journalize the January transactions.
(b) Post to the ledger accounts. (Use T accounts.)
(c) Prepare a trial balance at January 31.
(d) Journalize the following adjustments.
(1) Services provided but unbilled and uncollected at January 31 were $2,340.
(2) Depreciation on the truck for the month was $320.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $210 of cleaning supplies on hand at January 31.
(5) Accrued but unpaid employee salaries were $760.
(e) Post adjusting entries to the T accounts.
(f ) Prepare an adjusted trial balance.
(g) Prepare the income statement and a retained earnings statement for January and a
classified balance sheet at January 31.
(h) Journalize and post closing entries and complete the closing process.
(i) Prepare a post-closing trial balance at January 31.
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Problems: Set C
19
Problems: Set C
P5-1C Franklin Craft Store completed the following merchandising transactions in the
month of October. At the beginning of October, Franklin’s ledger showed Cash of $8,000
and Common Stock of $8,000.
Oct.
1
2
5
9
10
11
12
15
17
19
24
25
27
29
31
Purchased merchandise on account from Michael’s Wholesale Supply for
$4,800, terms 1/10, n/30.
Sold merchandise on account for $3,900, terms 2/10, n/30. The cost of
the merchandise sold was $2,400.
Received credit from Michael’s Wholesale Supply for merchandise
returned $600.
Received collections in full, less discounts, from customers billed on
sales of $3,900 on October 2.
Paid Michael’s Wholesale Supply in full, less discount.
Purchased supplies on account for $750.
Purchased merchandise for cash $2,100.
Received $200 refund for return of poor-quality merchandise from
supplier on cash purchase.
Purchased merchandise on account from Handiwork Distributors for
$2,500, terms 2/10, n/30.
Paid freight on October 17 purchase $310.
Sold merchandise for cash $6,900. The cost of the merchandise sold
was $4,510.
Purchased merchandise on account from Hobbytown Inc. for $1,000,
terms 3/10, n/30.
Paid Handiwork Distributors in full, less discount.
Made refunds to cash customers for returned merchandise $190. The
returned merchandise had cost $134.
Sold merchandise on account for $1,460, terms 1/10, n/30. The cost of
the merchandise sold was $950.
Journalize, post, prepare
partial income statement,
and calculate ratios.
(SO 2, 3, 4, 6)
GL S
Franklin Craft’s chart of accounts includes Cash, Accounts Receivable, Merchandise
Inventory, Supplies, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,
Sales Discounts, and Cost of Goods Sold.
Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Post the transactions to T accounts. Be sure to enter the beginning cash and common stock balances.
(c) Prepare an income statement through gross profit for the month of October 2007.
(d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses
were $2,100.)
P5-2C Crowning Glory Warehouse distributes commercial hair care products in onegallon bottles to hair salons and extends credit terms of 3/10, n/30 to all of its customers.
During the month of April the following merchandising transactions occurred.
Apr.
1
3
6
9
12
13
20
24
26
28
30
Purchased 190 bottles on account for $6 each (including freight) from
Healthy Hair, terms 2/10, n/30.
Sold 40 bottles on account to the Curl Up and Dye salon for $10 each.
Received $90 credit for 15 bottles returned to Healthy Hair.
Paid Healthy Hair in full.
Received payment in full from the Curl Up and Dye salon.
Sold 25 bottles on account to Hairport Salon for $10 each.
Purchased 200 bottles on account for $6 each from Golden Tresses,
terms 1/15, n/30.
Received payment in full from Hairport Salon.
Paid Golden Tresses in full.
Sold 160 bottles on account to Cheaper/Cuts salons for $10 each.
Granted Cheaper/Cuts $120 credit for 12 bottles returned costing $72.
(c) Gross profit
$4,266
Journalize purchase and
sale transactions under a
perpetual inventory system.
(SO 2, 3)
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Merchandising Operations and the Multiple-Step Income Statement
Instructions
Journalize the transactions for the month of April for Crowning Glory Warehouse, using
a perpetual inventory system. Assume the cost of each bottle sold was $6.
Journalize, post, and prepare
trial balance and partial
income statement.
(SO 2, 3, 4)
GL S
P5-3C At the beginning of the current season on November 1, the ledger of Lakeside
Ice House showed Cash $3,300; Merchandise Inventory $4,700; and Common Stock
$8,000. The following transactions were completed during November 2007.
Nov. 5
7
9
10
12
14
17
20
21
27
30
Purchased hockey sticks and pucks on account from Gillmore Co. $1,600,
terms 2/10, n/60.
Paid freight on Gillmore purchase $90.
Received credit from Gillmore Co. for merchandise returned $350.
Sold merchandise on account for $1,100, terms n/30. The merchandise
sold had a cost of $760.
Purchased gloves, socks, and other accessories on account from Orr
Sportswear $945, terms 1/10, n/30.
Paid Gillmore Co. in full.
Received credit from Orr Sportswear for merchandise returned $45.
Made sales on account for $1,330, terms n/30. The cost of the merchandise sold was $950.
Paid Orr Sportswear in full.
Granted an allowance to customers for clothing that did not fit properly
$110.
Received payments on account for $1,900.
The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchandise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,
and Cost of Goods Sold.
(c) Tot. trial
balance
(d) Gross profit
$10,430
$610
Prepare financial statements
and calculate profitability
ratios.
(SO 4, 6)
Instructions
(a) Journalize the November transactions using a perpetual inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the
November transactions.
(c) Prepare a trial balance on November 30, 2007.
(d) Prepare an income statement through gross profit.
P5-4C Tobin’s China and Collectibles is located in midtown Centralia. During the past
several years, net income has been declining because suburban shopping centers have
been attracting business away from city areas. At the end of the company’s fiscal year on
September 30, 2007, these accounts appeared in its adjusted trial balance.
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Building
Accumulated Depreciation—Store Equipment
Advertising Expense
Building
Cash
Common Stock
Cost of Goods Sold
Delivery Expense
Depreciation Expense—Building
Depreciation Expense—Store Equipment
Dividends
Gain on Sale of Investment
Insurance Expense
Interest Expense
Merchandise Inventory
Notes Payable
Prepaid Insurance
Property Tax Expense
Property Taxes Payable
Retained Earnings
Salaries Expense
$ 22,800
19,530
120,000
21,000
6,000
200,000
7,800
28,000
520,000
5,800
8,000
4,200
15,000
2,300
10,300
5,600
31,400
52,000
2,570
7,600
7,600
18,100
194,700
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Problems: Set C
Sales
Sales Commissions Expense
Sales Commissions Payable
Sales Returns and Allowances
Store Equipment
Utilities Expense
21
886,000
18,000
2,200
26,000
64,000
13,500
Additional data: Notes payable are due in 2013.
Instructions
(a) Prepare a multiple-step income statement; a retained earnings statement, and a classified balance sheet.
(b) Calculate the profit margin ratio and the gross profit rate.
(c) The vice-president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a
strictly commission basis using 30% of net sales. Given the increased incentive,
they expect net sales to increase by 25%. As a result, they estimate that gross profit
will increase by $85,000 and operating expenses by $109,800. Compute the expected new net income. (Hint: You do not need to prepare an income statement).
Then compute the revised profit margin ratio and gross profit rate. Comment on
the effect that this plan would have on net income and on the ratios, and evaluate
the merit of this proposal.
P5-5C An inexperienced accountant prepared this condensed income statement for
Xiong Company, a retail firm that has been in business for a number of years.
(a) Net income
Tot. assets
$68,600
$184,300
Prepare a correct multiplestep income statement.
(SO 4)
XIONG COMPANY
Income Statement
For the Year Ended December 31, 2007
Revenues
Net sales
Other revenues
$952,000
17,000
Cost of goods sold
969,000
548,000
Gross profit
Operating expenses
Selling expenses
Administrative expenses
421,000
161,000
104,000
265,000
Net earnings
$156,000
As an experienced, knowledgeable accountant, you review the statement and determine
the following facts.
1. Net sales consist of sales $972,000, less delivery expense on merchandise sold $20,000.
2. Other revenues consist of sales discounts $12,000 and interest revenue $5,000.
3. Selling expenses consist of salespersons’ salaries $88,000; depreciation on store equipment $4,000; sales returns and allowances $46,000; advertising $12,000; and sales commissions $11,000.
4. Administrative expenses consist of office salaries $54,000; dividends $14,000; utilities
$13,000; interest expense $3,000; and rent expense $20,000, which includes prepayments totaling $2,000 for the first month of 2008. The utilities represent utilities paid.
At December 31, utility expense of $3,000 has been incurred but not paid.
Instructions
Prepare a correct detailed multiple-step income statement.
P5-6C The trial balance of Wheels and Deals Inc. contained the accounts shown on the
following page as of December 31, the end of the company’s fiscal year.
Net income
$145,000
Journalize, post, and prepare
adjusted trial balance and
financial statements.
(SO 4)
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REVISED PAGES
Merchandising Operations and the Multiple-Step Income Statement
WHEELS AND DEALS INC.
Trial Balance
December 31, 2007
Debit
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Land
Buildings
Accumulated Depreciation—Buildings
Equipment
Accumulated Depreciation—Equipment
Notes Payable
Accounts Payable
Common Stock
Retained Earnings
Dividends
Sales
Sales Discounts
Cost of Goods Sold
Salaries Expense
Utilities Expense
Repair Expense
Gas and Oil Expense
Interest Expense
$
Credit
45,200
31,100
41,200
8,000
44,000
360,000
$
90,000
56,000
40,000
62,500
38,300
180,000
87,200
14,000
768,000
3,500
496,800
136,400
9,600
7,800
7,600
4,800
$1,266,000
$1,266,000
Adjustment data:
1. Depreciation is $18,000 on buildings and $8,000 on equipment. (Both are operating
expenses.)
2. Insurance expires at a rate of $500 per month.
Other data: $12,500 of the notes payable are payable next year.
(c) Tot. trial balance
$1,292,000
(d) Net income
$69,500
Tot. assets
$423,500
Determine cost of goods sold
and gross profit under
periodic approach.
(SO 4, 5)
Gross profit
$118,400
Calculate missing amounts
and assess profitability.
(SO 4, 5, 6)
Instructions
(a) Journalize the adjusting entries.
(b) Create T accounts for all accounts used in part (a). Enter the trial balance amounts
into the T accounts and post the adjusting entries.
(c) Prepare an adjusted trial balance.
(d) Prepare a multiple-step income statement and a retained earnings statement for the
year, and a classified balance sheet at December 31, 2007.
P5-7C At the end of Bill’s Dollar Store’s fiscal year on January 31, 2007, these accounts
appeared in its adjusted trial balance.
Freight-in
Merchandise Inventory (beginning)
Purchases
Purchase Discounts
Purchase Returns and Allowances
Sales
Sales Returns and Allowances
$
6,900
47,500
674,200
5,800
8,900
792,000
12,000
Additional facts:
1. Merchandise inventory on January 31, 2007, is $52,300.
2. Note that Bill’s Dollar Store uses a periodic system.
Instructions
Prepare an income statement through gross profit for the year ended January 31, 2007.
P5-8C All Decked Out Inc. operates a retail operation that purchases and sells lawn and
patio products. The company purchases all merchandise inventory on credit and uses a
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REVISED PAGES
Problems: Set C
23
perpetual inventory system. The accounts payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are
provided with the following selected information for the fiscal years 2005 through 2008,
inclusive.
Inventory (ending)
Sales
Purchases of merchandise
inventory on account
Cash payments to suppliers
2005
2006
2007
2008
$18,420
$ 14,300
292,000
$ 15,400
295,000
$ 12,680
284,000
174,000
171,000
178,100
183,000
162,000
167,000
Instructions
(a) Calculate cost of goods sold for each of the 2006, 2007, and 2008 fiscal years.
(b) Calculate the gross profit for each of the 2006, 2007, and 2008 fiscal years.
(c) Calculate the ending balance of accounts payable for each of the 2006, 2007, and
2008 fiscal years. The ending balance of accounts payable for 2005 was $19,000.
(d) The vice-presidents of sales, marketing, production, and finance are discussing the
company’s results with the CEO. They note that sales declined over the 3-year fiscal
period, 2006-2008. Does that mean that profitability necessarily also declined?
Explain, computing the gross profit rate for each fiscal year to help support your
answer.
*P5-9C At the beginning of the current season on November 1, the ledger of Lakeside
Ice House showed Cash $3,300, Merchandise Inventory $4,700, and Common Stock
$8,000. These transactions occured during November 2007.
Nov. 5
7
9
10
12
14
17
20
21
27
30
Purchased hockey sticks and pucks on account from Gillmore Co. $1,600,
terms 2/10, n/60.
Paid freight on Gillmore Co. purchases $90.
Received credit from Gillmore Co. for merchandise returned $350.
Sold merchandise on account for $1,100, terms n/30.
Purchased gloves, socks, and other accessories on account from Orr
Sportswear $945, terms 1/10, n/30.
Paid Gillmore Co. in full.
Received credit from Orr Sportswear for merchandise returned $45.
Made sales on account for $1,330, terms n/30.
Paid Orr Sportswear in full.
Granted credit to customers for clothing that did not fit properly $110.
Received payments on account for $1,900.
(a) 2007 cost of goods
sold
$177,000
2007 Ending acct.
payable
$17,100
Journalize, post, and prepare
trial balance and partial
income statement using
periodic approach.
(SO 5, 7)
GL S
The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchandise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,
Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in.
Instructions
(a) Journalize the November transactions using a periodic inventory system.
(b) Using T accounts, enter the beginning balances in the ledger accounts and post the
November transactions.
(c) Prepare a trial balance on November 30, 2007.
(d) Prepare an income statement through Gross Profit, assuming merchandise inventory
on hand at November 30 is $5,196.
(c) Tot. trial
balance
Gross profit
$10,859
$610
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REVISED PAGES
Reporting and Analyzing Inventory
Problems: Set C
Determine items and
amounts to be recorded in
inventory.
(SO 1)
P6-1C Farrell Company is trying to determine the value of its ending inventory as of
March 31, 2007, the company’s year-end. The following transactions occurred, and the accountant asked your help in determining whether they should be recorded or not.
(a) On March 30, Farrell shipped to a customer goods costing $800. The goods were
shipped FOB destination, and the receiving report indicates that the customer received the goods on April 1.
(b) On March 28, Supplier Inc. shipped goods to Farrell FOB shipping point. The invoice
price was $400 plus $20 for freight. The receiving report indicates that the goods
were received by Farrell on April 2.
(c) Farrell had $750 of consigned goods from Joyce Inc.
(d) Farrell had $380 of inventory at Zwingle Variety, on consignment from Farrell.
(e) On March 29, Farrell ordered goods costing $640. The goods were shipped FOB destination on March 31. Farrell received the goods on April 3.
(f ) A customer returned goods to Farrell on March 31. Upon inspection, the goods were
found to be undamaged and were accepted as returned goods. These goods originally
cost $400 and Farrell sold them for $640.
Instructions
For each of the above transactions, specify whether the item in question should be included
in ending inventory, and if so, at what amount. For each item that is not included in ending
inventory, indicate who owns it and what account, if any, it should have been recorded in.
Determine cost of goods sold
and ending inventory using
FIFO, LIFO, and average
cost, with analysis.
(SO 2, 3)
P6-2C Timeless Distribution markets classic children’s books. At the beginning of June,
Timeless had in beginning inventory 1,200 books with a unit cost of $3. During June,
Timeless made the following purchases of books.
June 3
June 18
3,000 @ $4
7,800 @ $5
June 29
4,000 @ $6
During June, 10,500 books were sold. Timeless uses a periodic inventory system.
Cost of goods sold:
FIFO
$47,100
LIFO
$56,500
Average $51,578
Determine cost of goods sold
and ending inventory using
FIFO, LIFO, and average
cost in a periodic inventory
system, and assess financial
statement effect.
(SO 2, 3)
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the
assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of
the cost of goods sold under the FIFO and LIFO methods. (Note: For average cost,
round cost per unit to three decimal places.)
(c) Which cost flow method results in (1) the highest inventory amount for the balance
sheet and (2) the highest cost of goods sold for the income statement?
P6-3C Byron Company Inc. had a beginning inventory of 200 units of Product ERV at
a cost of $6 per unit. During the year, purchases were:
Jan. 24
Apr. 12
800 units at $7
400 units at $8
Aug. 19
Nov. 30
600 units at $ 9
300 units at $10
Byron Company uses a periodic inventory system. Sales totalled 1,900 units.
Cost of goods sold:
FIFO
$14,500
LIFO
$15,800
Average $15,200
Instructions
(a) Determine the cost of goods available for sale.
(b) Determine the ending inventory and the cost of goods sold under each of the assumed
cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of
goods sold under the FIFO and LIFO methods.
(c) Which cost flow method results in the lowest inventory amount for the balance sheet?
The lowest cost of goods sold for the income statement?
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Problems: Set C
P6-4C The management of Jorgensen Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2007 the accounting records show these data.
Inventory, January 1 (4,000 units)
Cost of 105,000 units purchased
Selling price of 100,000 units sold
Operating expenses
$ 16,000
470,500
870,000
185,000
25
Compute ending inventory,
prepare income statements,
and answer questions using
FIFO and LIFO.
(SO 2, 3)
Units purchased consisted of 35,000 units at $4.20 on March 20; 65,000 units at $4.60 on
July 24, and 5,000 units at $4.90 on December 12. Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2007 under FIFO and LIFO.
(Show computations of ending inventory.)
(b) Answer the following questions for management in the form of a business letter.
(1) Which inventory cost flow method produces the most meaningful inventory
amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?
(4) How much more cash will be available under LIFO than under FIFO? Why?
(5) How much of the gross profit under FIFO is illusionary in comparison with the
gross profit under LIFO?
P6-5C You have the following information for Alsteen Inc. for the month ended May
31, 2007. Alsteen uses a periodic method for inventory.
Date
May
May
May
May
May
May
May
1
6
7
15
18
24
30
Description
Units
Unit Cost or
Selling Price
Beginning inventory
Purchase
Sale
Purchase
Sale
Purchase
Sale
40
110
90
70
40
60
80
$20
23
32
24
37
26
38
Instructions
(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross
profit rate under each of the following methods.
(1) LIFO.
(2) FIFO.
(3) Average cost. (Round cost per unit to three decimal places.)
(b) Compare results for the three cost flow assumptions.
P6-6C You have the following information for Tempus Watches. Tempus uses the
periodic method of accounting for its inventory transactions. Tempus carries only one
brand of hand-crafted jeweled watches—all are identical. Each batch of watches purchased is carefully coded and marked with its purchase cost.
July 1
July 2
July 5
July 14
July 28
Beginning inventory 220 watches at a cost of $400 per watch.
Purchased 200 watches at a cost of $450 each.
Sold 180 watches for $680 each.
Purchased 350 watches at a cost of $480 each.
Sold 480 watches for $720 each.
Instructions
(a) Assume that Tempus uses the specific identification cost flow method.
(1) Demonstrate how Tempus could maximize its gross profit for the month by specifically selecting which watches to sell on July 5 and July 28.
(2) Demonstrate how Tempus could minimize its gross profit for the month by
selecting which watches to sell on July 5 and July 28.
Gross profit:
FIFO $426,400
LIFO $420,500
Calculate ending inventory,
cost of goods sold, gross
profit, and gross profit rate
under periodic method;
compare results.
(SO 2, 3)
Gross profit:
LIFO
$2,320
FIFO
$2,630
Average $2,472
Compare specific
identification, FIFO, and
LIFO under periodic method;
use cost flow assumption to
influence earnings.
(SO 2, 3)
Gross profit:
Maximum $174,800
Minimum $166,000
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Reporting and Analyzing Inventory
(b) Assume that Tempus uses the FIFO cost flow assumption. Calculate cost of goods
sold. How much gross profit would Tempus report under this cost flow assumption?
(c) Assume that Tempus uses the LIFO cost flow assumption. Calculate cost of goods
sold. How much gross profit would the company report under this cost flow
assumption?
(d) Which cost flow method should Tempus Watches select? Explain.
Compute inventory turnover
ratio and days in inventory;
compute current ratio based
on LIFO and after adjusting
for LIFO reserve.
(SO 5, 6)
P6-7C This information is available for the Automotive Sector of Ford Motor Company
for 2004. Ford uses the LIFO inventory method.
(in millions)
Beginning inventory
Ending inventory
LIFO reserve
Current assets
Current liabilities
Cost of goods sold
Sales
Instructions
(a) Calculate the
(b) Calculate the
(c) Calculate the
(d) Comment on
Calculate cost of goods sold,
ending inventory, and gross
profit for LIFO, FIFO, and
average cost under the
perpetual system; compare
results.
(SO 3, 7)
*P6-8C Brong Inc. is a retailer operating in Centralia. Brong uses the perpetual inventory method. All sales returns from customers result in the goods being returned to inventory. (Assume that the inventory is not damaged.) Assume that there are no credit
transactions; all amounts are settled in cash. You are provided with the following information for Brong Inc. for the month of January 2007.
Dec. 31
Jan. 2
Jan. 6
Jan. 9
Jan. 9
Jan. 10
Jan. 10
Jan. 23
Jan. 30
Determine ending inventory
under a perpetual inventory
system.
(SO 3, 7)
$ 9,151
10,766
1,001
44,703
55,027
135,856
147,134
inventory turnover ratio and days in inventory.
current ratio based on inventory as reported using LIFO.
current ratio after adjusting for the LIFO reserve.
any difference between parts (b) and (c).
Date
Gross profit:
LIFO
$5,580
FIFO
$6,140
Average $5,932
2004
Description
Ending inventory
Purchase
Sale
Sale return
Purchase
Purchase return
Sale
Purchase
Sale
Quantity
Unit Cost or
Selling Price
140
120
150
20
85
15
70
100
110
$14
15
30
30
17
17
35
19
40
Instructions
(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold,
(ii) ending inventory, and (iii) gross profit.
(1) LIFO. (Assume sales returns had a cost of $14 and purchase returns had a cost
of $17.)
(2) FIFO. (Assume sales returns had costs of $14 for 10 units and $15 for 10 units,
and purchase returns had a cost of $17.)
(3) Moving-average. (Round cost per unit to three decimal places.)
(b) Compare results for the three cost flow assumptions.
*P6-9C Just Rugs began operations on February 1. It uses a perpetual inventory system.
During February the company had the following purchases and sales.
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REVISED PAGES
Problems: Set C
Purchases
Date
Feb.
Feb.
Feb.
Feb.
Feb.
Feb.
1
6
11
14
21
27
Units
Unit Cost
12
$150
8
$168
6
$172
Sales Units
9
5
4
Instructions
(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO,
(2) average cost (round unit cost to three decimal places), and (3) LIFO.
(b) Which costing method produces the highest ending inventory valuation?
FIFO
Average
LIFO
$1,368
$1,341
$1,298
27
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CHAPTER 7
REVISED PAGES
Internal Control and Cash
Problems: Set C
Identify internal control
weaknesses for cash receipts.
(SO 1, 2)
P7-1C State University’s Accounting Club decided to sell coupon books as a fund-raising
activity. The books allow users to enjoy restaurants, entertainment, and services such as
oil changes, at substantial discounts. The club bought 100 books for $16 each, and members will sell them for $20. About 20 members attended the last club meeting, and most
took one or two books to sell. Since the club had already paid for the books and didn’t
have other immediate cash needs, members do not have to pay for the books until they
sell them.
Extra books are stored on a book shelf in the club’s on-campus office. The office is
in a great location with plenty of student traffic. It is shared with the Marketing and
Information Systems clubs. Each club has four sets of keys that are used by its officers
and members.
As students sell books, they bring the cash or checks to the club’s office. Students
with unusual class schedules who arrive when the office is locked can put payments under
the door. Payments are stored in a desk drawer until the treasurer has time to make a
bank deposit. Students can pick up more books to sell as needed.
Instructions
(a) Indicate the weaknesses in internal accounting control in the club’s fund-raising plan.
(b) Indicate improvements in internal control procedures for the club’s fund-raising plan.
Identify internal control
weaknesses in cash receipts
and cash disbursements.
(SO 1, 2, 3)
P7-2C Sam Hill has worked for Dr. Lee Hogan for several years. Sam demonstrates a
loyalty that is rare among employees. He is always willing to “cover” for other employees
and hasn’t taken a vacation in three years.
One of Sam’s primary duties at the dental office is to open the mail, list checks received, and prepare the bank deposit form.
He also collects cash from patients at the cashier window as patients leave. At times,
it is so hectic that Sam doesn’t bother to give patients a receipt for the cash paid on their
accounts. He assures them he will see to it that they receive the proper credit. He is so
well known by most patients that no one has ever complained.
When traffic is slow in the office, Sam offers to help another employee, Mary, post
the payments to patients’ accounts receivable. Dr. Hogan installed a computerized accounting program that requires a user ID and password to log in, but Sam and Mary
have found that it is more efficient to just leave the computer on and the receivables file
open all the time, and minimize the file when it is not in use.
Instructions
Identify the principles of internal control that may be violated in this situation.
Prepare a bank reconciliation
and adjusting entries.
(SO 4)
P7-3C On March 31, 2007, Dezelle Company had a cash balance per books of $5,274.20.
The statement from Riverside Bank on that date showed a balance of $5,941.40. A
comparison of the bank statement with the cash account revealed the following facts.
1. The bank service charge for March was $28.
2. The bank collected a note receivable of $2,000 for Dezelle Company on March 15, plus
$115 of interest. The bank made a $20 charge for the collection. Dezelle has not accrued
any interest on the note.
3. The March 31 receipts of $1,681.60 were not included in the bank deposits for March.
These receipts were deposited by the company in a night deposit vault on March 31.
4. Company check No. 1245 issued to B. Solveson, a creditor, for $672 that cleared the bank
in March was incorrectly entered in the cash payments journal on March 8 for $627.
5. Checks outstanding on March 31 totaled $1,360.00.
6. On March 31 the bank statement showed an NSF charge of $1,033.20 for a check
received by the company from Z. Fowler, a customer, on account.
(a) Cash bal. $6,263
Prepare a bank reconciliation
and adjusting entries from
detailed data.
(SO 4)
Instructions
(a) Prepare the bank reconciliation as of March 31.
(b) Prepare the necessary adjusting entries at March 31.
P7-4C The bank portion of the bank reconciliation for Vincent Company at July 31,
2007, is shown on the next page.
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Problems: Set C
VINCENT COMPANY
Bank Reconciliation
July 31, 2007
Cash balance per bank
Add: Deposits in transit
$ 9,596
930
$10,526
Less: Outstanding checks
Check Number
Check Amount
3151
3170
3171
3172
3174
$ 290
812
1,538
1,251
1,172
5,063
Adjusted cash balance per bank
$ 5,463
The adjusted cash balance per bank agreed with the cash balance per books at July 31.
The August bank statement showed the following checks and deposits.
Bank Statement
Checks
Date
8-1
8-2
8-5
8-4
8-8
8-10
8-15
8-18
8-27
8-30
8-29
Number
3170
3171
3174
3175
3176
3177
3179
3180
3181
3183
3187
Total
Deposits
Amount
Date
$ 812
1,538
1,172
802
132
737
1,325
900
596
93
734
8-1
8-4
8-8
8-13
8-18
8-21
8-25
8-28
8-30
Total
Amount
$
930
1,325
1,152
1,104
1,587
1,159
1,054
1,830
1,067
$11,208
$8,841
The cash records per books for August showed the following.
Cash Receipts
Journal
Cash Payments Journal
Date
Number
Amount
Date
Number
8-1
8-2
8-2
8-4
8-8
8-10
8-15
8-18
3175
3176
3177
3178
3179
3180
3181
3182
$ 802
132
737
1,598
1,325
900
569
1,508
8-20
8-22
8-23
8-24
8-29
8-30
3183
3184
3185
3186
3187
3188
Total
Amount
Date
Amount
$
8-3
8-7
8-12
8-17
8-20
8-24
8-27
8-29
8-30
$ 1,325
1,152
1,014
1,587
1,159
1,054
1,830
1,067
390
Total
$10,578
93
760
1,038
455
734
273
$10,924
29
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CHAPTER 7
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Internal Control and Cash
The bank statement contained two bank memoranda:
1. A credit of $1,670 for the collection of a $1,600 note for Vincent Company plus interest
of $80 and less a collection fee of $10. Vincent Company has not accrued any interest
on the note.
2. A debit for the printing of additional company checks $70.
At August 31, the cash balance per books was $5,117, and the cash balance per bank
statement was $13,563. The bank did not make any errors, but Vincent Company made
two errors.
(a) Cash bal.
$6,780
Prepare a bank reconciliation
and adjusting entries.
(SO 4)
Instructions
(a) Using the four steps in the reconciliation procedure described on page 330 of the textbook, prepare a bank reconciliation at August 31, 2007.
(b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of
any errors pertaining to recording checks should be made to Accounts Payable. The
correction of any errors relating to recording cash receipts should be made to
Accounts Receivable.)
P7-5C Bug Off Company provides insect extermination services. On October 31, 2007,
the company’s cash account per its general ledger showed a balance of $4,732.
The bank statement from Newton Bank on that date showed the following balance.
NEWTON BANK
Checks and Debits
Deposits and Credits
Daily Balance
XXX
XXX
10-31 4,070
A comparison of the details on the bank statement with the details in the cash account
revealed the following facts.
1. The statement included a debit memo of $50 for the printing of additional company
checks.
2. Cash sales of $342 on October 6 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $372. The bank credited Bug
Off Company for the correct amount.
3. Outstanding checks at October 31 totaled $1,250, and deposits in transit were $2,390.
4. On October 13, the company issued check No. 4263 for $196 to H. Simpson, on account.
The check, which cleared the bank in May, was incorrectly journalized and posted by
Bug Off Company for $169.
5. A $900 note receivable was collected by the bank for Bug Off Company on October 31
plus $50 interest. The bank charged a collection fee of $15. No interest has been accrued
on the note.
6. Included with the cancelled checks was a check issued by Big Oaf Company for $120
that was incorrectly charged to Bug Off Company by the bank.
7. On October 31, the bank statement showed an NSF charge of $230 for a check issued
by Tom Piper, a customer, to Bug Off Company on account.
(a) Cash bal.
$5,330
Prepare a cash budget.
(SO 7)
Instructions
(a) Prepare the bank reconciliation at October 31, 2007.
(b) Prepare the necessary adjusting entries for Bug Off Company at October 31, 2007.
P7-6C You are provided with the following information taken from Keystone Inc.’s May
31, 2007, balance sheet.
Cash
Accounts receivable
Inventory
Property, plant, and equipment, net of depreciation
Accounts payable
Common stock
Retained earnings
$ 11,000
47,600
21,000
70,400
18,200
110,000
21,800
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REVISED PAGES
31
Problems: Set C
Additional information concerning Keystone Inc. is as follows.
1. Gross profit is 40% of sales.
2. Actual and budgeted sales data:
May (actual)
June (budgeted)
$68,000
80,000
3. Sales are 30% for cash and 70% on credit. There are no sales discounts, and credit
sales are collected in the month following the sale.
4. Half of a month’s purchases are paid for in the month of purchase and half in the following month. Purchases of inventory totalled $36,400 for the month of May and are
anticipated to total $55,000 for the month of June. Ending inventory is expected to be
$28,000 at the end of June.
5. Cash operating costs are anticipated to be $21,300 for the month of June.
6. Equipment costing $6,000 will be purchased for cash in June.
7. The company wishes to maintain a minimum cash balance of $11,000. An open line
of credit is available at the bank. All borrowing is done at the beginning of the month,
and all repayments are made at the end of the month. The interest rate is 9% per year,
and interest expense is accrued at the end of the month and paid in the following
month.
Instructions
(a) Calculate cash collections in June for May and June sales.
(b) Calculate the cash disbursements in June related to May and June purchases.
(c) Prepare a cash budget for the month of June. Determine how much cash Keystone
Inc. must borrow, or can repay, in June.
(a) June cash
collections
(c) June
borrowings
P7-7C Benes Corporation prepares monthly cash budgets. Here are relevant data from
operating budgets for 2007.
Prepare a cash budget.
(SO 7)
Sales
Purchases
Salaries
Administrative expenses
Selling expenses
January
February
$280,000
112,000
72,000
58,000
30,000
$318,000
150,000
78,000
60,000
36,000
All sales are on account. Collections are expected to be 50% in the month of sale, 35% in
the first month following the sale, and 15% in the second month following the sale. Fifty
percent (50%) of purchases are paid in cash in the month of purchase, and the balance due
is paid in the month following the purchase. All other expenses are paid in the month incurred except for administrative expenses, which include $2,000 of depreciation per month.
Other data:
1. Credit sales — November 2006, $250,000; December 2006, $320,000
2. Purchases — December 2006, $100,000
3. Other receipts — January: collection of December 31, 2006, interest receivable $7,500;
February: proceeds from sale of securities $8,000
4. Other disbursements—January: pay $35,000 note payable due January 1, 2007;
February: pay $6,000 cash dividend
5. The company’s cash balance on January 1, 2007 is expected to be $40,000. The company wants to maintain a minimum cash balance of $40,000. An open line of credit
is available at the bank. All borrowing is done at the beginning of the month, and all
repayments are made at the end of the month. The interest rate is 9% per year, and
interest expense is accrued at the end of the month and paid in the following month.
The company’s cash balance on January 1, 2007, is expected to be $41,000. The company
wants to maintain a minimum cash balance of $40,000.
$71,600
$1,400
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32
CHAPTER 7
(a) Jan. customer
collections $289,500
(b) Jan. 31
cash bal.
$40,000
Prepare a comprehensive
bank reconciliation with
theft and internal control
deficiencies.
(SO 1, 2, 3, 4)
REVISED PAGES
Internal Control and Cash
Instructions
(a) Prepare schedules for (1) expected collections from customers and (2) expected payments for purchases for January and February.
(b) Prepare a cash budget for January and February.
P7-8C At Your Service Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep
clerical and office expenses to a minimum, the company has combined the jobs of cashier
and bookkeeper. As a result, Leon Quint handles all cash receipts, keeps the accounting
records, and prepares the monthly bank reconciliations.
The balance per the bank statement on March 31, 2007, was $5,931.51. Outstanding
checks were: No. 206 for $358.53, No. 441 for $292, No. 590 for $183.00, No. 781 for
$286.00, No. 782 for $319.47, and No. 783 for $303.14. Included with the statement was
a credit memorandum of $175 indicating the collection of a note receivable for At Your
Service Company by the bank on March 21. This memorandum has not been recorded
by At Your Service.
The company’s ledger showed one cash account with a balance of $6,889.53. The
balance included undeposited cash on hand. Because of the lack of internal controls,
Leon took for personal use all of the undeposited receipts in excess of $1,591.63. He
then prepared the following bank reconciliation in an effort to conceal his theft of
cash.
Cash balance per books, March 31
Add: Outstanding checks
No. 781
No. 782
No. 783
$5,781.00
$286.00
319.47
303.14
808.61
Less: Undeposited receipts
7,698.14
1,591.63
Unadjusted balance per bank, March 31
Less: Bank credit memorandum
6,106.51
175.00
Cash balance per bank statement, March 31
(a) Cash bal.
$6,889.53
$5,931.51
Instructions
(a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the
adjusted balance per books.)
(b) Indicate the three ways that Leon attempted to conceal the theft and the dollar amount
involved in each method.
(c) What principles of internal control were violated in this case?
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Problems: Set C
33
Problems: Set C
P8-1C Happy Daze uses the allowance method to estimate uncollectible accounts receivable. The company produced the following aging of the accounts receivable at year
end.
Journalize transactions
related to bad debts.
(SO 2, 3)
Number of Days Outstanding
Total
Accounts receivable
$435,000
0–30
31–60
61–90
$238,000 $120,000 $44,000
% uncollectible
1.5%
3%
8%
91–120
Over 120
$13,000
$20,000
10%
15%
Estimated
uncollectible
accounts
Instructions
(a) Calculate the total estimated bad debts based on the above information.
(b) Prepare the year-end adjusting journal entry to record the bad debts using the aged
uncollectible accounts receivable determined in (a). Assume the unadjusted balance
in Allowance for Doubtful Accounts is a $5,400 debit.
(c) Of the above accounts, $7,500 is determined to be specifically uncollectible. Prepare
the journal entry to write off the uncollectible account.
(d) The company collects $2,000 subsequently on a specific account that had previously
been determined to be uncollectible in (c). Prepare the journal entry(ies) necessary
to restore the account and record the cash collection.
(e) Comment on how your answers to (a)–(d) would change if Happy Daze used 4% of
total accounts receivable, rather than aging the accounts receivable. What are the advantages to the company of aging the accounts receivable rather than applying a percentage to total accounts receivable?
P8-2C
sheet.
At December 31, 2007, Super Heroes reported this information on its balance
Accounts receivable
Less: Allowance for doubtful accounts
$96,000
7,000
(a) Tot. est.
bad debts
$14,990
Prepare journal entries
related to bad debt expense,
and compute ratios.
(SO 2, 3, 8)
During 2008 the company had the following transactions related to receivables.
1. Sales on account
2. Sales returns and allowances
3. Collections of accounts receivable
$940,000
24,000
880,000
4. Write-offs of accounts receivable deemed uncollectible
8,000
5. Recovery of bad debts previously written off as uncollectible
2,000
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no
cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2008, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine
the balances.
(c) Prepare the journal entry to record bad debts expense for 2008, assuming that aging
the accounts receivable indicates that estimated uncollectible accounts total $9,200.
(d) Compute the receivables turnover ratio and average collection period.
(b) A/R bal.
$124,000
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CHAPTER 8
Journalize transactions
related to bad debts.
(SO 2, 3)
REVISED PAGES
Reporting and Analyzing Receivables
P8-3C
Presented below is an aging schedule for Hendrix Company.
Customer
Total
Arias
Beyer
Cappell
Darrah
Others
Not Yet
Due
Number of Days Past Due
1–30
31–60
$12,000
$6,000
61–90
Over 90
$ 18,000
24,000
40,000
52,000
196,000
$ 25,000
15,000
97,000
60,000
39,000
$330,000
$122,000
$87,000
$45,000
$24,000
$52,000
1%
3%
9%
20%
40%
$ 2,610
$ 4,050
$ 4,800
$20,800
$24,000
$52,000
Estimated percentage
uncollectible
Total estimated
uncollectible accounts $ 33,480
$
1,220
At December 31, 2007, the unadjusted balance in Allowance for Doubtful Accounts is a
credit of $9,600.
Instructions
(a) Journalize and post the adjusting entry for bad debts at December 31, 2007. (Use
T accounts.)
(b) Journalize and post to the allowance account these 2008 events and transactions:
1. February 1, a $900 customer balance originating in 2007 is judged uncollectible.
2. July 1, a check for $900 is received from the customer whose account was written off as uncollectible on February 1.
(c) Bad Debts Exp. $33,400
(c) Journalize the adjusting entry for bad debts at December 31, 2008, assuming that the
unadjusted balance in Allowance for Doubtful Accounts is a debit of $2,800 and the
aging schedule indicates that total estimated uncollectible accounts will be $30,600.
Compute bad debt amounts.
(SO 3)
P8-4C
(b) Bad Debts Exp. $11,200
Journalize entries to record
transactions related to bad
debts.
(SO 2, 3)
Here is information related to Evergreen Company for 2007.
Total credit sales
Accounts receivable at December 31
Bad debts written off
$920,000
330,000
7,000
Instructions
(a) What amount of bad debts expense will Evergreen Company report if it uses the direct write-off method of accounting for bad debts?
(b) Assume Evergreen Company decides to estimate its bad debts expense based on 4%
of accounts receivable. What amount of bad debts expense will the company record
if Allowance for Doubtful Accounts has a credit balance of $2,000?
(c) Assume the same facts as in part (b), except that there is a $3,000 debit balance in
Allowance for Doubtful Accounts. What amount of bad debts expense will Evergreen
record?
(d)
What is a weakness of the direct write-off method of reporting bad debts
expense?
P8-5C At December 31, 2007, the trial balance of Portia Company contained the following amounts before adjustment.
Debits
Accounts Receivable
Allowance for Doubtful Accounts
Sales
Credits
$120,000
$
2,800
680,000
Instructions
(a) Prepare the adjusting entry at December 31, 2007, to record bad debts expense assuming that the aging schedule indicates that $7,600 of accounts receivable will be
uncollectible.
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Problems: Set C
35
(b) Repeat part (a) assuming that instead of a credit balance there is a $2,800 debit balance in the Allowance for Doubtful Accounts.
(c) During the next month, January 2008, a $750 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off.
(d) Repeat part (c) assuming that Portia Company uses the direct write-off method instead of the allowance method in accounting for uncollectible accounts receivable.
(e)
What are the advantages of using an aging schedule and the allowance method
in accounting for uncollectible accounts as compared to the direct write-off method?
(b) Bad Debts Exp. $10,400
P8-6C On January 1, 2007, Aruba Company had Accounts Receivable of $87,400 and
Allowance for Doubtful Accounts of $4,300. Aruba Company prepares financial statements annually and uses a perpetual inventory system. During the year the following selected transactions occurred.
Journalize various
receivables transactions.
(SO 1, 2, 4, 5)
Jan.
8
Feb.
6
15
Apr. 20
28
May 6
June 15
20
28
Sold $9,000 of merchandise to Trinidad Company, terms n/30. Cost of
the merchandise sold was $6,000.
Accepted a $9,000, 3-month, 8% promissory note from Trinidad
Company for balance due.
Sold $11,500 of merchandise costing $8,000 to Martinique Company and
accepted Martinique’s $11,500, 4-month, 9% note for the balance due.
Sold $7,400 of merchandise costing $4,900 to Guadeloupe Co., terms n/10.
Accepted a $7,400, 2-month, 6% note from Guadeloupe Co. for balance due.
Collected Trinidad Company note in full.
Collected Martinique Company note in full.
Sold $4,000 of merchandise costing $2,900 to Puerto Rico Inc. and accepted a $4,000, 6-month, 8% note for the amount due.
Collected Guadeloupe Company note in full.
Instructions
Journalize the transactions.
P8-7C The president of Hampton Enterprises asks if you could indicate the impact certain transactions have on the following ratios.
Current
Ratio
(2 : 1)
Transaction
Receivables
Turnover
(10X)
Explain the impact of
transactions on ratios.
(SO 8)
Average
Collection
Period
(36.5 days)
1. Recorded $4,300 sales on account.
The cost of the goods sold was
$2,000.
2. Recorded bad debts expense of $800
using allowance method.
3. Wrote off a $300 account receivable
as uncollectible.
4. Collected a $200 account
receivable that had previously
been written off.
Instructions
Complete the table, indicating whether each transaction will increase (I), decrease (D),
or have no effect (NE) on the specific ratios provided for Hampton Enterprises.
P8-8C OldeLine Company closes its books on September 30. On August 31, the Notes
Receivable account balance is $20,600. Notes Receivable include the following.
Date
Maker
Face Value
Term
Maturity Date
Interest Rate
May 11
June 30
July 31
Emeril Inc.
Alton Co.
Sarah Corp.
$5,000
6,600
9,000
120 days
90 days
4 months
Sept. 8
Sept. 28
Nov. 30
6%
8%
7%
Prepare entries for various
credit card and notes
receivable transactions.
(SO 2, 4, 5, 6, 9)
GL S
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36
CHAPTER 8
REVISED PAGES
Reporting and Analyzing Receivables
During September the following transactions were completed.
Sept. 2
8
12
28
(b) A/R bal.
$8,700
(c) Tot.
receivables $17,805
Calculate and interpret
various ratios.
(SO 7, 8)
Made sales of $8,700 on OldeLine credit cards.
Received payment in full from Emeril Inc. on the amount due.
Made sales of $950 on Discover credit cards. The credit card service
charge is 4%.
Received payment in full from Alton Co. on the amount due.
Instructions
(a) Journalize the September transactions and the September 30 adjusting entry for accrued interest receivable. (Interest is computed using 360 days.)
(b) Enter the balances at September 1 in the receivable accounts and post the entries to
all of the receivable accounts. (Use T accounts.)
(c) Show the balance sheet presentation of the receivable accounts at September 30.
P8-9C Presented here is basic financial information (in millions) from the 2004 annual
reports of Columbia Sportswear and The Timberland Company.
Sales
Allowance for doubtful accounts, Jan. 1
Allowance for doubtful accounts, Dec. 31
Accounts receivable balance (gross), Jan. 1
Accounts receivable balance (gross), Dec. 31
Columbia
Timberland
$1,095.3
8.9
7.8
214.9
275.5
$1,500.6
7.7
8.9
132.8
164.0
Instructions
Calculate the receivables turnover ratio and average collection period for both companies. Comment on the difference in their collection experiences.
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REVISED PAGES
Problems: Set C
37
Problems: Set C
P9-1C Owens Company was organized on January 1. During the first year of operations,
the following plant asset expenditures and receipts were recorded in random order.
Determine acquisition costs
of land and building.
(SO 1)
Debits
1. Cost of real estate purchased as a plant site (land $280,000 and
building $40,000)
2. Installation cost of fences around property
3. Cost of demolishing building to make land suitable for
construction of new building
4. Excavation costs for new building
5. Building permit
6. Cost of parking lots and driveways
7. Architect’s fees on building plans
8. Real estate taxes paid for the current year on land
9. Full payment to building contractor
$ 320,000
4,000
12,000
18,000
1,800
34,000
27,000
6,200
750,000
$1,173,000
Credits
10. Proceeds from sale of timber on land
$6,000
Instructions
Analyze the transactions using the following table column headings. Enter the number
of each transaction in the Item column, and enter the amounts in the appropriate columns.
For amounts in the Other Accounts column, also indicate the account title.
Item
P9-2C
Land
Building
Other Accounts
Land
At December 31, 2007, Goethe Corporation reported the following plant assets.
Land
Buildings
Less: Accumulated depreciation—buildings
Equipment
Less: Accumulated depreciation—equipment
$ 2,000,000
$21,600,000
7,920,000
13,680,000
7,200,000
2,700,000
4,500,000
Total plant assets
$326,000
Journalize equipment
transactions related to
purchase, sale, retirement,
and depreciation.
(SO 5, 8)
$20,180,000
During 2008, the following selected cash transactions occurred.
Feb. 1
Apr. 1
June 1
Sept. 1
Dec. 31
Purchased land for $1,400,000.
Sold equipment that cost $48,000 when purchased on January 1, 2003.
The equipment was sold for $14,000.
Sold land for $1,300,000. The land cost $900,000.
Purchased equipment for $96,000.
Retired equipment that cost $64,000 when purchased on December 31,
2000. No salvage value was received.
Instructions
(a) Journalize the transactions. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2008 transactions.) Goethe uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 30-year useful
life and no salvage value; the equipment is estimated to have an 8-year useful life and
no salvage value. Update depreciation on assets disposed of at the time of sale or
retirement.
(b) Record adjusting entries for depreciation for 2008.
(c) Prepare the plant assets section of Goethe’s balance sheet at December 31, 2008.
(c) Tot. plant assets
$19,140,000
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CHAPTER 9
REVISED PAGES
Reporting and Analyzing Long-Lived Assets
Journalize entries for
disposal of plant assets.
(SO 5)
P9-3C
Presented here are selected transactions for Dark Arts Company for 2007.
Jan.
1 Retired a piece of machinery that was purchased on January 1, 1995. The
machine cost $96,000 on that date and had a useful life of 12 years with
no salvage value.
Sept. 30 Sold a computer that was purchased on January 1, 2005. The computer
cost $28,000 and had a useful life of 4 years with no salvage value. The
computer was sold for $9,000.
Dec. 31 Discarded a delivery truck that was purchased on January 1, 2002. The
truck cost $28,000 and was depreciated based on an 6-year useful life
with a $4,000 salvage value.
Instructions
Journalize all entries required on the above dates, including entries to update depreciation,
where applicable, on assets disposed of. Dark Arts Company uses straight-line depreciation. (Assume depreciation is up to date as of December 31, 2006.)
Prepare entries to record
transactions related to
acquisition and amortization
of intangibles; prepare the
intangible assets section and
note.
(SO 7, 8)
P9-4C The intangible assets section of Ewing Corporation’s balance sheet at December
31, 2007, is presented here.
Patents ($56,000 cost less $16,000 amortization)
Copyrights ($42,000 cost less $28,000 amortization)
$40,000
14,000
Total
$54,000
The patent was acquired in January 2006 and has a useful life of 7 years. The copyright
was acquired in January 2000 and also has a useful life of 12 years. The following cash
transactions may have affected intangible assets during 2008.
Jan.
2
Jan.–June
Aug. 1
Sept. 1
(c) Tot. intangibles
$218,075
Prepare entries to correct
errors in recording and
amortizing intangible assets.
(SO 7)
Paid $25,000 legal costs to successfully defend the patent against
infringement by another company.
Developed a new product, incurring $185,000 in research and development costs. A patent was granted for the product on July 1, and its useful life is equal to its legal life. Legal and other costs for the patent
were $7,000.
Acquired a copyright for $150,000. The copyright has a useful life and
legal life of 50 years.
Paid $65,000 to a quarterback to appear in commercials advertising
the company’s products. The commercials will air in September and
October.
Instructions
(a) Prepare journal entries to record the transactions.
(b) Prepare journal entries to record the 2008 amortization expense for intangible
assets.
(c) Prepare the intangible assets section of the balance sheet at December 31, 2008.
(d) Prepare the note to the financial statements on Ewing Corporation’s intangible assets
as of December 31, 2008.
P9-5C Due to rapid employee turnover in the accounting department, the following
transactions involving intangible assets were improperly recorded by Folger Corporation
in 2007.
1. Folger developed a new manufacturing process, incurring research and development
costs of $220,000. The company also purchased a patent for $48,000. In early January
Folger capitalized $268,000 as the cost of the patents. Patent amortization expense of
$13,400 was recorded based on a 20-year useful life.
2. On July 1, 2007, Folger purchased a small company and as a result acquired goodwill
of $40,000. Folger recorded a half-year’s amortization in 2007, based on a 10-year life
($2,000 amortization). The goodwill has an indefinite life.
Instructions
Prepare all journal entries necessary to correct any errors made during 2007. Assume the
books have not yet been closed for 2007.
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REVISED PAGES
Problems: Set C
P9-6C Snow White Corporation and Sleeping Beauty Corporation, two companies of
roughly the same size, are both involved in the manufacture of formalwear. Each company depreciates its plant assets using the straight-line approach. An investigation of their
financial statements reveals the following information.
Net income
Sales
Total assets (average)
Plant assets (average)
Intangible assets (goodwill)
Snow White Corp.
Sleeping Beauty Corp.
$ 250,000
1,280,000
2,800,000
2,100,000
250,000
$ 320,000
1,400,000
2,600,000
1,700,000
0
39
Calculate and comment on
return on assets, profit
margin, and asset turnover
ratio.
(SO 6)
Instructions
(a) For each company, calculate these values:
(1) Return on assets ratio.
(2) Profit margin.
(3) Asset turnover ratio.
(b) Based on your calculations in part (a), comment on the relative effectiveness of the
two companies in using their assets to generate sales. What factors complicate your
ability to compare the two companies?
*P9-7C In recent years Singh Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in
charge of selecting the depreciation method for each machine, and various methods have
been used. Information concerning the machines is summarized in the table below.
Machine
Acquired
Cost
Salvage
Value
Useful Life
(in years)
Depreciation Method
1
2
3
July 1, 2004
Apr. 1, 2005
Sept. 1, 2005
$68,000
60,000
84,000
$5,000
6,000
4,000
7
4
8
Straight-line
Declining-balance
Units-of-activity
Compute depreciation under
different methods.
(SO 3, 9)
For the declining-balance method, Singh Company uses the double-declining rate. For
the units-of-activity method, total machine hours are expected to be 40,000. Actual hours
of use in the first 3 years were: 2005, 1,200; 2006, 6,400; and 2007, 7,000.
Instructions
(a) Compute the amount of accumulated depreciation on each machine at December 31,
2007.
(b) If machine 2 was purchased on November 1 instead of April 1, what would be the
depreciation expense for this machine in 2005? In 2006?
*P9-8C Darius Corporation purchased machinery on January 1, 2007, at a cost of
$310,000. The estimated useful life of the machinery is 5 years, with an estimated residual value at the end of that period of $10,000. The company is considering different
depreciation methods that could be used for financial reporting purposes.
(a) Machine 2
$50,625
Compute depreciation under
different methods.
(SO 3, 9)
Instructions
(a) Prepare separate depreciation schedules for the machinery using the straight-line
method, and the declining-balance method using double the straight-line rate. Round
to the nearest dollar.
(b) Which method would result in the higher reported 2007 income? In the highest total reported income over the 5-year period?
(c) Which method would result in the lower reported 2007 income? In the lowest total
reported income over the 5-year period?
(a) Double-decliningbalance expense 2009
$44,640
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REVISED PAGES
Reporting and Analyzing Liabilities
Problems: Set C
Prepare current liability
entries, adjusting entries, and
current liabilities section.
(SO 1, 2, 3, 7)
P10-1C On January 1, 2007, the ledger of Edina Company contained these liability
accounts.
Accounts Payable
Sales Taxes Payable
Unearned Service Revenue
GL S
$36,800
5,300
12,400
During January the following selected transactions occurred.
Jan. 1
7
10
15
26
Borrowed $16,000 in cash from Shoreline Bank on a 3-month, 9%,
$16,000 note.
Sold merchandise for cash totaling $19,610, which includes 6% sales
taxes.
Provided services for customers who had made advance payments of
$8,000. (Credit Service Revenue.)
Paid state treasurer’s department for sales taxes collected in December
2006, $5,300.
Sold 700 units of a new product on credit at $40 per unit, plus 6% sales tax.
During January the company’s employees earned wages of $56,000. Withholdings related
to these wages were $4,284 for Social Security (FICA), $6,000 for federal income tax, and
$2,500 for state income tax. The company owed no money related to these earnings for
federal or state unemployment tax. Assume that wages earned during January will be
paid during February. No entry had been recorded for wages or payroll tax expense as of
January 31.
(c) Tot. current
liabilities
$120,394
Journalize and post note
transactions; show balance
sheet presentation.
(SO 2, 7)
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for the outstanding note payable and
for wages expense and payroll tax expense.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2007. Assume no change in Accounts Payable.
P10-2C On Board Corporation sells skateboard products and also operates an indoor
skating facility. During the last part of 2007, On Board had the following transactions
related to notes payable.
Aug. 1
Aug. 31
Sept. 1
Sept. 30
Oct.
1
Oct. 31
Nov. 1
Nov. 30
Dec. 31
(b) Interest
Payable
$1,000
Issued a $6,000 note to FreeStyle to purchase inventory. The 3-month
note payable bears interest of 9% and is due November 1.
Recorded accrued interest for the FreeStyle note.
Issued a $15,000, 8%, 6-month note to Commerce Bank to finance the
purchase of a new ramp for advanced boarders. The note is due March 1.
Recorded accrued interest for the FreeStyle note and the Commerce
Bank note.
Issued a $30,000 note and paid $10,000 cash to repair and improve its
building. This note bears interest of 8% and matures in 12 months.
Recorded accrued interest for the FreeStyle note, the Commerce Bank
note, and the improvement note.
Paid principal and interest on the FreeStyle note.
Recorded accrued interest for the Commerce Bank note and the
improvement note.
Recorded accrued interest for the Commerce Bank note and the
improvement note.
Instructions
(a) Prepare journal entries for the transactions noted above.
(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense
accounts. (Use T accounts.)
(c) Show the balance sheet presentation of notes payable and interest payable at
December 31.
(d) How much interest expense relating to notes payable did On Board incur during the
year?
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Problems: Set C
P10-3C
The following section is taken from Merlyn’s balance sheet at December 31, 2006.
Current liabilities
Bond interest payable
Long-term liabilities
Bonds payable, 6%, due January 1, 2013
$ 36,000
41
Prepare journal entries to
record interest payments and
redemption of bonds.
(SO 5, 6)
600,000
Interest is payable annually on January 1. The bonds are callable on any annual interest
date.
Instructions
(a) Journalize the payment of the bond interest on January 1, 2007.
(b) Assume that on January 1, 2007, after paying interest, Merlyn calls bonds having a
face value of $60,000. The call price is 103. Record the redemption of the bonds.
(c) Prepare the adjusting entry on December 31, 2007, to accrue the interest on the
remaining bonds.
P10-4C On November 1, 2006, Angela Corp. issued $300,000, 5%, 10-year bonds at face
value. The bonds were dated November 1, 2006, and pay interest annually on November 1.
Financial statements are prepared annually on December 31.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2006.
(c) Show the balance sheet presentation of bonds payable and bond interest payable on
Prepare journal entries to
record issuance of bonds,
interest, balance sheet
presentation, and bond
redemption.
(SO 5, 6, 7)
December 31, 2006.
(d) Prepare the journal entry to record the payment of interest on November 1, 2007.
(e) Prepare the adjusting entry to record the accrual of interest on December 31, 2007.
(f) Assume that on January 1, 2008, Angela pays the accrued bond interest and calls the
(f) Loss
$12,000
bonds. The call price is 104. Record the payment of interest and redemption of the
bonds.
P10-5C Dunhill Company sold $800,000, 7%, 15-year bonds on January 1, 2007. The
bonds were dated January 1, 2007, and pay interest on December 31. The bonds were
sold at 97.
Instructions
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.
(b) At December 31, 2007, $1,600 of the bond discount had been amortized. Show the
balance sheet presentation of the bond liability at December 31, 2007. (Assume that
interest has been paid.)
(c) At December 31, 2008, when the carrying value of the bonds was $779,200, the company redeemed the bonds at 101. Record the redemption of the bonds assuming that
interest for the year had already been paid.
P10-6C You have been presented with the following selected information taken from
the financial statements of Kellogg Company.
KELLOGG COMPANY
Balance Sheet (partial)
December 31
(in millions)
2004
2003
$ 2,121.8
8,668.6
$ 1,787.9
8,354.8
$10,790.4
$10,142.7
Current liabilities
Long-term liabilities
$ 2,846.0
5,687.2
$ 2,766.0
5,933.5
Total liabilities
Shareholders’ equity
8,533.2
2,257.2
8,699.5
1,443.2
$10,790.4
$10,142.7
Total current assets
Noncurrent assets
Total assets
Total liabilities and shareholders’ equity
Prepare journal entries to
record issuance of bonds,
show balance sheet
presentation, and record
bond redemption.
(SO 5, 6, 7)
(c) Loss
$28,800
Calculate and comment on
ratios.
(SO 7)
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Other information:
2004
Net income (loss)
Income tax expense
Interest expense
Cash provided by operations
Capital expenditures
Cash dividends
$ 890.6
475.3
308.6
1,229.0
278.6
417.6
2003
$ 787.1
382.4
371.4
1,171.0
247.2
412.4
Note 6. Leases and Other Commitments
The Company’s leases are generally for equipment and warehouse space. Future minimum annual lease payments under noncancelable operating leases were as follows: 2005,
$87.2; 2006, $72.5; 2007, $57.0; 2008, $44.9; 2009, $76.7; after 2009, $65.9.
Instructions
(a) Calculate each of the following ratios for 2004 and 2003.
Current ratio.
Free cash flow.
Debt to total assets.
Times interest earned ratio.
(b) Comment on the trend in ratios.
(c) Read the company’s note on leases. If the operating leases had instead been accounted
for like a purchase, assets and liabilities would increase by approximately $324.2 million. Recalculate the debt to total assets ratio for 2004 in light of this information,
and discuss the implictions for analysis.
(1)
(2)
(3)
(4)
Prepare journal entries to
record interest payments,
straight-line discount
amortization, and
redemption of bonds.
(SO 5, 6, 8)
*P10-7C The information below is taken from Lolly Corp.’s balance sheet at December
31, 2007.
Current liabilities
Bond interest payable
Long-term liabilities
Bonds payable, 7%, due January 1, 2014
Plus: Premium on bonds payable
$ 105,000
$1,500,000
13,500
1,513,500
Interest is payable annually on January 1. The bonds are callable on any annual interest
date. Lolly uses straight-line amortization for any bond premium or discount. From
December 31, 2007, the bonds will be outstanding for an additional 6 years (72 months).
(c) Loss
$19,500
Prepare journal entries to
record issuance of bonds,
interest, and straight-line
amortization, and balance
sheet presentation.
(SO 5, 7, 8)
Instructions
(Round all computations to the nearest dollar.)
(a) Journalize the payment of bond interest on January 1, 2008.
(b) Prepare the entry to amortize bond premium and to accrue the interest on December
31, 2008.
(c) Assume on January 1, 2009, after paying interest, that Lolly Corp. calls bonds having a face value of $600,000. The call price is 104. Record the redemption of the
bonds.
(d) Prepare the adjusting entry at December 31, 2009, to amortize bond premium and
to accrue interest on the remaining bonds.
*P10-8C Nish Corporation sold $2,200,000, 8%, 5-year bonds on January 1, 2007. The
bonds were dated January 1, 2007, and pay interest on January 1. Nish Corporation uses
the straight-line method to amortize bond premium or discount.
Instructions
(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond
interest expense for 2007, assuming that the bonds sold at 102.
(b) Prepare journal entries as in part (a) assuming that the bonds sold at 99.
(c) Show the balance sheet presentation for the bond issue at December 31, 2007, using
(1) the 102 selling price, and then (2) the 99 selling price.
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Problems: Set C
*P10-9C Zaidi Co. sold $3,000,000, 7%, 8-year bonds on January 1, 2007. The bonds were
dated January 1, 2007, and pay interest on January 1. The company uses straight-line amortization on bond premiums and discounts. Financial statements are prepared annually.
Instructions
(a) Prepare the journal entries to record the issuance of the bonds assuming they sold at:
(1) 103.
(2) 98.
(b) Prepare amortization tables for both assumed sales for the first three interest
43
Prepare journal entries to
record issuance of bonds,
interest, and straight-line
amortization, and balance
sheet presentation.
(SO 5, 6, 8)
payments.
(c) Prepare the journal entries to record interest expense for 2007 under both assumed
sales.
(d) Show the balance sheet presentation for both assumed sales at December 31, 2007.
*P10-10C On January 1, 2007, Chiu Corporation issued $800,000 face value, 6%,
15-year bonds at $727,137. This price resulted in an effective-interest rate of 7% on
the bonds. Chiu uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.
(b) Prepare an amortization table through December 31, 2009 (three interest periods) for
this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of
the discount on December 31, 2007.
(d) Prepare the journal entry to record the payment of interest on January 1, 2008.
(e) Prepare the journal entry to record the accrual of interest and the amortization of
the discount on December 31, 2008.
*P10-11C On January 1, 2007, Lopez Company issued $1,600,000 face value, 7%, 10-year
bonds at $1,780,903. This price resulted in a 5.5% effective-interest rate on the bonds.
Lopez uses the effective-interest method to amortize bond premium or discount. The
bonds pay annual interest on each January 1.
Instructions
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on January 1, 2007.
(2) Accrual of interest and amortization of the premium on December 31, 2007.
(3) The payment of interest on January 1, 2008.
(4) Accrual of interest and amortization of the premium on December 31, 2008.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the
(c) (1) Interest
Expense
$198,750
Prepare journal entries to
record issuance of bonds,
payment of interest, and
amortization of bond
discount using effectiveinterest method.
(SO 9)
(c) Interest
Expense
$50,900
Prepare journal entries to
record issuance of bonds,
payment of interest, and
effective-interest amortization,
and balance sheet
presentation.
(SO 5, 7, 9)
(a) (4) Interest
Expense
$97,177
December 31, 2008, balance sheet.
(c) Provide the answers to the following questions in narrative form.
(1) What amount of interest expense is reported for 2008?
(2) Would the bond interest expense reported in 2008 be the same as, greater than,
or less than the amount that would be reported if the straight-line method of
amortization were used?
*P10-12C Masood purchased a new piece of equipment to be used in its new facility.
The $380,000 piece of equipment was purchased with a $40,000 down payment and with
cash received through the issuance of a $340,000, 9%, 5-year mortgage note payable issued on October 1, 2007. The terms provide for quarterly installment payments of
$21,298 on December 31, March 31, June 30, and September 30.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare an installment payments schedule for the first five payments of the notes
payable.
(b) Prepare all journal entries related to the notes payable for December 31, 2007.
(c) Show the balance sheet presentation for this obligation for December 31, 2007. (Hint:
Be sure to distinguish between the current and long-term portions of the note.)
*P10-13C Hakan Paydak has just approached a venture capitalist for financing for a new
business venture, the development of a local ski hill. On July 1, 2007, Hakan was loaned
Prepare installment payments
schedule, journal entries, and
balance sheet presentation
for a mortgage note payable.
(SO 7, 10)
(c) Current portion $57,732
Prepare journal entries to
record payments for longterm note payable, and
balance sheet presentation.
(SO 7, 10)
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$120,000 at an annual interest rate of 8%. The loan is repayable over 5 years in annual
installments of $30,055, principal and interest, due each June 30. The first payment is
due June 30, 2008. Hakan uses the effective-interest method for amortizing debt. The ski
hill company’s year-end will be June 30.
Instructions
(a) Prepare an amortization schedule for the 5 years, 2007–2012. Round all calculations
to the nearest dollar.
(b) 6/30/08 Interest
Expense $9,600
(b) Prepare all journal entries for Hakan Paydak for the first 2 fiscal years ended June
30, 2008, and June 30, 2009. Round all calculations to the nearest dollar.
(c) Show the balance sheet presentation of the note payable as of June 30, 2009. (Hint:
Be sure to distinguish between the current and long-term portions of the note.)
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Problems: Set C
45
Problems: Set C
P11-1C Pickwick Corporation was organized on January 1, 2007. It is authorized to
issue 50,000 shares of 8%, $75 par value preferred stock and 700,000 shares of no-par
common stock with a stated value of $2 per share. The following stock transactions were
completed during the first year.
Jan.
Feb.
June
Aug.
Dec.
7
12
30
24
1
Issued
Issued
Issued
Issued
Issued
90,000 shares of common stock for cash at $5 per share.
7,000 shares of preferred stock for cash at $77 per share.
65,000 shares of common stock for cash at $6 per share.
25,000 shares of common stock for cash at $6.50 per share.
2,000 shares of preferred stock for cash at $79 per share.
Instructions
(a) Journalize the transactions.
(b) Post to the stockholders’ equity accounts. (Use T accounts.)
(c) Prepare the paid-in capital portion of the stockholders’ equity section at December
31, 2007.
P11-2C The stockholders’ equity accounts of Pareek Corporation on January 1, 2007,
were as follows.
Preferred Stock (6%, $50 par noncumulative, 8,000 shares authorized)
Common Stock ($1 stated value, 400,000 shares authorized)
Paid-in Capital in Excess of Par Value—Preferred Stock
Paid-in Capital in Excess of Stated Value—Common Stock
Retained Earnings
Treasury Stock—Common (12,000 shares)
$ 175,000
250,000
7,000
4,000,000
950,000
66,000
Journalize stock
transactions, post, and
prepare paid-in capital
section.
(SO 2, 4, 7)
GL S
(c) Tot. paid-in capital
$1,699,500
Journalize transactions, post,
and prepare a stockholders’
equity section; calculate
ratios.
(SO 2, 3, 5, 7, 8)
GL S
During 2007 the corporation had the following transactions and events pertaining to its
stockholders’ equity.
Feb. 1
July 12
Oct. 1
Nov. 1
Dec. 1
31
Issued 7,000 shares of common stock for $126,000.
Purchased 2,000 additional shares of common treasury stock at $17 per
share.
Declared a 6% cash dividend on preferred stock, payable November 1.
Paid the dividend declared on October 1.
Declared a $2.00 per share cash dividend to common stockholders of
record on December 15, payable December 31, 2007.
Determined that net income for the year was $930,000. Paid the
dividend declared on December 1.
Instructions
(a) Journalize the transactions. (Include entries to close net income to Retained Earnings.)
(b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use T accounts.)
(c) Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.
(d) Calculate the payout ratio, earnings per share, and return on common stockholders’
equity ratio. (Note: Use the common shares outstanding on January 1 and December
31 to determine the average shares outstanding.)
P11-3C On December 31, 2006, Jochims Company had 820,000 shares of $10 par
common stock issued and outstanding. The stockholders’ equity accounts at December
31, 2006, had the balances listed here.
Common Stock
Additional Paid-in Capital
Retained Earnings
$8,200,000
2,460,000
1,600,000
Transactions during 2007 and other information related to stockholders’ equity accounts
were as follows.
1. On January 18, 2007, issued at $107 per share 80,000 shares of $100 par value, 7%
cumulative preferred stock.
(c) Tot. paid-in capital
$4,558,000
Prepare a stockholders’
equity section.
(SO 7)
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2. On March 23, 2007, reacquired 20,000 shares of its common stock for $15 per share.
3. On June 8, 2007, declared a cash dividend of $1.60 per share on the common stock
outstanding, payable on July 10, 2007, to stockholders of record on July 1, 2007.
4. On December 15, 2007, declared the yearly cash dividend on preferred stock, payable
January 12, 2008, to stockholders of record on December 15, 2007.
5. Net income for the year was $2,900,000.
Tot. stockholders’ equity
$21,580,000
Instructions
Prepare the stockholders’ equity section of Jochims’ balance sheet at December 31, 2007.
Reproduce retained earnings
account, and prepare a
stockholders’ equity section.
(SO 5, 6, 7)
P11-4C The ledger of Ninomiya Corporation at December 31, 2007, after the books have
been closed, contains the following stockholders’ equity accounts.
Preferred Stock (8,000 shares issued)
Common Stock (430,000 shares issued)
Paid-in Capital in Excess of Par Value—Preferred Stock
Paid-in Capital in Excess of Stated Value—Common Stock
Retained Earnings
$ 800,000
860,000
100,000
1,750,000
2,872,000
A review of the accounting records reveals this information:
1. Preferred stock is 10%, $100 par value, noncumulative. Since January 1, 2006, 8,000
shares have been outstanding; 20,000 shares are authorized.
2. Common stock is no-par with a stated value of $2 per share; 500,000 shares are
authorized.
3. The January 1, 2007, balance in Retained Earnings was $2,450,000.
4. On October 1, 80,000 shares of common stock were sold for cash at $8 per share.
5. A cash dividend of $553,000 was declared and properly allocated to preferred and com-
mon stock on November 1. No dividends were paid to preferred stockholders in 2006.
6. Net income for the year was $975,000.
7. On December 31, 2007, the directors authorized disclosure of a $160,000 restriction
of retained earnings for plant expansion. (Use Note A.)
Instructions
(b) Tot. paid-in capital
$3,510,000
(a) Reproduce the retained earnings account (T account) for the year.
(b) Prepare the stockholders’ equity section of the balance sheet at December 31.
Prepare entries for stock
transactions, and prepare a
stockholders’ equity section.
(SO 2, 3, 4, 7)
P11-5C Romero Corporation has been authorized to issue 25,000 shares of $100 par
value, 8%, noncumulative preferred stock and 1,000,000 shares of no-par common stock.
The corporation assigned a $4 stated value to the common stock. At December 31, 2007,
the ledger contained the following balances pertaining to stockholders’ equity.
Preferred Stock
Paid-in Capital in Excess of Par Value—Preferred Stock
Common Stock
Paid-in Capital in Excess of Stated Value—Common Stock
Treasury Stock—Common (40,000 shares)
Retained Earnings
$ 400,000
72,000
2,400,000
6,600,000
680,000
3,630,000
The preferred stock was issued for $472,000 cash. All common stock issued was for cash.
In November 40,000 shares of common stock were purchased for the treasury at a per
share cost of $17. No dividends were declared in 2007.
Instructions
(a) Prepare the journal entries for the following.
(b) Tot. stockholders’ equity
$12,422,000
Prepare a stockholders’
equity section.
(SO 7)
(1) Issuance of preferred stock for cash.
(2) Issuance of common stock for cash.
(3) Purchase of common treasury stock for cash.
(b) Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.
P11-6C
On January 1, 2007, Matusiak Inc. had these stockholders’ equity balances.
Common Stock, $5 par (2,000,000 shares authorized, 600,000
shares issued and outstanding)
Paid-in Capital in Excess of Par Value
Retained Earnings
$3,000,000
1,800,000
810,000
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Problems: Set C
47
During 2007, the following transactions and events occurred.
1.
2.
3.
4.
5.
Issued 75,000 shares of $5 par value common stock for $9 per share.
Issued 60,000 shares of common stock for cash at $9.50 per share.
Purchased 25,000 shares of common stock for the treasury at $10 per share.
Declared and paid a cash dividend of $355,000.
Earned net income of $860,000.
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.
Tot. stockholders’ equity
$7,110,000
P11-7C Devang Company manufactures disc golf equipment. During 2007 Devang
issued bonds at 8% interest and used the cash proceeds to purchase treasury stock.
The following financial information is available for Devang Company for the years
2007 and 2006.
Evaluate a company’s
profitability and solvency.
(SO 8)
Sales
Net income
Interest expense
Tax expense
Dividends paid
Total assets (year-end)
Average total assets
Total liabilities (year-end)
Average total stockholders’ equity
2007
2006
$ 6,000,000
1,460,000
280,000
630,000
770,000
9,500,000
8,800,000
4,000,000
5,700,000
$ 6,000,000
1,500,000
120,000
660,000
800,000
8,600,000
9,100,000
2,000,000
7,400,000
Instructions
(a) Use the information above to calculate the following ratios for both years: (i) return
on assets ratio, (ii) return on common stockholders’ equity ratio, (iii) payout ratio,
(iv) debt to total assets ratio, (v) times interest earned ratio.
(b) Referring to your findings in part (a), discuss the changes in the company’s profitability from 2006 to 2007.
(c) Referring to your findings in part (a), discuss the changes in the company’s solvency
from 2006 to 2007.
(d) Based on your findings in (b), was the decision to issue debt to purchase common
stock a wise one?
*P11-8C On January 1, 2007, Labovitz Corporation had these stockholders’ equity
accounts.
Common Stock ($2 par value, 80,000 shares issued and outstanding)
Paid-in Capital in Excess of Par Value
Retained Earnings
$160,000
400,000
580,000
During the year, the following transactions occurred.
Jan. 10
Feb. 28
May 1
June 1
Dec. 1
31
Prepare dividend entries,
prepare a stockholders’ equity
section, and calculate ratios.
(SO 5, 7, 8, 9)
GL S
Declared a $0.50 cash dividend per share to stockholders of record on
January 31, payable February 28.
Paid the dividend declared in January.
Declared a 5% stock dividend to stockholders of record on May 10,
distributable June 1. On May 1, the market price of the stock was
$9 per share.
Issued the shares for the stock dividend.
Declared a $0.75 per share cash dividend to stockholders of record on
December 15, payable January 10, 2008.
Determined that net income for the year was $320,000.
Instructions
(a) Journalize the transactions. (Include entries to close net income to Retained
Earnings.)
(b) Enter the beginning balances and post the entries to the stockholders’ equity T
accounts. (Note: Open additional stockholders’ equity accounts as needed.)
(c) Prepare the stockholders’ equity section of the balance sheet at December 31.
(d) Calculate the payout ratio and return on common stockholders’ equity ratio.
(c) Tot. stockholders’ equity
$1,357,000
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Statement of Cash Flows
Problems: Set C
Distinguish among
operating, investing, and
financing activities.
(SO 6)
P12-1C You are provided with the following transactions that took place during a recent fiscal year.
Transaction
(a)
(b)
(c)
(d)
(e)
(f )
(g)
(h)
(i)
(j)
Cash Inflow,
Outflow, or
No Effect?
Where Reported
on Statement
Purchased shares of common treasury
stock.
Distributed a stock dividend to common
stockholders.
Recorded cash sales.
Recorded sales on account.
Recorded prepayment of insurance expense.
Purchased supplies on account.
Recorded amortization expense on
a patent.
Recorded and received interest revenue.
Recorded cash proceeds from a sale of
plant assets.
Acquired land by issuing a note
payable.
Instructions
Complete the table indicating whether each item (1) should be reported as an operating
(O) activity, investing (I) activity, financing (F) activity, or as a noncash (NC) transaction
reported in a separate schedule, and (2) represents a cash inflow or cash outflow or has
no cash flow effect. Assume use of the indirect approach.
Determine cash flow effects
of changes in equity
accounts.
(SO 4)
P12-2C The following account balances relate to the stockholders’ equity accounts of
Bakhtiar Corp. at year-end.
Common stock, 9,800 and 8,000 shares,
respectively, for 2007 and 2006
Preferred stock, 3,000 shares
Retained earnings
2007
2006
$200,600
225,000
218,400
$160,000
225,000
210,000
A small stock dividend was declared and issued in 2007. The market value of the shares
was $17,600. Cash dividends were $18,000 in both 2007 and 2006. The common stock
has no par or stated value.
(a) Net income
$44,000
Prepare the operating
activities section—indirect
method.
(SO 4)
Instructions
(a) What was the amount of net income reported by Bakhtiar Corp. in 2007?
(b) Determine the amounts of any cash inflows or outflows related to the common stock
and dividend accounts in 2007.
(c) Indicate where each of the cash inflows or outflows identified in (b) would be classified on the statement of cash flows.
P12-3C
The income statement of Von Roenn Company is presented here.
VON ROENN COMPANY
Income Statement
For the Year Ended November 30, 2007
Sales
Cost of goods sold
Beginning inventory
Purchases
Goods available for sale
$6,400,000
$1,200,000
4,140,000
5,340,000
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Problems: Set C
Ending inventory
49
1,500,000
Cost of goods sold
3,840,000
Gross profit
Operating expenses
Selling expenses
Administrative expenses
2,560,000
540,000
900,000
1,440,000
Net income
$1,120,000
Additional information:
1. Accounts receivable decreased $180,000 during the year, and inventory increased
$300,000.
2. Prepaid expenses decreased $210,000 during the year.
3. Accounts payable to suppliers of merchandise increased $290,000 during the year.
4. Accrued expenses payable decreased $75,000 during the year.
5. Administrative expenses include depreciation expense of $84,000.
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended
November 30, 2007, for Von Roenn Company, using the indirect method.
*P12-4C
Data for Von Roenn Company are presented in P12-3C.
Instructions
Prepare the operating activities section of the statement of cash flows using the direct
method.
*P12-5C
below.
Chamay Company’s income statement contained the condensed information
CHAMAY COMPANY
Income Statement
For the Year Ended December 31, 2007
Revenues
Operating expenses, excluding depreciation
Depreciation expense
Loss on sale of equipment
Cash from operations
$1,509,000
Prepare the operating
activities section—direct
method.
(SO 6)
Cash from operations
$1,509,000
Prepare the operating
activities section—indirect
method.
(SO 4)
$850,000
$506,000
56,000
4,000
Income before income taxes
Income tax expense
566,000
284,000
80,000
Net income
$204,000
Chamay’s balance sheet contained the comparative data at December 31, below.
Accounts receivable
Accounts payable
Income taxes payable
2007
2006
$72,000
27,000
23,000
$65,000
31,000
18,000
Accounts payable pertain to operating expenses.
Instructions
Prepare the operating activities section of the statement of cash flows using the indirect
method.
*P12-6C
Data for Chamay Company are presented in P12-5C.
Instructions
Prepare the operating activities section of the statement of cash flows using the direct
method.
Cash from operations
$258,000
Prepare the operating activities section—direct method.
(SO 6)
Cash from
operations
$258,000
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50
CHAPTER 12
Prepare a statement of cash
flows—indirect method, and
compute cash-based ratios.
(SO 4, 5)
REVISED PAGES
Statement of Cash Flows
P12-7C
Presented below are the financial statements of Shafi Company.
SHAFI COMPANY
Comparative Balance Sheets
December 31
Assets
2007
2006
Cash
Accounts receivable
Merchandise inventory
Property, plant, and equipment
Accumulated depreciation
$ 37,000
55,000
34,000
162,000
(36,000)
$ 26,000
43,000
38,000
112,000
(32,000)
Total
$252,000
$187,000
Accounts payable
Income taxes payable
Bonds payable
Common stock
Retained earnings
$ 20,000
19,000
60,000
42,000
111,000
$ 27,000
15,000
50,000
30,000
65,000
Total
$252,000
$187,000
Liabilities and Stockholders’ Equity
SHAFI COMPANY
Income Statement
For the Year Ended December 31, 2007
Sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
$448,000
272,000
176,000
$45,000
9,000
54,000
Income from operations
Interest expense
122,000
4,000
Income before income taxes
Income tax expense
118,000
32,000
Net income
$ 86,000
Additional data:
1. Dividends declared and paid were $40,000.
2. During the year equipment was sold for $3,000 cash. This equipment cost $15,000
originally and had a book value of $3,000 at the time of sale.
3. Equipment costing $65,000 was purchased for cash during the year.
4. All depreciation expense is in the selling expense category.
5. All sales and purchases are on account.
(a) Cash from operations
$91,000
Prepare a statement of cash
flows—direct method, and
compute cash-based ratios.
(SO 5, 6)
(a) Cash from
operations
$91,000
Instructions
(a) Prepare a statement of cash flows using the indirect method.
(b) Compute these cash-basis measures:
(1) Current cash debt coverage ratio.
(2) Cash debt coverage ratio.
(3) Free cash flow.
*P12-8C Data for Shafi Company are presented in P12-7C. Further analysis reveals the
following.
1. Accounts payable pertain to merchandise suppliers.
2. All operating expenses except for depreciation were paid in cash.
Instructions
(a) Prepare a statement of cash flows for Shafi Company using the direct method.
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Problems: Set C
51
(b) Compute these cash-basis measures:
(1) Current cash debt coverage ratio.
(2) Cash debt coverage ratio.
(3) Free cash flow.
P12-9C
Prepare a statement of cash
flows—indirect method.
(SO 4)
Condensed financial data of Tomasi Inc. follow.
TOMASI INC.
Comparative Balance Sheets
December 31
Assets
2007
2006
Cash
Accounts receivable
Inventories
Prepaid expenses
Investments
Plant assets
Accumulated depreciation
$ 27,000
57,000
45,000
17,000
162,000
580,000
(211,000)
$ 33,000
41,000
48,000
14,000
130,000
520,000
(180,000)
Total
$677,000
$606,000
Accounts payable
Accrued expenses payable
Bonds payable
Common stock
Retained earnings
$ 44,000
21,000
180,000
175,000
257,000
$ 51,000
15,000
220,000
150,000
170,000
Total
$677,000
$606,000
Liabilities and Stockholders’ Equity
TOMASI INC.
Income Statement Data
For the Year Ended December 31, 2007
Sales
Less:
Cost of goods sold
Operating expenses, excluding
depreciation
Depreciation expense
Income taxes
Interest expense
Loss on sale of plant assets
$600,000
$290,000
65,000
50,000
47,000
12,000
9,000
Net income
473,000
$127,000
Additional information:
1.
2.
3.
4.
New plant assets costing $90,000 were purchased for cash during the year.
Old plant assets having an original cost of $30,000 were sold for $2,000 cash.
Bonds matured and were paid off at face value for cash.
A cash dividend of $40,000 was declared and paid during the year.
Instructions
Prepare a statement of cash flows using the indirect method.
*P12-10C Data for Tomasi Inc. are presented in P12-9C. Further analysis reveals that
accounts payable pertain to merchandise creditors.
Instructions
Prepare a statement of cash flows for Tomasi Inc. using the direct method.
P12-11C The comparative balance sheets for Borkovec Company as of December 31
are presented on the next page.
Cash from operations
$169,000
Prepare a statement of cash
flows—direct method.
(SO 6)
Cash from operations
$169,000
Prepare a statement of cash
flows—indirect method.
(SO 4)
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CHAPTER 12
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Statement of Cash Flows
BORKOVEC COMPANY
Comparative Balance Sheets
December 31
Assets
2007
2006
Cash
Accounts receivable
Inventory
Prepaid expenses
Land
Equipment
Accumulated depreciation—equipment
Building
Accumulated depreciation—building
$ 91,000
81,000
52,000
22,000
110,000
264,000
(90,000)
300,000
(60,000)
$ 78,000
70,000
55,000
18,000
144,000
210,000
(80,000)
300,000
(50,000)
Total
$770,000
$745,000
Accounts payable
Bonds payable
Common stock, $1 par
Retained earnings
$ 26,000
350,000
170,000
224,000
$ 35,000
400,000
120,000
190,000
Total
$770,000
$745,000
Liabilities and Stockholders’ Equity
Additional information:
Operating expenses include depreciation expense of $48,000.
Land was sold for cash at book value.
Cash dividends of $12,000 were paid.
Net income for 2007 was $46,000.
Equipment was purchased for $88,000 cash. In addition, equipment costing $34,000
with a book value of $6,000 was sold for $9,000 cash.
6. Bonds were converted at face value by issuing 50,000 shares of $1 par value common
stock.
1.
2.
3.
4.
5.
Cash from operations
$70,000
Identify the impact of
transactions on ratios.
(SO 5)
Instructions
Prepare a statement of cash flows for the year ended December 31, 2007, using the
indirect method.
P12-12C
You are provided with the following transactions that took place during the year.
Transactions
(a)
(b)
(c)
(d)
(e)
(f)
Free
Cash
Flow
($80,000)
Current
Cash
Debt
Coverage
Ratio
(0.7 times)
Cash
Debt
Coverage
Ratio
(0.4 times)
Recorded cash sales $4,800.
Sold land for $10,000 cash.
Declared $6,000 cash dividends.
Paid $5,800 cash dividends declared last year.
Paid amount owed to suppliers, $9,400.
Retired $20,000 convertible bonds
payable by issuing common stock.
Instructions
For each transaction listed above, indicate whether it will increase (I), decrease (D), or
have no effect (NE) on the ratios.
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Problems: Set C
53
Problems: Set C
P13-1C Here are comparative statement data for Mickey Company and Minnie Company,
two competitors. All balance sheet data are as of December 31, 2007, and December 31, 2006.
Mickey Company
2007
Prepare vertical analysis and
comment on profitability.
(SO 5, 6)
Minnie Company
2006
2007
2006
Net sales
Cost of goods sold
Operating expenses
Interest expense
Income tax expense
$490,000
231,000
29,000
5,000
68,000
$620,000
274,000
97,000
3,000
75,000
Current assets
Plant assets (net)
Current liabilities
Long-term liabilities
110,000
170,000
35,000
55,000
$ 98,000
160,000
40,000
58,000
120,000
310,000
50,000
45,000
$ 105,000
290,000
60,000
40,000
Common stock, $10 par
Retained earnings
50,000
140,000
50,000
110,000
180,000
155,000
180,000
115,000
Instructions
(a) Prepare a vertical analysis of the 2007 income statement data for Mickey Company
and Minnie Company.
(b) Comment on the relative profitability of the companies by computing the 2007 return
on assets and the return on common stockholders’ equity ratios for both companies.
P13-2C
The comparative statements of Art Mart Company are presented here.
ART MART COMPANY
Income Statements
For the Years Ended December 31
2007
2006
$ 545,500
273,700
$504,300
248,500
271,800
194,900
255,800
161,900
Income from operations
Other expenses and losses
Interest expense
76,900
93,900
4,100
3,900
Income before income taxes
Income tax expense
72,800
22,000
90,000
27,000
$ 50,800
$ 63,000
Net sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Net income
ART MART COMPANY
Balance Sheets
December 31
Assets
Current assets
Cash
Short-term investments
Accounts receivable
Inventory
Total current assets
Plant assets (net)
Total assets
2007
2006
$ 67,500
5,400
74,000
122,600
$ 79,500
11,300
62,900
99,100
269,500
252,800
111,400
54,800
$380,900
$307,600
Compute ratios from balance
sheet and income statement.
(SO 6)
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Financial Analysis: The Big Picture
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Income taxes payable
$ 45,200
17,900
Total current liabilities
Bonds payable
Total liabilities
Stockholders’ equity
Common stock ($2 par)
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 27,700
19,900
63,100
47,600
125,000
100,000
188,100
147,600
52,000
140,800
50,000
110,000
192,800
160,000
$380,900
$307,600
All sales were on account. Net cash provided by operating activities for 2007 was $60,000.
Capital expenditures were $55,000, and cash dividends were $20,000.
Instructions
Compute the following ratios for 2007.
(a) Earnings per share.
(b) Return on common stockholders’ equity.
(c) Return on assets.
(d) Current ratio.
(e) Receivables turnover.
(f) Average collection period.
(g) Inventory turnover.
Perform ratio analysis, and
discuss change in financial
position and operating
results.
(SO 6)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
Days in inventory.
Times interest earned.
Asset turnover.
Debt to total assets.
Current cash debt coverage.
Cash debt coverage.
Free cash flow.
P13-3C Condensed balance sheet and income statement data for Rock and Roll Corporation are presented here.
ROCK AND ROLL CORPORATION
Balance Sheets
December 31
Cash
Receivables (net)
Other current assets
Investments
Plant and equipment (net)
Current liabilities
Long-term debt
Common stock, $5 par
Retained earnings
2007
2006
2005
$106,000
27,000
92,000
291,000
150,000
$ 72,000
24,000
115,000
240,000
133,000
$ 61,000
30,000
90,000
206,000
120,000
$666,000
$584,000
$507,000
$ 63,000
77,000
200,000
326,000
$ 58,000
52,000
200,000
274,000
$ 56,000
49,000
180,000
222,000
$666,000
$584,000
$507,000
ROCK AND ROLL CORPORATION
Income Statements
For the Years Ended December 31
2007
2006
$399,000
6,000
$406,000
9,000
Net sales
Cost of goods sold
393,000
222,000
397,000
207,000
Gross profit
Operating expenses (including income taxes)
171,000
105,000
190,000
115,000
$ 66,000
$ 75,000
Sales
Less: Sales returns and allowances
Net income
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Problems: Set C
55
Additional information:
1. The market price of Rock and Roll’s common stock was $7.40, $8.80, and $7.60 for
2005, 2006, and 2007, respectively.
2. You must compute dividends paid. All dividends were paid in cash.
Instructions
(a) Compute the following ratios for 2006 and 2007.
(1) Profit margin.
(2) Gross profit.
(3) Asset turnover.
(4) Earnings per share.
(5) Price-earnings.
(6) Payout.
(7) Debt to total assets.
(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the
financial position and operating results from 2006 to 2007 of Rock and Roll
Corporation.
P13-4C
The following financial information is for Hertig Company.
Compute ratios; comment
on overall liquidity and
profitability.
(SO 6)
HERTIG COMPANY
Balance Sheets
December 31
Assets
2007
2006
$ 130,000
210,000
204,000
134,000
38,000
58,000
175,000
$ 104,000
190,000
156,000
117,000
33,000
58,000
126,000
$949,000
$784,000
Notes payable
Accounts payable
Accrued liabilities
Bonds payable, due 2009
Common stock, $10 par
Retained earnings
$120,000
50,000
35,000
250,000
180,000
314,000
$100,000
42,000
27,000
200,000
180,000
235,000
Total liabilities and stockholders’ equity
$949,000
$784,000
Cash
Short-term investments
Receivables
Inventories
Prepaid expenses
Land
Building and equipment (net)
Total assets
Liabilities and Stockholders’ Equity
HERTIG COMPANY
Income Statements
For the Years Ended December 31
2007
2006
Sales
Cost of goods sold
$952,000
511,000
$816,000
438,000
Gross profit
Operating expenses
441,000
321,000
378,000
275,000
$120,000
$103,000
Net income
Additional information:
1. Inventory at the beginning of 2006 was $121,000.
2. Receivables (net) at the beginning of 2006 were $184,000.
3. Total assets at the beginning of 2006 were $790,000.
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Financial Analysis: The Big Picture
4. No common stock transactions occurred during 2006 or 2007.
5. All sales were on account.
Instructions
(a) Indicate, by using ratios, the change in liquidity and profitability of Hertig Company
from 2006 to 2007. (Note: Not all profitability ratios can be computed nor can cashbasis ratios be computed.)
(b) Given below are three independent situations and a ratio that may be affected. For
each situation, compute the affected ratio (1) as of December 31, 2007, and (2) as of
December 31, 2008, after giving effect to the situation. Net income for 2008 was
$125,000. Total assets on December 31, 2008, were $960,000.
Compute selected ratios,
and compare liquidity,
profitability, and solvency
for two companies.
(SO 6)
Situation
Ratio
1. 2,000 shares of common stock were
purchased as treasury stock at par on
July 1, 2008.
2. All of the notes payable were paid in 2008.
3. The market price of common stock was
$15 and $18 on December 31, 2007
and 2008, respectively.
Return on common stockholders’
equity
Debt to total assets
Price-earnings
P13-5C Selected financial data of Columbia Sportswear Company and The Timberland
Company for 2004 are presented here (in millions).
Columbia
Timberland
Income Statement Data for Year
Net sales
Cost of goods sold
Selling and administrative expenses
Interest expense
Other income (expense)
Income tax expense
$1,095.3
597.4
290.5
0.6
8.1
76.3
$1,500.6
761.5
505.2
0.7
3.5
84.0
Net income
$ 138.6
$ 152.7
Balance Sheet Data (End of Year)
Current assets
Noncurrent assets
$756.0
193.4
$649.0
108.5
Total assets
$949.4
$757.5
Current liabilities
Long-term debt
Total stockholders’ equity
$146.9
22.3
780.2
$226.2
19.8
511.5
Total liabilities and stockholders’ equity
$949.4
$757.5
Beginning-of-Year Balances
Total assets
Total stockholders’ equity
Current liabilities
Total liabilities
$783.8
640.8
119.9
143.0
$641.7
428.5
197.0
213.2
Other Data
Average net receivables
Average inventory
Net cash provided by operating activities
Capital expenditures
Dividends
$236.8
146.1
93.7
44.5
–0–
$140.1
123.9
184.7
24.1
–0–
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Problems: Set C
Instructions
(a) For each company, compute the
(1) Current.
(2) Receivables turnover.
(3) Average collection period.
(4) Inventory turnover.
(5) Days in inventory.
(6) Profit margin.
(7) Asset turnover.
following ratios.
(8) Return on assets.
(9) Return on common stockholders’ equity.
(10) Debt to total assets.
(11) Times interest earned.
(12) Current cash debt coverage.
(13) Cash debt coverage.
(14) Free cash flow.
(b) Compare the liquidity, solvency, and profitability of the two companies.
57